As filed with the Securities and Exchange Commission on
March 19, 2001
Registration No.
(Investment Company Act Registration No. 811-7270)
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
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Pre-Effective Amendment No. / /
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Post-Effective Amendment No. / /
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(Check appropriate box or boxes)
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PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
(Exact Name of Registrant as Specified in Charter)
One Post Office Square, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
617-292-1000
(Area Code and Telephone Number)
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JOHN R. VERANI, Vice President
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
One Post Office Square
Boston, Massachusetts 02109
(Name and address of Agent for Service)
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Copy to:
JOHN W. GERSTMAYR, Esquire
ROPES & GRAY
One International Place
Boston, Massachusetts 02110
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Approximate Date of Proposed Offering:
As soon as practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Being Amount Being Proposed Maximum Offering Proposed Maximum Amount of
Registered Registered Price Per Unit Aggregate Offering Price Registration Fee
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Common Shares 3,900,000 $12.44(1) $48,516,000 $12,129
Preferred Shares 200 $50,000 $10,000,000 $ 2,500
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(1) Average of high and low reported price for common shares on March 9, 2001.
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
-1-
IMPORTANT INFORMATION FOR SHAREHOLDERS OF
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III AND
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
The document you hold in your hands contains a combined
prospectus/proxy statement and proxy card. A proxy card is, in
essence, a ballot. When you fill out your proxy card, it tells us how
to vote on your behalf on important issues relating to your fund. If
you complete and sign the proxy, we'll vote it exactly as you tell
us. If you simply sign the proxy, we'll vote it in accordance with
the Trustees' recommendations on pages 35 and 37.
We urge you to carefully review the prospectus/proxy statement, fill
out your proxy card and return it to us. When shareholders don't
return their proxies in sufficient numbers, we have to make follow-up
solicitations which can cost your fund money.
We want to know how you would like to vote and welcome your comments.
Please take a few minutes with these materials and return your proxy
card to us.
[Putnam Scales Logo]
Table of contents
A Message from the Chairman................................................ 1
Notice of a Joint Meeting of Shareholders.................................. 3
Combined Prospectus/Proxy Statement........................................ 5
Proxy card enclosed
If you have any questions, please contact
us at the special toll-free number we have
set up for you (1-xxx-xxx-xxxx)
or call your financial advisor.
- -----------------------------------------------
[A Message from the Chairman
Dear Shareholder:
[Photo of John A. Hill]
I am writing to you to ask for your vote on an important matter that
affects your investment in Putnam Investment Grade Municipal Trust II
("Trust II"). While you are, of course, welcome to join us at the meeting,
most shareholders cast their vote by filling out and signing the enclosed
proxy card, by calling 1-xxx-xxx-xxxx or by voting via the Internet at
[www.proxyweb.com/Putnam].
The fund is asking for your vote on the following matter:
1. Approval or disapproval of a proposed merger of Putnam Investment Grade
Municipal Trust III ("Trust III") into Trust II. In this merger, the
common shares of Trust III would, in effect, be exchanged, on a tax-free
basis, for common shares of Trust II with an equal net asset value and
your preferred shares of Trust III would, in effect, be exchanged for
preferred shares of Trust II with an equal aggregate liquidation
preference (face amount). (To be voted on by common and preferred
shareholders.)
2. Approval or disapproval of the authorization of up to $60 million of
additional preferred shares of Trust II. (To be voted on by preferred
shareholders only.)
The proposed merger is not intended to change significantly the nature of
your investment. The investment objective and policies of Trust II and
your fund are virtually identical. Both are leveraged, closed-end funds
seeking as high a level of current income exempt from federal income tax
as Putnam Investment Management, LLC ("Putnam Management") believes is
consistent with preservation of capital and both invest primarily in
investment grade municipal bonds. Although the proposed merger will not
materially affect the operation of your fund, we are required by the Rules
of the New York Stock Exchange to solicit your vote on this matter.
1
The proposed issuance of up to $60 million of additional remarketed
preferred shares of Trust II after the merger will enable the combined
fund to increase its leverage. The additional leverage will bring the
combined fund more in line with the leverage levels of comparable
closed-end municipal bond funds with similar investment objectives.
The proposals are key elements in a plan to make both funds more
attractive to shareholders. Putnam Management believes that increasing the
potential earning power of the combined fund and creating a broader market
for the combined fund's shares may attract more investor interest in the
combined fund than is currently the case with either fund, which may
result in higher trading levels for the combined fund's common shares.
However, there can be no guarantee that these steps will have the intended
effect.
Your vote is important to us. We appreciate the time and consideration I
am sure you will give this important matter. If you have questions about
the proposal, please call 1-xxx-xxx-xxxx, or call your financial advisor.
Sincerely yours,
[Signature of John A. Hill]
John A. Hill, Chairman]
2
A Message from the Chairman
Dear Shareholder:
[Photo of John A. Hill]
I am writing to you to ask for your vote on an important matter that
affects your investment in Putnam Investment Grade Municipal Trust III
("Trust III"). While you are, of course, welcome to join us at the
meeting, most shareholders cast their vote by filling out and signing the
enclosed proxy card, by calling 1-xxx-xxx-xxxx or by voting via the
Internet at [www.proxyweb.com/Putnam].
The fund is asking for your vote on the following matter:
1. Approval or disapproval of a proposed merger of Trust III into Putnam
Investment Grade Municipal Trust II ("Trust II"). In this merger, the
common shares of Trust III would, in effect, be exchanged, on a tax-free
basis, for common shares of Trust II with an equal net asset value and
your preferred shares of Trust III would, in effect, be exchanged for
preferred shares of Trust II with an equal aggregate liquidation
preference (face amount). (To be voted on by common and preferred
shareholders.)
The proposed merger is not intended to change significantly the nature of
your investment. The investment objective and policies of Trust II and
your fund are virtually identical. Both are leveraged, closed-end funds
seeking as high a level of current income exempt from federal income tax
as Putnam Investment Management, LLC ("Putnam Management") believes is
consistent with preservation of capital and both invest primarily in
investment grade municipal bonds.
The merger is a key element in a plan to make both funds more attractive
to shareholders by continuing two relatively small closed-end funds and
then having the merged entity issue additional preferred shares to provide
additional income potential. Putnam Management believes that increasing
the potential earning power of the combined fund and creating a
1
broader market for the combined fund's shares may attract more investor
interest in the combined fund than is currently the case with either fund,
which may result in higher trading levels for the combined fund's common
shares. However, there can be no guarantee that these steps will have the
intended effect.
Your vote is important to us. We appreciate the time and consideration I
am sure you will give this important matter. If you have questions about
the proposal, please call 1-xxx-xxx-xxxx, or call your financial advisor.
Sincerely yours,
[Signature of John A. Hill]
John A. Hill, Chairman
2
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III ("TRUST III") AND
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II ("TRUST II")
Notice of a Joint Meeting of Shareholders
[Photo of John A. Hill]
> This is the formal agenda for the shareholder meeting. It tells you what
matters will be voted on and the time and place of the meeting.
To the Shareholders of Trust III:
A Meeting of Shareholders of Trust III will be held July 12, 2001, at 2:00
p.m., Boston time, on the eighth floor of One Post Office Square, Boston,
Massachusetts, to consider the following:
1. Approving or disapproving an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of Trust III to Trust II
in exchange for common and preferred shares of Trust II and the assumption
by Trust II of all of the liabilities of Trust III, and the distribution
of such common shares to the common shareholders of Trust III and such
preferred shares to the preferred shareholders of Trust III in complete
liquidation of Trust III. See page 8. (To be voted on by common and
preferred shareholders.)
3
To the Shareholders of Trust II:
A Meeting of Shareholders of Trust II will be held July 12, 2001, at 2:00
p.m., Boston time, on the eighth floor of One Post Office Square, Boston,
Massachusetts, to consider the following:
1. Approving or disapproving an Agreement and Plan of Reorganization
providing for the transfer of all of the assets of Trust III to Trust II
in exchange for common and preferred shares of Trust II and the assumption
by Trust II of all of the liabilities of Trust III, and the distribution
of such common shares to the common shareholders of Trust III and such
preferred shares to the preferred shareholders of Trust III in complete
liquidation of Trust III. See page 8. (To be voted on by common and
preferred shareholders.)
2. Approving or disapproving the authorization of additional preferred shares
of Trust II with an aggregate liquidation preference of up to $60 million.
See page 36. (To be voted on by preferred shareholders only.)
By the Trustees
John A. Hill, Chairman
Jameson Adkins Baxter John H. Mullin, III
Hans H. Estin Robert E. Patterson
Ronald J. Jackson George Putnam, III
Paul L. Joskow A.J.C. Smith
Elizabeth T. Kennan W. Thomas Stephens
Lawrence J. Lasser W. Nicholas Thorndike
WE URGE YOU TO MARK, SIGN, DATE, AND MAIL THE ENCLOSED PROXY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, OR FOLLOW THE INSTRUCTIONS IN THESE
MATERIALS RELATING TO TELEPHONIC OR INTERNET VOTING, SO THAT YOU WILL BE
REPRESENTED AT THE MEETING.
----------------- , 2001
4
Prospectus/Proxy Statement
- ----------------- , 2001
> Acquisition of the assets of
Putnam Investment Grade Municipal Trust III
One Post Office Square
Boston, Massachusetts 02109
(617) 292-1000
> By and in exchange for shares of
Putnam Investment Grade Municipal Trust II
One Post Office Square
Boston, Massachusetts 02109
(617) 292-1000
Table of Contents
II. Proposal Regarding Approval or Disapproval of Merger and Plan of
Reorganization
Synopsis........................................................ 8
Risk Factors.................................................... 16
Information about the Proposed Merger........................... 26
II. Proposal Regarding Approval or Disapproval of Authorization of
Additional Preferred Shares of Trust II........................... 36
III. Information about the Funds....................................... 37
IV. Further Information about Voting and the Meeting.................. 63
Agreement and Plan of Reorganization............................. A-1
Information about the Funds' Preferred Shares.................... B-1*
* Mailed to preferred shareholders of Trust II only. A free copy of
Appendix B is available to other shareholders of the funds by calling
1-888-225-1581.
This document will give you the information you need to vote on the
proposals. Much of the information is required under rules of the
Securities and Exchange Commission ("SEC"); some of it is technical. If
there is anything you
5
don't understand, please contact us at our toll-free number,
1-800-xxx-xxxx, or call your financial advisor.
This Prospectus/Proxy Statement relates to the proposed merger of Putnam
Investment Grade Municipal Trust III ("Trust III") into Putnam Investment
Grade Municipal Trust II ("Trust II"). As a result of the proposed merger,
each holder of common shares of Trust III will receive a number of full
and fractional common shares of Trust II equal in value at the date of the
exchange to the total value of the shareholder's Trust III common shares.
Similarly, each holder of preferred shares of Trust III will receive
preferred shares of Trust II with an equal aggregate liquidation
preference. Like Trust II, Trust III is in the family of funds managed by
Putnam Investment Management, LLC ("Putnam Management"). Trust II and
Trust III are collectively referred to herein as the "funds," and each is
referred to individually as a "fund."
This Prospectus/Proxy Statement explains concisely what you should know
before voting on the proposed merger or investing in Trust II, a
diversified, closed-end management investment company. Please read it and
keep it for future reference.
A Statement of Additional Information (the "SAI"), dated ------------- ,
2001, relating to the proposed merger has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement. For a free
copy of the SAI, please contact us at 1-888-225-1581.
The common shares of Trust II are listed on the New York Stock Exchange
(the "NYSE") under the symbol "PMG" and the common shares of Trust III are
listed on the American Stock Exchange (the "AMEX") under the symbol "PML."
You may inspect reports, proxy material and other information concerning
either Trust II or Trust III at its respective exchange.
6
Trust II and Trust III are subject to the informational requirements of
the Securities Exchange Act of 1934 and, in accordance therewith, file
reports and other information with the SEC. You may review and copy
information about either Trust II or Trust III, including the SAI, at the
SEC's public reference room in Washington, D.C. You may call the SEC at
1-202-942-8090 for information about the operation of the public reference
room. You may also access reports and other information about the funds on
the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You
may obtain copies of this information, with payment of a duplication fee,
by electronic request at the following e-mail address: publicinfo@sec.gov,
or by writing the SEC's Public Reference Section, Washington, D.C.
20549-0102.
The securities offered by the accompanying Prospectus/ Proxy Statement
have not been approved or disapproved by the SEC nor has the SEC passed
upon the accuracy or adequacy of such Prospectus/Proxy Statement. Any
representation to the contrary is a criminal offense.
Shares of Trust II are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
agency, and involve risk, including the possible loss of principal amount
invested.
7
Synopsis
I. PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF MERGER AND PLAN OF
REORGANIZATION
> The responses to the questions that follow provide an overview of key
points typically of concern to shareholders considering a proposed merger
between closed-end funds. These responses are qualified in their entirety
by the remainder of the Prospectus/Proxy Statement, which contains
additional information and further details regarding the proposed merger.
1. What is being proposed?
The Trustees of the funds are recommending that shareholders approve the
merger of Trust III into Trust II. If approved by shareholders, all of the
assets of Trust III will be transferred to Trust II in exchange for common
and preferred shares of Trust II (the "Common Merger Shares" and the
"Preferred Merger Shares," respectively, and together, the "Merger
Shares") with a value equal to those assets net of liabilities and for the
assumption by Trust II of all of the liabilities of Trust III. Immediately
following the transfer, the Common Merger Shares and the Preferred Merger
Shares received by Trust III will be distributed to its common and
preferred shareholders, respectively, pro rata.
2. What will happen to my shares as a result of the merger?
If you are a shareholder of Trust III, your common shares of Trust III
will, in effect, be exchanged on a tax-free basis for common shares of
Trust II with an equal aggregate net asset value on the date of the
merger. It is possible, however, that the market value of such shares may
differ. See question 11 below. Your preferred shares of Trust III will, in
effect, be exchanged on a tax-free basis for preferred shares of Trust II
with an equal aggregate liquidation preference and substantially the same
terms.
If you are a shareholder of Trust II, your common and preferred shares of
Trust II will not be affected by the merger, but will represent interests
in a larger fund pursuing the same investment objectives and policies.
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3. Why are the Trustees proposing the merger?
As discussed in more detail below, the two funds are virtually identical
in investment strategy and policy. The merger is a key element in a plan
to make both funds more attractive to shareholders by combining two
relatively small closed-end funds and then having the merged entity issue
additional preferred shares to provide additional income potential.
Accordingly, Trust II currently intends to issue additional preferred
shares following the merger, and is currently seeking the approval of its
preferred shareholders of the issuance by Trust II of new preferred shares
(in addition to the Preferred Merger Shares) with an aggregate liquidation
preference of up to $60 million (the "Additional Preferred Shares").
Although it would be possible for Trust III and Trust II to make
corresponding offerings of new preferred shares separately, Putnam
Management believes that making a single offering of Additional Preferred
Shares following the merger would be more efficient and result in lower
costs of issuance. The significant increase in the number of common and
preferred shares outstanding for the combined fund might also attract
greater investor interest, and may create a more liquid market for
shareholders in the combined fund. As Trust II is considerably larger, the
Trustees believe it is appropriate for the smaller Trust III to be merged
into the larger fund.
4. How do the investment goals, policies and restrictions of the two funds
compare?
The investment goals and policies of the two funds are virtually
identical. Each seeks as high a level of current income exempt from
federal income tax as Putnam Management believes is consistent with
preservation of capital by investing, under normal market conditions, at
least 80% of its assets in investment grade tax-exempt securities. Because
Trust II has proportionately more preferred shares outstanding than Trust
III, Trust II is more leveraged. It is expected that the combined fund
will become even more leveraged following the merger, because Trust II
intends to offer up to $60 million in Additional Preferred Shares.
9
5. How do the management fees and other expenses of the two funds compare,
and what are they estimated to be following the merger?
The aggregate management and administrative services fees payable to
Putnam Management are identical. For more information on the management
and administrative service fees paid by the funds, see "Information about
the Funds--Management" below.
As shown in the table below, Trust II's "other expenses" were slightly
higher on a per common share basis than those of Trust III in each fund's
last year. The difference in expenses is primarily attributable to the
greater relative amount of preferred shares outstanding for Trust II. Each
fund pays management fees, as well as a remarketing fee of 0.25%, on the
aggregate liquidation preference of its outstanding preferred shares. The
pro forma post-merger total operating expenses of Trust II are also higher
than those of Trust III on a per common share basis for the same reason,
and would be even higher giving effect to the proposed issuance of
Additional Preferred Shares. Putnam Management believes that these higher
expenses are offset by the potential for higher income.
Trust II Trust III
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Shareholder transaction expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) None(a) None(a)
Dividend Reinvestment Plan None(b) None(b)
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(a) Shares of either fund purchased on the secondary market are not subject to
sales charges but may be subject to brokerage commissions or other charges.
The table does not include an underwriting commission paid by shareholders
in the initial offering of each fund.
(b) Each participant in a fund's dividend reinvestment plan pays a
proportionate share of the brokerage commissions incurred with respect to
open market purchases in connection with such plan.
10
Annual Fund Operating Expenses
(Expenses that are deducted from Fund assets)*
Trust II
(Pro forma
combined with
Trust II Additional
(Pro forma Preferred
Trust III Trust II combined) Shares)
- ---------------------------------------------------------------------------------------
Management Fees 0.85%** 0.96% 0.94% 1.13%
Other Expenses 0.31% 0.30% 0.27%*** 0.36%***
Total Annual Fund
Operating Expenses 1.16% 1.26% 1.21%*** 1.49%***
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*Ratios reflect net assets available to common shares only.
**Includes an administrative services fee for Trust III.
***Does not reflect non-recurring merger expenses. If such expenses had been
reflected, pro forma "other expenses" and Total Annual Fund Operating
Expenses would have been .51% and 1.45%, respectively (or 0.60% and 1.73%,
respectively, giving effect to the Additional Preferred Shares).
The tables are provided to help you understand the expenses of investing
in the funds and your share of the operating expenses that each fund
incurs and that Putnam Management expects the combined fund to incur in
the first year following the merger. The expenses shown in the table do
not reflect the application of credits related to expense offset
arrangements that reduce certain fund expenses.
Examples
These examples translate the "Total Annual Fund Operating Expenses" shown
in the preceding table into dollar amounts. By doing this, you can more
easily compare the cost of investing in the funds. The examples make
certain assumptions. They assume that you invest $1,000 in a fund for the
time periods shown and then redeem all your shares at the end of these
periods. They also assume 5% return on your investment each year and that
a fund's operating expenses remain the same. The examples are
hypothetical; your actual costs and returns may be higher or lower.
11
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ----------
Trust III $12 $37 $64 $141
Trust II $13 $40 $69 $152
Trust II
(Pro forma
combined) $12 $38 $67 $147
Trust II
(Pro forma
combined
Additional
Preferred Shares) $15 $47 $81 $178
- --------------------- --- --- --- ----
6. What are the federal income tax consequences of the proposed merger?
For federal income tax purposes, no gain or loss will be recognized by the
funds or their shareholders as a result of the merger.
7. Will my dividend be affected by the merger?
The merger will not result in a change in dividend policy or, because the
funds' earning rates are currently similar, any immediate change in
current dividend rate. Over the longer term, the level of dividends will
depend on market conditions and the ability of Putnam Management to invest
the fund's assets, including those received in the merger, in securities
meeting Trust II's investment objectives and policies. Trust II will not
permit any holder of Trust III common shares holding certificates for such
shares at the time of the merger to receive cash dividends or other
distributions, receive certificates for Common Merger Shares or pledge
Common Merger Shares until such certificates for Trust III shares have
been surrendered, or, in the case of lost certificates, until an adequate
surety bond has been posted.
12
If a shareholder is not, for the reason above, permitted to receive cash
dividends or other distributions on Common Merger Shares, Trust II will
pay all such dividends and distributions in additional shares,
notwithstanding any election the shareholder may have made previously to
receive dividends and distributions on Trust III shares in cash.
8. Do the procedures for purchasing and selling shares of the two funds
differ?
Except for the fact that the common shares of Trust II are listed on the
NYSE while the common shares of Trust III are listed on the AMEX, the
procedures for purchasing and selling shares of each fund are identical
and will not change. As closed-end funds, the funds do not redeem
outstanding shares or continuously offer shares. The funds' shares
currently may be bought and sold at prevailing market prices on the
relevant exchange. Trust II will apply to list the Common Merger Shares on
the NYSE. It is a condition to the closing of the merger that the Common
Merger Shares be accepted for listing.
9. How will I be notified of the outcome of the merger?
If the proposed merger is approved, shareholders of Trust III will receive
confirmation after the reorganization is completed, indicating your new
account number, the number of shares you are receiving and the procedures
for surrendering your certificates, if you have any; shareholders of Trust
II will be notified in the next annual report of Trust II. If the merger
is not approved, shareholders will be notified and the results of the
meeting will be provided in the next annual report of each fund.
10. Will the number of shares I own change?
The number of preferred shares of Trust III you own will not change. If
you are a common shareholder of Trust III, the number of common shares you
own will change and the total value of the common shares of Trust II you
receive will equal
13
the total value of the common shares of Trust III that you hold at the
time of the merger. If you are a shareholder of Trust II, the number of
Trust II shares you own will not change. Even though the net asset value
per common share of each fund is different, the total net asset value of a
shareholder's holdings will not change as a result of the merger. Of
course, the Common Merger Shares may trade at a discount from net asset
value, which might be greater or less than the trading discount of Trust
III common shares at the time of the merger.
11. Will the market value of my investment change?
Common shares of each fund will continue to be traded on the relevant
exchange until the time of the merger, and may at times trade at a market
price greater or less than net asset value. In recent years, shares of
both funds have traded at a discount to net asset value. Depending on
market conditions immediately prior to the exchange, common shares of
Trust II may trade at a greater or smaller discount to net asset value
than common shares of Trust III. This could result in the Common Merger
Shares having a market value that is greater or less than the market value
the Trust III common shares currently have.
12. Why is the vote of Trust II's shareholders being solicited?
Although, as a technical matter, Trust II will continue its legal
existence and operations as before, we are required by the Rules of the
NYSE to solicit the vote of Trust II's shareholders in this matter. In
addition, because the merger involves the issuance by Trust II of
preferred shares (the Preferred Merger Shares), Trust II's Bylaws require
the approval of Trust II's existing preferred shareholders.
14
13. What percentage of shareholders' votes are required to approve the merger?
Approval of the merger will require the "yes" vote of the holders of:
o a majority of the outstanding common and preferred shares of beneficial
interest of Trust III entitled to vote (voting together),
o a majority of the outstanding preferred shares of Trust III,
o a majority of the outstanding common and preferred shares of beneficial
interest of Trust II entitled to vote (voting together) (or a majority
of the outstanding common and preferred shares of beneficial interest of
Trust II voted, if holders of more than 50% of such shares vote), and
o a majority of the outstanding preferred shares of Trust II.
The Trustees believe that the proposed merger is in the best interests of
each fund's shareholders. Accordingly, the Trustees unanimously recommend
that shareholders vote for approval of the proposed merger.
15
Risk Factors
> What is the principal risk of the proposed merger and related
transactions?
Although Trust II and Trust III have virtually identical investment
policies and operate in a similar manner, the merger will result in
increased investment leverage for shareholders of Trust III because Trust
II's capital structure is more leveraged than Trust III's. In addition, if
the merger is completed, the combined fund intends to issue up to $60
million in Additional Preferred Shares, which will increase leverage for
all shareholders of the combined fund. The percentage of the net assets
represented by preferred shares for the two funds and on a pro forma basis
for the combined fund is as follows (as of October 31, 2000):
Percentage Represented by
Fund Preferred Shares
- --------------------------------------- --------------------------
Trust III 16.6%
Trust II 26.7%
Pro forma combined
Giving effect to merger 24.7%
Giving effect to merger and Additional
Preferred Shares 37.4%
- --------------------------------------- ----
As of December 31, 2000, the average leverage percentage (preferred shares
divided by total assets) for the universe of closed-end municipal bond
funds as determined by UBS Warburg was 34%.
Although the increase in leverage is intended to enhance the income of the
combined fund, the increase in leverage also involves significant risks
not present with unleveraged funds having similar investment objectives
and policies, including a higher volatility of the net asset value of the
shares and potentially more volatility in the market value of the common
shares.
Successful use of a leveraging strategy may depend on Putnam Management's
ability to correctly predict interest
16
rates and market movements, and there is no assurance that a leveraging
strategy will be successful during any period in which it is employed.
So long as the increase in Trust II's net return on its investment
portfolio as a result of the leverage provided by the preferred shares is
greater than the then current dividend rate on common shares, after taking
into account the additional operating expenses relating to the preferred
shares, the effect of the leverage provided by such preferred shares will
be to cause the common shareholders to realize a higher current dividend
rate than if Trust II were not so leveraged. On the other hand, to the
extent that the then current dividend rate on the preferred shares were to
exceed the amount of any such increase after expenses in Trust II's net
return on its investment portfolio as a result of leverage provided by the
preferred shares, Trust II's leveraged capital structure would result in a
lower rate of return to its common shareholders than if Trust II had less
leverage or an unleveraged capital structure. In addition to the potential
effects on investment income and dividends, Trust II's leveraged capital
structure may also adversely affect the net asset value and market value
of its common shares. Similarly, because any decline in the value of Trust
II's investments is generally borne by its common shareholders, the effect
of leverage in a declining market would be to cause a greater decline in
the net asset value of common shares than if Trust II were not leveraged,
which would likely be reflected in a greater decline in the market price
for Trust II's common shares. Under those circumstances Trust II might
redeem its preferred shares, thereby eliminating the potential benefits of
leverage to the common shareholders.
If the fund's current investment income is not sufficient to meet dividend
payments on its preferred shares, it could be necessary for the fund to
liquidate certain of its investments, thereby reducing the net asset value
attributable to the fund's common shares. In addition, a decline in the
net asset value
17
of the fund's investments may affect the ability of the fund to make
dividend payments on its common shares, and such failure to pay dividends
or make distributions may result in the fund ceasing to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
Leverage thus creates risks for common shareholders, including the risk
that fluctuations in the dividend rates of the preferred shares may affect
the yield to common shareholders, and the likelihood of greater volatility
of the net asset value and market value of the common shares. Upon any
liquidation of Trust II, the holders of the preferred shares would be
entitled to receive liquidating distributions (expected to equal the
original purchase price per preferred share plus any accumulated and
unpaid dividends) before any distribution would be made to common
shareholders.
> What are the main investment strategies and related risks of Trust II and
how do they compare with those of Trust III?
Because the funds share identical goals and the same policies, the risks
described below for an investment in Trust II are virtually identical to
the risks of an investment in Trust III, except as noted above with
respect to leverage.
Any investment carries with it some level of risk that generally reflects
its potential for reward. The fund normally pursues its goal by investing
at least 80% of the fund's net assets in tax-exempt securities. This
investment policy cannot be changed without the approval of the fund's
shareholders. Putnam Management will consider, among other things, credit,
interest rate and prepayment risks as well as general market conditions
when deciding whether to buy or sell investments for the fund.
Tax-exempt investments. These investments are issued by public authorities
to raise money for public purposes, such as
18
loans for the construction of housing, schools or hospitals, or to provide
temporary financing in anticipation of the receipt of taxes and other
revenue. They also include private activity obligations of public
authorities to finance privately owned or operated facilities. Changes in
law or adverse determinations by the Internal Revenue Service (the
"Service") or a state authority could make the income from some of these
obligations taxable.
Interest income from private activity bonds may be subject to Federal
Alternative Minimum Tax ("AMT") for individuals. The fund can include
these investments for the purpose of complying with the 80% investment
policy described above. Corporate shareholders will be required to include
all tax- exempt interest dividends in determining their AMT. For more
information, including possible state and other taxes, contact your tax
advisor.
General obligations. These are backed by the issuer's authority to levy
taxes and are considered an obligation of the issuer. They are payable
from the issuer's general unrestricted revenues, although payment may
depend upon government appropriation or aid from other governments. These
investments may be vulnerable to legal limits on a government's power to
raise revenue or increase taxes, as well as economic or other developments
that can reduce revenues.
Special revenue obligations. These are payable from revenue earned by a
particular project or other revenue source. They include private activity
bonds such as industrial development bonds, which are paid only from the
revenues of the private owners or operators of the facilities. Investors
can look only to the revenue generated by the project or the private
company operating the project rather than the credit of the state or local
government authority issuing the bonds. Special revenue obligations are
typically subject to greater credit risk than general obligations because
of the relatively limited source of revenue.
19
Interest rate risk. The values of bonds and other debt usually rise and
fall in response to changes in interest rates. Declining interest rates
generally increase the values of existing debt instruments, and rising
interest rates generally decrease the values of existing debt instruments.
Changes in a debt instrument's value usually will not affect the amount of
income the fund receives from it, but will affect the value of the fund's
shares. During periods of rising interest rates, the fund's yield will
likely rise as amounts received by the fund from repayments of principal
are reinvested by the fund in investments paying higher interest rates.
Conversely, during times of falling interest rates, the fund's yield will
likely decline, as it reinvests such amounts in investments paying lower
interest rates. Interest rate risk is generally greater for investments
with longer maturities.
Some investments give the issuer the option to call, or redeem them before
their maturity date. If an issuer calls its securities during a time of
declining interest rates, the fund might have to reinvest the proceeds in
an investment offering a lower yield, and therefore might not benefit from
any increase in value as a result of declining interest rates.
"Premium investments" offer interest rates higher than prevailing market
rates. However, they involve a greater risk of loss, because their values
tend to decline over time. You may find it useful to compare the fund's
yield, which factors out the effect of premium investments, with its
current dividend rate, which does not factor out that effect.
Credit risk. Investors normally expect to be compensated in proportion to
the risk they are assuming. Thus, the debt of issuers with lower credit
ratings usually offers higher yield than debt of issuers with more higher
credit ratings. Higher-rated investments generally offer lower credit
risk.
The fund invests mostly in investment-grade debt investments. These are
rated at least BBB or its equivalent at the time of
20
purchase by a nationally recognized securities rating agency. The fund may
invest up to 20% of its total assets in securities rated at least B by a
nationally recognized securities rating agency and unrated investments
that Putnam Management believes are of comparable quality. The fund will
not necessarily sell an investment if its rating is reduced.
Investments rated below BBB or its equivalent are known as "junk bonds."
This rating reflects a greater possibility that the issuers may be unable
to make timely payments of interest and principal and thus default. If
this happens, or is perceived as likely to happen, the values of those
investments are likely to fall. A default or expected default could also
make it difficult for us to sell investments at prices approximating the
values the fund had previously placed on them. Tax-exempt debt,
particularly lower-rated tax-exempt debt, usually has a more limited
market than taxable debt, which may at times make it difficult for us to
buy or sell certain investments or to establish their fair value. Credit
risk is generally greater for investments that are issued at less than
their face value and make payments of interest only at maturity rather
than at intervals during the life of the investment.
Credit ratings are based largely on the issuer's historical financial
condition and the rating agencies' investment analysis at the time of
rating. The rating assigned to any particular investment does not
necessarily reflect the issuer's current financial condition, and does not
reflect an assessment of an investment's volatility or liquidity.
Although Putnam Management considers credit ratings in making investment
decisions, it performs its own investment analysis and does not rely on
ratings assigned by the rating agencies. However, the amount of
information about the financial condition of issuers of tax-exempt
securities may not be as extensive as that which is made available by
companies whose stock or debt is publicly traded. Successful investing in
21
lower-rated securities depends more on Putnam Management's ability than
does buying investment-grade securities.
The fund may have to participate in legal proceedings or to take
possession of and manage assets that secure the issuer's obligations. The
fund's ability to enforce rights in bankruptcy proceedings may be more
limited than would be the case for taxable debt. This could increase the
fund's operating expenses and decrease its net asset value. Any income
that arises from ownership or operation of assets would be taxable.
Although investment-grade investments generally have lower credit risk,
they may share some of the risks of lower-rated investments.
Concentration of investments. The fund may make significant investments in
a segment of the tax-exempt debt market, such as revenue bonds for health
care facilities, housing or airports. These investments may cause the
value of fund's shares to change more than the value of shares of funds
that invest in a greater variety of investments. Certain events may
adversely affect all investments within a particular market segment.
Examples include legislation or court decisions, concerns about pending
legislation or court decisions, or lower demand for the services or
products provided by a particular market segment.
At times, the fund and other accounts that Putnam Management and its
affiliates manage may own all or most of the debt of a particular issuer.
This concentration of ownership may make it more difficult to sell, or to
determine the fair value of, these investments.
Derivatives. The fund may engage in a variety of transactions involving
derivatives, such as futures, options, warrants, swap contracts and
inverse floaters. Derivatives are financial instruments whose value
depends upon, or is derived from, the value of something else, such as one
or more underlying investments, pools of investments or indexes. The fund
may
22
use derivatives both for hedging and non-hedging purposes such as to
adjust the fund's exposure to changes in a particular interest rate. For
example, the fund may use derivatives to increase or decrease its exposure
to long- or short-term interest rates. However, the fund may also choose
not to use derivatives, based on Putnam Management's evaluation of market
conditions or the availability of suitable derivatives.
Derivatives involve special risks and may result in losses. Successful use
of derivatives depends on Putnam Management's ability to manage these
sophisticated instruments. The prices of derivatives may move in
unexpected ways, especially in unusual market conditions. Some derivatives
are "leveraged" and therefore may magnify or otherwise increase investment
losses. The fund's use of derivatives may also cause the fund to receive
taxable income, which could increase the amount of taxes payable by
shareholders.
Other risks arise from the potential inability to terminate or sell
derivatives positions as well as an illiquid secondary market. In fact,
many over-the-counter instruments (those investments not traded on an
exchange) will not be liquid. Over-the-counter instruments also involve
the risk that the other party to the transaction will not meet its
obligations. For further information about the risks of derivatives, see
the SAI.
Inverse floating obligations. The fund may invest in so-called "inverse
floating obligations" or "residual interest bonds" on which the interest
rates typically decline as short-term market interest rates increase and
increase as short-term market rates decline. Such securities have the
effect of providing a degree of investment leverage, since they will
generally increase or decrease in value in response to changes in market
interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term tax-exempt securities increase or decrease
in response to such changes.
23
As a result, the market values of such securities will generally be more
volatile than the market value of fixed-rate tax-exempt securities.
Anti-takeover provisions. The fund's Agreement and Declaration of Trust
includes provisions that could limit the ability of other persons or
entities to acquire control of the fund or to cause it to engage in
certain transactions or to modify its structure. Such provisions may have
the effect of depriving common shareholders of an opportunity to sell
their common shares at a premium over prevailing market prices and may
have the effect of inhibiting the fund's conversion to open-end status.
Market price of shares. Shares of closed-end investment companies often
trade at a discount to their net asset values, and the fund's common
shares may likewise trade at a discount, although it is possible that they
may trade at a premium above net asset value. Net asset value will be
reduced immediately following the merger as a result of merger-related
expenses. Since the market price of the fund's common shares will be
determined by such factors as relative demand for and supply of such
shares in the market, the fund's net asset value, general market and
economic conditions, and other factors beyond the control of the fund, the
fund cannot predict whether its common shares will trade at, below, or
above net asset value.
Other investments. In addition to the main investment strategies described
above, the fund may also make other types of investments, such as
investments in repurchase agreements and forward commitments, which may
produce taxable income and be subject to other risks, as described in the
SAI.
Alternative strategies. Under normal market conditions, the fund keeps its
portfolio fully invested, with minimal cash holdings. However, at times
Putnam Management may judge
24
that market conditions make pursuing the fund's usual investment
strategies inconsistent with the best interests of its shareholders. The
fund then may temporarily use alternative strategies that are mainly
designed to limit losses, including investing in taxable obligations.
However, Putnam Management may choose not to use these strategies for a
variety of reasons, even in very volatile market conditions. These
strategies may cause the fund to miss out on investment opportunities, and
may prevent the fund from achieving its goal.
Changes in policies. The fund's Trustees may change the fund's objective,
investment strategies and other policies without shareholder approval,
except as otherwise indicated.
An investment in Trust II may not be appropriate for all investors, and
there is no assurance that Trust II will achieve its investment objective.
Trust II is designed primarily as a long-term investment and not as a
trading vehicle.
25
Information about the Proposed Merger
The shareholders of each fund are being asked to approve or disapprove a
merger between Trust III and Trust II pursuant to an Agreement and Plan of
Reorganization between the funds, dated as of April --- , 2001 (the
"Agreement"), a copy of which is attached to this Prospectus/Proxy
Statement as Appendix A.
The merger is structured as a transfer of all of the assets of Trust III
to Trust II in exchange for the assumption by Trust II of all of the
liabilities of Trust III and for preferred and common shares of Trust II
equal in aggregate value to the net value of assets transferred to Trust
II. As part of the merger, Trust III's Bylaws will be amended to make
explicit the authority of Trust III to distribute the Preferred Merger
Shares to its preferred shareholders and to distribute the Common Merger
Shares to its common shareholders.
After receipt of the Merger Shares, Trust III will distribute the
Preferred Merger Shares to its preferred shareholders, and the Common
Merger Shares to its common shareholders, in proportion to their existing
shareholdings in complete liquidation of Trust III, and the legal
existence of Trust III as a separate business trust under Massachusetts
law will be terminated. Each common shareholder of Trust III will receive
a number of full and fractional Common Merger Shares and each preferred
shareholder of Trust III will receive Preferred Merger Shares equal in
liquidation preference at the date of the exchange to the aggregate
liquidation preference of the shareholder's Trust III shares.
Prior to the date of the transfer (the "Exchange Date"), Trust III will
declare a distribution to shareholders which, together with all previous
distributions, will have the effect of distributing to shareholders all of
its investment company income (computed without regard to the deduction
for dividends paid) and net realized capital gains, if any, through the
Exchange Date.
26
The Trustees have voted unanimously to approve the proposed merger and to
recommend that shareholders also approve the merger. The actions
contemplated by the Agreement and Plan of Reorganization will be
consummated only if approved by the affirmative vote of the (i) holders of
a majority of the outstanding common and preferred shares of beneficial
interest of Trust III entitled to vote (voting together), (ii) holders of
a majority of the outstanding preferred shares of Trust III, (iii) holders
of a majority of the outstanding common and preferred shares of beneficial
interest of Trust II entitled to vote (voting together) (or holders of a
majority of such common and preferred shares voted, if holders of more
than 50% of such shares vote), and (iv) holders of a majority of the
outstanding preferred shares of Trust II. It is a condition to the closing
of the merger that Standard & Poor's and Moody's shall have advised Trust
II that the closing of the merger will not result in the withdrawal of
their current ratings of Trust II's outstanding preferred shares.
As noted above, Trust II currently intends to sell additional preferred
shares following the merger, and is currently seeking the approval of its
preferred shareholders of the issuance by Trust II of preferred shares
with an aggregate liquidation preference of up to $60 million. Although
the amount, timing and terms of a preferred share offering will be
determined by the Trustees, it is expected that Trust II will offer
additional preferred shares promptly following the completion of the
proposed merger. It is a condition of the merger that authorization of the
issuance of the Additional Preferred Shares be approved by the holders of
Trust II's outstanding preferred shares.
In the event that the merger does not receive the required approvals, each
fund will continue to be managed as a separate fund in accordance with its
current investment objectives and policies, and the Trustees may consider
such alternatives as may be in the best interests of its shareholders.
27
Background and reasons for the proposed merger.
The Trustees of each fund, including all Trustees who are not "interested
persons" of the funds as defined in the Investment Company Act of 1940
(the "1940 Act"), have determined that the merger would be in the best
interests of each fund's shareholders, and that the interests of existing
shareholders of each of the funds would not be diluted as a result of
effecting the reorganization. The Trustees have unanimously approved the
proposed reorganization and have recommended its approval by shareholders.
The merger is the result of a set of proposals by the funds' manager,
Putnam Management, intended to improve the attractiveness of the funds to
investors. First, the two funds are relatively small (as of February 28,
2001, Trust II had approximately $177 million in total assets and Trust
III had approximately $51 million in total assets). As a result, the funds
are not generally followed by investment analysts and have had relatively
small trading markets. In addition, the funds have relatively low levels
of investment leverage when compared to other national tax-exempt funds.
Putnam Management believes that investment leverage, while imposing risks,
can offer significant opportunities for increased income. Putnam
Management advised the Trustees of its concern that, without additional
leverage, the funds' yield could be uncompetitive over time relative to
other national tax-exempt funds.
Putnam Management proposed a series of steps to the Trustees to enhance
the attractiveness of the funds. These steps included (1) a change in
investment policy to permit up to 20% of each fund to be invested in below
investment grade securities (this change was approved and is currently in
effect), (2) the merger of the two funds, (3) the issuance of Additional
Preferred Shares and (4) renaming the combined fund "Putnam Municipal Bond
Fund."
28
Based on Putnam Management's advice, the Trustees have concluded that the
merger is in the best interests of the funds' shareholders. Putnam
Management believes that
o the combination of the two funds may enhance the trading market for the
funds' shares and the potential for greater investor and analyst
interest;
o shareholders in the combined fund will benefit from the cost savings
associated with making a single offering of Additional Preferred Shares
rather than two separate offerings; and
o the merger and the subsequent offering of Additional Preferred Shares,
if completed, may increase the income available to common shareholders
of the combined fund.
Putnam Management believes that for these reasons the proposed merger and
offering of Additional Preferred Shares may lead to lower trading
discounts for the combined fund's common shares.
There can be no assurance that the merger will produce the intended
benefits.
29
Set forth below is total return information for the common shares of the
two funds for the one-year periods ending on the dates stated:
Annualized Total Return
(Total Investment Return at NAV)
Year ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- ---------- ---------
Trust II 12.7% -5.5% 4.6% 10.5% 1.9%
Trust III 12.7% -4.7% 5.7% 9.9% 3.1%
- ----------- ---- ----- --- ---- ---
The dividend yield for each fund as of December 31, 2000 was as follows:
Trust II Trust III
- ----------------------------- -----------------------------
NAV Market Price NAV Market Price
5.85% 6.75% 5.81% 6.49%
- ---- ---- ---- ----
Of course, the funds' past performance is no guarantee of future
performance.
Agreement and plan of reorganization. The proposed merger will be governed
by an Agreement and Plan of Reorganization. The Agreement provides that
Trust II will acquire all of the assets of Trust III in exchange for the
assumption by Trust II of all of the liabilities of Trust III and for the
issuance of Preferred and Common Merger Shares equal in value to the value
of the transferred assets net of assumed liabilities. The shares will be
issued on the next full business day (the "Exchange Date") following the
time as of which the funds' shares are valued for determining net asset
value for the merger (4:00 p.m. Boston time on ----------------- , 2001 or
such other date as may be agreed upon by the parties). The following
discussion of the Agreement is qualified in its entirety by the full text
of the Agreement, which is attached as Appendix A to this Prospectus/Proxy
Statement.
Trust III will sell all of its assets to Trust II, and in exchange, Trust
II will assume all of the liabilities of Trust III and deliver
30
to Trust III (i) a number of full and fractional Preferred Merger Shares
having an aggregate liquidation preference equal to, and terms
substantially similar to, those of the outstanding preferred shares of
Trust III; and (ii) a number of full and fractional Common Merger Shares
having a net asset value equal to the value of assets of Trust III, less
the value of the liabilities of Trust III assumed by Trust II (including
the liquidation preference of Trust III's outstanding preferred shares).
Immediately following the Exchange Date, Trust III will distribute pro
rata to its shareholders of record, as of the close of business on the
Exchange Date, the full and fractional Merger Shares received by Trust
III, with Preferred Merger Shares being distributed to holders of
preferred shares of Trust III and Common Merger Shares being distributed
to holders of common shares of Trust III. As a result of the proposed
merger, each holder of preferred shares of Trust III will receive a number
of preferred shares equal in aggregate liquidation preference to such
preferred shares of Trust III. Similarly, each holder of common shares of
Trust III will receive a number of common shares of Trust II equal in
aggregate value at the Exchange Date to the value of such common shares of
Trust III. This distribution will be accomplished by the establishment of
accounts on the share records of Trust II in the name of such Trust III
shareholders, each account representing the respective number of full and
fractional preferred and common shares due such shareholder. New
certificates for Common Merger Shares will be issued only upon written
request; no certificates will be issued for Preferred Merger Shares. If
you hold certificates for shares of Trust III you will not, following the
merger, be able to receive any dividends or transfer your Trust II shares
until you have delivered your Trust III share certificate to
----------------- .
The consummation of the merger is subject to the conditions set forth in
the Agreement. The Agreement may be terminated and the merger abandoned at
any time, before or after approval by
31
the shareholders, prior to the Exchange Date by mutual consent of Trust II
and Trust III or, if any condition set forth in the Agreement has not been
fulfilled and has not been waived by the party entitled to its benefits,
by such party.
The fees and expenses for the merger are estimated to be approximately
$526,000. All fees and expenses, including legal and accounting expenses,
portfolio transfer taxes (if any) or other similar expenses incurred in
connection with the consummation of the transactions contemplated by the
Agreement will be allocated ratably between the two funds in proportion to
their net assets as of the day of the transfer, except that the costs of
proxy materials and proxy solicitations for each fund will be borne by
that fund. However, to the extent that any payment by either fund of such
fees or expenses would result in the disqualification of Trust II or Trust
III as a "regulated investment company" within the meaning of Section 851
of the Code, such fees and expenses will be paid directly by the party
incurring them.
Description of the Merger Shares. Each of the Merger Shares will be fully
paid and nonassessable when issued and will have no preemptive or
conversion rights. The Preferred Merger Shares will have terms identical
to those of Trust III's outstanding preferred shares, except that the
terms of the Preferred Merger Shares will authorize the issuance of the
Additional Preferred Shares. The Common Merger Shares will be transferable
without restriction, but the Preferred Merger Shares will be subject to
the same restrictions on transfer as the outstanding preferred shares of
Trust III. The Agreement and Declaration of Trust of Trust II permits the
fund to divide its shares, without shareholder approval, into two or more
classes of shares having such preferences and special or relative rights
and privileges as the Trustees may determine. Trust II's shares are
currently divided into two classes.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations
32
of Trust II. However, the Agreement and Declaration of Trust disclaims
shareholder liability for acts or obligations of Trust II and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by Trust II or its Trustees. The
Agreement and Declaration of Trust provides for indemnification out of
fund property for all loss and expense of any shareholder held personally
liable for the obligations of Trust II. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Trust II would be unable to meet its obligations.
The likelihood of such circumstances is remote. The shareholders of Trust
III are currently subject to this same risk of shareholder liability.
Federal income tax consequences. As a condition to each fund's obligation
to consummate the reorganization, each fund will receive an opinion from
Ropes & Gray, counsel to the funds (which opinion would be based on
certain factual representations and subject to certain qualifications), to
the effect that, on the basis of the existing provisions of the Code,
current administrative rules and court decisions, for Federal income tax
purposes:
(i) the acquisition by Trust II of substantially all of the assets of
Trust III solely in exchange for Merger Shares and the assumption by
Trust II of liabilities of Trust III followed by the distribution by
Trust III to its shareholders of Merger Shares in complete
liquidation of Trust III, all pursuant to the plan of
reorganization, constitutes a reorganization within the meaning of
Section 368(a) of the Code and Trust III and Trust II will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code;
(ii) under Section 361 of the Code, no gain or loss will be recognized
by Trust II or Trust III upon the transfer of Trust III's assets and
the assumption of its liabilities by Trust II or upon the
distribution of the Merger Shares to Trust III's shareholders in
liquidation of Trust III;
33
(iii) under Section 354 of the Code, no gain or loss will be recognized
by shareholders of Trust III on the exchange of their shares of
Trust III for Merger Shares;
(iv) under Section 358 of the Code, the aggregate basis of the Merger
Shares received by Trust III's shareholders will be the same as the
aggregate basis of Trust III shares exchanged therefor;
(v) under Section 1223(1) of the Code, the holding periods of the Merger
Shares received by the shareholders of Trust III will include the
holding periods of Trust III shares exchanged therefor, provided
that at the time of the reorganization Trust III shares are held by
such shareholders as a capital asset;
(vi) under Section 1032 of the Code, no gain or loss will be recognized
by Trust II upon the receipt of assets of Trust III in exchange for
Merger Shares and the assumption by Trust II of the liabilities of
Trust III;
(vii) under Section 362(b) of the Code, the basis in the hands of Trust
II of the assets of Trust III transferred to Trust II will be the
same as the basis of such assets in the hands of Trust III
immediately prior to the transfer;
(viii) under Section 1223(2) of the Code, the holding periods of the
assets of Trust III in the hands of Trust II will include the
periods during which such assets were held by Trust III;
(ix) Trust II's holding periods with respect to the investments will
include the respective periods for which the investments were held
by Trust III; and
(x) Trust II will succeed to and take into account the items of Trust
III described in Section 381(c) of the Code, subject to the
conditions and limitations specified in Sections 381, 382, 383 and
384 of the Code and Regulations thereunder.
34
Capitalization. The following table shows the capitalization of the funds
as of October 31, 2000, and on a pro forma combined basis, giving effect
to the proposed acquisition of assets at net asset value as of that date:
(UNAUDITED)
Pro Forma
Combined
with
Additional
Pro Forma Preferred
Trust II Trust III Combined* Shares*
------------- ----------- ------------- -------------
Net assets+
(000's omitted) $236,039 $60,228 $295,954 $355,954
Shares outstanding
Common
(000's omitted) 13,357 4,007 17,232 17,232
Preferred 1,260 200 1,460 2,660
Net asset value
per common share $ 12.96 $ 12.55 $ 12.93 $ 12.93
- -------------------- -------- ------- -------- --------
+Assets reflect proxy-related costs.
* Pro forma combined net assets reflect legal and accounting merger-related
costs.
Unaudited pro forma combining financial statements of the funds as of
October 31, 2000, and for the twelve-month period then ended are included
in the SAI relating to the proposed merger. Because the Agreement provides
that Trust II will be the surviving fund following the merger and because
Trust II's investment objectives and policies will remain unchanged, the
pro forma combining financial statements reflect the transfer of the
assets and liabilities of Trust III to Trust II as contemplated by the
Agreement.
THE TRUSTEES, INCLUDING THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMEND
APPROVAL OF THE MERGER.
35
II. PROPOSAL REGARDING APPROVAL OR DISAPPROVAL OF AUTHORIZATION OF ADDITIONAL
PREFERRED SHARES OF TRUST II
1. What is this proposal about?
The Trustees are recommending that Trust II's preferred shareholders
authorize the issuance of the Additional Preferred Shares. It is currently
expected that the Additional Preferred Shares would be issued on terms
substantially similar to those of the outstanding preferred shares of
Trust II or Trust III and would be on parity with Trust II's outstanding
preferred shares and the Preferred Merger Shares with respect to the
payment of dividends or distribution of assets in liquidation. For more
information about the funds' preferred shares, see "Information about the
Funds--Preferred Shares" below and "Information about the Funds' Preferred
Shares" in the SAI or, for preferred shareholders of Trust II only,
Appendix B to this Prospectus/Proxy Statement.
2. Why are the Trustees proposing the authorization of issuance of the
Additional Preferred Shares?
As discussed above, the merger and issuance of Additional Preferred Shares
are key elements in a plan to make both funds more attractive to
shareholders. After the merger, the combined fund intends, subject to
Trustee approval, shareholder approval and market conditions, to issue
Additional Preferred Shares to provide additional income potential.
3. What will happen to Trust II's outstanding preferred shares as a result of
the issuance of Additional Preferred Shares?
Although the issuance of Additional Preferred Shares, by increasing the
leverage of the combined fund, will have the effect of decreasing the
asset coverage of Trust II's outstanding preferred shares, the Fund will
not issue any Additional Preferred Shares unless it has been informed by
the rating agencies that such issuance will not cause the rating of such
outstanding preferred shares to fall below AAA by Standard & Poor's and
36
Aaa by Moody's. Trust II's outstanding preferred shares would, in
addition, remain subject to the 1940 Act and other asset coverage
requirements to which they are currently subject.
4. What percentage of shareholders' votes are required to authorize the
issuance of Additional Preferred Shares?
Approval of the issuance of Additional Preferred Shares will require the
"yes" vote of the holders of a majority of the outstanding preferred
shares of Trust II.
The Trustees believe that the issuance of Additional Preferred Shares is
in the best interests of shareholders. Accordingly, the Trustees
unanimously recommend Trust II's preferred shareholders vote FOR approval
of the authorization of Additional Preferred Shares.
III. INFORMATION ABOUT THE FUNDS
Trust II and Trust III are both Massachusetts business trusts and are both
diversified closed-end management companies. Trust II was organized on
October 2, 1992, and Trust III was organized on September 23, 1993.
Preferred Shares. Both Trust II and Trust III have outstanding preferred
shares intended to increase the current income available for distribution
to holders of the funds' common shares. Because, as noted above, Trust II
is more leveraged than Trust III, and because Trust II expects to issue
Additional Preferred Shares following the merger, the special risks of
preferred shares will be greater for Trust II than for Trust III. See
"Risk Factors."
The preferred shares pay dividends at rates that are adjusted over the
short or medium term and reflect prevailing short- and medium-term
tax-exempt interest rates. The proceeds of the original preferred share
offering were invested and the proceeds of the proposed preferred share
offering would be invested in long-term tax-exempt securities, which
typically bear interest rates that are higher than short- and medium-term
tax-exempt interest rates.
37
Assuming such comparative yields, the leveraged capital structure of Trust
II would potentially enable Trust II to pay a higher yield on its common
shares than investment companies with investment objectives similar to
that of Trust II, but without an additional class of shares with
preference and dividend rights similar to those of Trust II's outstanding
preferred shares. Use of leverage may, under certain circumstances, cause
the yield on Trust II's common shares to be lower and cause Trust II's net
asset value to decline to a greater extent than would be the case if Trust
II were not to use leverage, as described below.
Trust II's use of leverage through issuance of preferred shares requires
Trust II to meet certain requirements and may entail certain risks. Under
the asset coverage requirements of the 1940 Act, the value of Trust II's
total assets, less all liabilities and indebtedness of Trust II, must be
at least equal to 200% of the aggregate liquidation preference of the
outstanding preferred shares. The liquidation preference of the preferred
shares equals their aggregate original purchase price plus any accrued and
unpaid dividends thereon. In addition, Trust II is required at all times
when the preferred shares are outstanding to meet additional requirements
imposed by rating agencies in connection with the rating of the preferred
shares. Because of the 1940 Act asset coverage requirements and/or the
rating agency requirements, Trust II may be required to redeem the
preferred shares at a time when, in the judgment of Putnam Management, it
may not be desirable to do so.
As long as any preferred shares are outstanding, Trust II will not
declare, pay, or set apart for payment any dividend or other distribution
in respect of the common shares, or call for redemption, redeem, purchase,
or otherwise acquire for consideration any common shares, unless (i)
immediately thereafter, the asset coverage requirements imposed by the
1940 Act and any rating agency are met, (ii) full cumulative dividends on
all preferred shares for all past dividend periods have
38
been paid or declared and a sum sufficient for the payment of such
dividends set apart for payment and (iii) Trust II has redeemed the full
number of preferred shares required to be redeemed pursuant to any
provision of Trust II's Bylaws requiring such mandatory redemption.
The holders of any preferred shares are entitled to receive dividends on a
cumulative basis before any dividend or other distribution may be paid to
Trust II's common shareholders. Moreover, the terms of the preferred
shares require, and the terms of the Additional Preferred Shares will
likely also require Trust II to pay additional dividends ("Additional
Dividends"), on the preferred shares, if income other than exempt interest
is required to be allocated to the preferred shares in an amount such that
the net after-tax return on the preferred shares would be the same as the
net after-tax return that would have been realized if the dividends paid
to the holders of the preferred shares, not including any such Additional
Dividends, had qualified in their entirety as exempt-interest dividends.
Dividends paid to holders of preferred shares will reduce the net
tax-exempt and taxable investment income and capital gain net income of
Trust II available for distribution to its common shareholders.
As noted above, Trust II is not permitted to declare any cash dividend or
other distribution on its common shares unless, at the time of such
declaration, Trust II meets the 200% asset coverage requirement
(determined after deducting the amount of such dividend or distribution).
Such prohibition on the payment of dividends or other distributions might
impair the ability of Trust II to maintain its qualification, for federal
income tax purposes, as a regulated investment company and/or might cause
Trust II to be subject to federal tax. Trust II intends, however, to the
extent possible to purchase or redeem preferred shares from time to time
to maintain such asset coverage of at least 200%.
39
In addition to the requirements of the 1940 Act, Trust II is required to
comply with other asset coverage requirements as a condition to Trust II's
obtaining a rating of the preferred shares from a nationally recognized
rating service. These requirements include an asset coverage test more
stringent than under the 1940 Act. These rating agency requirements and
the requirements of the 1940 Act will limit Trust II's ability to take
advantage of certain investments which might otherwise be available to it,
will require Trust II to invest a greater portion of its assets in more
highly-rated, potentially lower-yielding securities than it might
otherwise do, and will require Trust II to sell a portion of its assets
when it might otherwise be disadvantageous to do so. Such requirements
will also restrict the amount of preferred shares that may be outstanding
from time to time. The amount of preferred share leverage used by Trust II
may vary from time to time depending primarily on Putnam Management's
analysis of conditions in the tax-exempt securities market, including
expectations regarding movements of short- and medium-term and long-term
interest rates.
The rating agencies will also impose certain requirements as to minimum
issue size, issuer and geographical diversification, and other factors in
determining portfolio assets that are eligible for computing compliance
with their asset coverage requirements. Such requirements will also limit
Trust II's ability to engage in transactions involving options and futures
contracts.
In the event that Trust II is precluded from making distributions on its
common shares because of any applicable asset coverage requirements, the
terms of its preferred shares provide that any amounts so precluded from
being distributed, but required to be distributed in order for Trust II to
meet the distribution requirements for federal tax purposes, will be paid
to the holders of the preferred shares as a "special dividend."
40
Financial Highlights. The financial highlights tables are intended to help
you understand the funds' recent financial performance. Certain
information reflects financial results for a single fund share. The total
returns represent the rate that an investor would have earned or lost on
an investment in the relevant fund, assuming reinvestment of all dividends
and distributions. This information has been derived from the funds'
financial statements, which have been audited by PricewaterhouseCoopers
LLP. Its reports and the funds' financial statements are included in each
fund's annual report to shareholders, which are available upon request.
41
FINANCIAL HIGHLIGHTS
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
(For a share outstanding throughout the period)
42
Year ended April 30
Per-share ---------------------------------------------------------------
operating performance 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period (common shares) $ 13.94 $ 14.13 $ 13.70 $ 13.79 $ 13.94
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations:
Net investment income .98 1.00 1.06 1.07 1.09
Net realized and unrealized gain (loss) on investments (1.37) (.07) .50 (.03) (.10)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.39) .93 1.56 1.04 .99
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment income
To preferred shareholders (.18) (.16) (.17) (.17) (.18)
To common shareholders (.82) (.96) (.96) (.96) (.96)
In excess of net investment income -- -- -- -- --
To common shareholders (.03)
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions: (1.03) (1.12) (1.13) (1.13) (1.14)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $ 12.52 $ 13.94 $ 14.13 $ 13.70 $ 13.79
- -----------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $ 10.563 $15.250 $14.125 $14.250 $ 13.875
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data:
Total return at market value (common shares) (%)(a) (25.71) 15.08 5.63 9.86 16.62
Net assets, end of period (total funds) (in thousands) $230,268 $249,264 $251,864 $246,028 $247,234
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.29 1.23 1.26 1.26 1.24
Ratio of net investment income to average net assets (%)(b) 6.27 5.93 6.26 6.51 6.41
Portfolio turnover (%) 17.71 17.07 25.71 45.48 160.28
- -----------------------------------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment.
(b) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(c) Includes amounts paid through expense offset arrangements.
FINANCIAL HIGHLIGHTS
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST III
(For a share outstanding throughout the period)
43
Year ended October 31
Per-share -----------------------------------------------------------
operating performance 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period (common shares) $ 12.24 $ 13.51 $ 13.35 $ 13.02 $ 13.22
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations:
Net investment income .86 .85 .80 .86 .82
Net realized and unrealized gain (loss) on investments .29 (1.25) .25 .36 (.13)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.15 (.40) 1.05 1.22 .69
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment income
To preferred shareholders (.10) (.08) (.09) (.09) (.09)
To common shareholders (.74) (.78) (.80) (.80) (.80)
In excess of net investment income
To common shareholders -- (.01) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions: (.84) (.87) (.89) (.89) (.89)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period (common shares) $ 12.55 $ 12.24 $ 13.51 $ 13.35 $ 13.02
- -----------------------------------------------------------------------------------------------------------------------------
Market value, end of period (common shares) $11.000 $ 10.688 $13.688 $ 12.875 $ 11.875
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data:
Total return at market value (common shares) (%)(a) 10.27 (16.97) 12.92 15.54 6.89
Net assets, end of period (total funds) (in thousands) $60,306 $ 59,048 $64,149 $ 63,498 $ 62,166
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b)(c) 1.16 1.24 1.21 1.30 1.30
Ratio of net investment income to average net assets (%)(b) 6.21 5.86 5.25 5.90 5.59
Portfolio turnover (%) 12.13 17.20 28.13 37.75 123.89
=============================================================================================================================
(a) Total return assumes dividend reinvestment.
(b) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(c) Includes amounts paid through expense offset arrangements.
Investment Restrictions. Both funds have adopted the following investment
restrictions which may not be changed without the affirmative vote of a
"majority of the outstanding voting securities" of the fund, which is
defined in the 1940 Act to mean the affirmative vote of the lesser of (1)
more than 50% of the outstanding common shares and of the outstanding
preferred shares of the fund, each voting as a separate class, or (2) 67%
or more of the common shares and of the outstanding preferred shares, each
voting as a separate class, present at a meeting if more than 50% of the
outstanding shares of each class are represented at the meeting in person
or by proxy. The fund may not:
(i) Issue senior securities, as defined in the 1940 Act, other than
shares of beneficial interest with preference rights, except to the
extent such issuance might be involved with respect to borrowings
described under restriction (ii) below or with respect to
transactions involving financial futures, options, and other
financial instruments.
(ii) Borrow money in excess of 10% of the value (taken at the lower of
cost or current value) of its total assets (not including the amount
borrowed) at the time the borrowing is made, and then only from
banks as a temporary measure (not for leverage) in situations which
might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
(iii) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under the federal
securities laws.
(iv) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, securities which are secured
by interests in real estate, and
44
securities representing interests in real estate, and it may acquire
and dispose of real estate or interests in real estate acquired
through the exercise of its rights as a holder of debt obligations
secured by real estate or interests therein.
(v) Purchase or sell commodities or commodity contracts, except that the
fund may purchase and sell financial futures contracts and options
and may enter into foreign exchange contracts and other financial
transactions not involving physical commodities.
(vi) Make loans, except by purchase of debt obligations in which the
fund may invest consistent with its investment policies (including
without limitation debt obligations issued by other Putnam funds),
by entering into repurchase agreements or by lending its portfolio
securities.
(vii) With respect to 75% of its total assets, invest in securities of
any issuer if, immediately after such investment, more than 5% of
the total assets of the fund (taken at current value) would be
invested in the securities of such issuer; provided that this
limitation does not apply to obligations issued or guaranteed as to
interest or principal by the U.S. Government or its agencies or
instrumentalities.
(viii) With respect to 75% of its total assets, acquire more than 10% of
the voting securities of any issuer.
(ix) Purchase securities (other than securities of the U.S. Government,
its agencies or instrumentalities or tax-exempt securities, except
tax-exempt securities backed only by the assets and revenues of non-
governmental issuers) if, as a result of such purchase, more than
25% of the fund's total assets would be invested in any one
industry.
45
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above and the
fund's policy under normal market conditions to invest at least 80% of its
total assets in tax-exempt securities, the other investment policies
described in this Prospectus are not fundamental and may be changed by
approval of the Trustees. As a matter of policy, the Trustees would not
materially change the fund's investment objective without shareholder
approval.
Management. Each fund's Trustees are responsible for generally overseeing
the conduct of fund business. The funds have the same Trustees. Putnam
Management, which has managed mutual funds since 1937, manages both Trust
II and Trust III.
Subject to such policies as the Trustees may determine, Putnam Management
furnishes a continuing investment program for each fund and makes
investment decisions on its behalf. Subject to the control of the
Trustees, Putnam Management also manages each fund's other affairs and
business. The funds pay identical aggregate management and administrative
services fees. Trust II pays Putnam Management a single management fee at
the following rates: 0.70% on the first $500 million of the average net
asset value of Trust II, 0.60% of the next $500 million, 0.55% of the next
$500 million and 0.50% of any excess over $1.5 billion of such average net
asset value. Trust II pays no separate administrative services fee. Trust
III pays separate management and administrative fees to Putnam Management
at the following rates: management fees of 0.50% on the first $500 million
of the average net asset value of Trust III, 0.43% of the next $500
million, 0.39% of the next $500 million and 0.35% of any excess over $1.5
billion of such average net asset value; Trust III also pays an
administrative fee of 0.20% on the first $500 million of the average net
asset value of Trust III, 0.17% of
46
the next $500 million, 0.16% of the next $500 million and 0.15% of any
excess over $1.5 billion of such average net asset value.
Putnam Management is a subsidiary of Putnam Investments, LLC. Putnam
Investments, LLC is a wholly-owned subsidiary of Putnam Investments Trust,
which, except for shares held by employees, is wholly owned by Marsh &
McLennan Companies, Inc., a publicly-owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
The following officer of Putnam Management has had primary responsibility
for the day-to-day management of the funds' portfolios since October,
1996:
Business Experience (at least 5 years)
----------------------------------------
Richard P. Wyke
Senior Vice President 1987-Present Putnam Management
- ------------------------- ---- ------------------
The funds pay all expenses not assumed by Putnam Management, including
Trustees' fees, auditing, legal, custodial, investor servicing and
shareholder reporting expenses. The funds also reimburse Putnam Management
for the compensation and related expenses of certain funds officers and
their staff who provide administrative services. The total reimbursement
is determined annually by the Trustees.
Putnam Fiduciary Trust Company, One Post Office Square, Boston,
Massachusetts 92109, is the custodian of the funds' securities. Putnam
Investor Services, P.O. Box 41203, Providence, Rhode Island 02940-1203, as
division of Putnam Fiduciary Trust Company, is the investor servicing,
transfer and dividend disbursing agent for the funds.
Description of Fund Shares. The Trustees of each fund have authority to
issue an unlimited number of shares of beneficial interest without par
value in such classes and
47
series as may be provided for in the Bylaws. The Bylaws of Trust II
currently authorize the issuance of up to 1,260 preferred shares (and
approval of the holders of Trust II's outstanding preferred shares is
currently being sought to authorize 200 Preferred Merger Shares and up to
1,200 Additional Preferred Shares), and the Bylaws of Trust III currently
authorize the issuance of up to 200 preferred shares. The Bylaws of each
fund also prohibit the fund from offering additional preferred shares on
parity with or having priority on liquidation over the fund's outstanding
preferred shares without the approval of a majority of the fund's
outstanding preferred shares. Except for the Merger Shares to be issued in
the merger, and the Additional Preferred Shares of Trust II expected to be
offered promptly following the merger for cash at approximately $50,000
per share, neither fund has a present intention of offering additional
shares. All other offerings of a fund's shares require approval of the
Trustees. Any additional offering of common shares would be subject to the
requirements of the 1940 Act that such shares may not be sold at a price
per common shares below the then current net asset value per share,
exclusive of underwriting discounts and commissions, except in connection
with an offering to existing common shareholders or with the consent of
the holders of a majority of a fund's outstanding common shares.
The outstanding common shares of each fund are, and the Common Merger
Shares, when issued and sold, will be, except as described under
"Description of the Merger Shares" above, fully paid and non-assessable by
the fund. The outstanding common shares of each fund have, and the Common
Merger Shares will have, no preemptive, conversion, exchange or redemption
rights. Each common share of a fund has one vote, with fractional shares
voting proportionately, and is freely transferable. Common shares of Trust
II are traded on the NYSE, with an average weekly trading volume for the
year ended December 31, 2000 of 93,378 shares. Common
48
shares of Trust III are traded on the AMEX, with an average weekly trading
volume for the year ended December 31, 2000 of 25,130 shares.
All outstanding preferred shares of each fund and all Preferred Merger
Shares have, and Additional Preferred Shares are expected to have, a
liquidation preference of $50,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared). All
outstanding preferred shares are, and all Preferred Merger Shares and
Additional Preferred Shares, when issued and sold, will be, except as
described under "Description of the Merger Shares" above, fully paid and
non-assessable and not convertible into common shares. Further, such
shares do not, and will not, have any preemptive rights. Such preferred
shares are not, and will not be, subject to any sinking fund, but are
redeemable under certain circumstances.
The Bylaws of each fund provide generally that holders of preferred shares
will be entitled to receive, when, as and if declared by the fund,
cumulative cash dividends for each dividend period (generally 28 days,
although the fund may, subject to certain conditions, designate a special
dividend period of up to five years) at an annual rate set by the fund's
remarketing agent in accordance with the remarketing procedures set forth
in the fund's Bylaws. The holder of a preferred share may elect, by notice
to the fund's remarketing agent, to tender such share in any remarketing
or to hold such share for the next dividend period. The dividend rate
applicable to a dividend period for preferred shares of a fund is the rate
that the fund's remarketing agent determines is the lowest rate that will
enable it to remarket, on behalf of the holders of such preferred shares,
all preferred shares tendered in such remarketing. This dividend rate is
subject to a maximum rate based on the credit rating assigned to such
preferred shares and an applicable reference rate (the maximum rate is
increased for periods during which the fund has failed to
49
make dividend payments on preferred shares when due). If a fund includes
any income subject to regular federal income tax in a dividend on
preferred shares, it will generally be required to pay Additional
Dividends on such preferred shares in an amount that approximates the
related regular federal income tax effects. The preferred shares of each
fund are generally held only in book entry form through The Depository
Trust Company; transfers of beneficial ownership of preferred shares will
be recorded only in accordance with the procedures of the fund's paying
agent.
Each fund's preferred shares are subject to mandatory redemption in the
event the fund should fail to meet the asset coverage requirements imposed
by the Investment Company Act of 1940 or by the agencies rating such
preferred shares, and, subject to certain conditions (including the
condition that the fund be current in the payment of dividends on all
preferred shares), to redemption at the option of the fund, at a price
equal to the applicable liquidation preference (plus any applicable
premium, if the fund has designated a premium call period).
The Bylaws of each fund require that the holders of the fund's preferred
shares, 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
two years' dividends on the preferred shares are unpaid. The holders of
each fund's preferred shares will vote as a separate class on certain
other matters as required by the fund's Bylaws, the 1940 Act and
Massachusetts law. Except as expressly required by applicable law or
expressly set forth in the funds' Agreement and Declaration of Trust and
Bylaws and as otherwise indicated in this prospectus/proxy statement, each
holder of preferred shares and each holder of common shares of the funds
shall be entitled to one vote for each held on each matter submitted to a
vote of shareholders of the fund, and the holders of outstanding preferred
shares and of common shares
50
shall vote together as a single class. The Agreement and Declaration of
Trust and Bylaws of each fund may not be amended in a manner that would
materially and adversely affect its preferred shareholders without the
consent of holders of a majority of its outstanding preferred shares. For
more information about the funds' preferred shares, see "Information about
the Funds--Preferred Shares" and "Information about the funds' preferred
shares" in the SAI or, for preferred shareholders of Trust III only,
Appendix B.
Set forth below is information about each fund's securities as of February
28, 2001 (except where otherwise noted):
TRUST II
Amount Amount Amount
Title of Class Authorized Held by Fund Outstanding
- ------------------ ------------ -------------- ------------
Common Shares unlimited 264,776,491 13,357,092
Preferred Shares 1,260 0 1,260
- ------------------ ----- ----------- ----------
TRUST III
Amount Amount Amount
Title of Class Authorized Held by Fund Outstanding
- ------------------ ------------ -------------- ------------
Common Shares unlimited 66,895,050 4,007,092
Preferred Shares 200 0 200
- ------------------ --- ---------- ---------
Repurchase of shares. Because each fund is a closed-end investment
company, shareholders of each fund do not, and will not, have the right to
redeem their shares. A fund, however, may repurchase its shares from time
to time in open- market or private transactions when it can do so at
prices below the current net asset value per share and on terms that
represent a favorable investment opportunity. The funds currently are
authorized to make periodic repurchases of shares in open-market
transactions at times when discount levels make such purchases an
attractive investment. Such purchases may have the effect of temporarily
reducing discount levels, but are not believed to influence discounts
materially over the longer term.
51
Shares of the funds trade in the open market at a price which will be a
function of several factors, including yield and net asset value of the
shares and the extent of market activity. Shares of closed-end investment
companies frequently trade at a discount from net asset value, but in some
cases trade at a premium. When a fund repurchases its shares at a price
below their net asset value, the net asset value of those shares that
remain outstanding will be increased, but this does not necessarily mean
that the market price of those outstanding shares will be affected either
positively or negatively.
Determination of net asset value. Each fund calculates the net asset value
of a share at least weekly by dividing the total value of its assets, less
liabilities and the net assets allocated to the preferred shares, by the
number of its shares outstanding. Trust II shares are valued as of the
close of regular trading on the NYSE each day the exchange is open and
Trust III shares are valued as of the close of regular trading on the AMEX
each day the exchange is open.
Securities for which market quotations are readily available are valued at
market values. Short-term investments that have remaining maturities of 60
days or less are valued at amortized cost, which approximates market
value. All other securities and assets are valued at their fair value
following procedures approved by the Trustees.
Dividend reinvestment plan. Each fund has adopted a dividend reinvestment
plan (each, a "Plan") pursuant to which each registered common shareholder
may have all income dividends and distributions of capital gains
automatically reinvested by Investors Bank and Trust Company, 200
Clarendon St., Boston, MA (617-330-6700) (the "Plan Agent"), as agent for
shareholders, in additional shares of the fund. Common shareholders who do
not participate in a Plan receive all distributions in cash paid by check
mailed directly to the shareholder by the Plan Agent as dividend
disbursing agent. Common shareholders whose shares are held in the
52
name of a broker or nominee should contact the broker or nominee to
determine whether and how they may participate in a Plan. For both Trust
II and Trust III, shareholders are automatically enrolled in the Plan and
must elect not to participate in the Plan. Holders of Trust III common
shares who have elected not to participate in Trust III's Plan will, if
the merger is approved, be deemed to have elected not to participate in
Trust II's Plan.
If the Trustees of a fund declare a dividend or determine to make a
capital gain distribution payable either in shares of the fund or in cash,
non-participants in that fund's Plan receive cash and participants in the
Plan receive the equivalent in shares of the fund.
The Plan Agent serves as agent for the common shareholders in
administering the Plan. Common shareholders may receive more detailed
instructions on the Plan from the fund. Common shareholders whose shares
are held in the name of a broker or nominee other than the selling agent
should contact such broker or nominee to determine their rights with
respect to the Plan. Under the Plan, the Plan Agent, as agent for the
participants, receives all distributions by the fund of net investment
income or capital gains and uses them to purchase common shares in the
open market for the participants' account. The prices at which the Plan
Agent reinvests distributions may be higher or lower than the net asset
value per common share of the fund at the time of the reinvestment. The
fund does not issue any new common shares in connection with the Plan.
Participants in a Plan may withdraw from the Plan upon written notice to
the Plan Agent. When a participant withdraws from a Plan or upon
termination of a Plan as provided below, certificates for whole shares
credited to his or her account under the Plan are issued and a cash
payment is made for any fraction of a share credited to such account.
53
The Plan Agent maintains all common shareholders' accounts in a Plan and
furnishes written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Common
shares in the account of each participant in a Plan are held by the Plan
Agent in non- certificated form in the name of the participant, and each
shareholder's proxy includes those shares purchased pursuant to the Plan.
In the case of shareholders such as banks, brokers, or nominees which hold
shares for others who are the beneficial owners, the Plan Agent
administers a Plan on the basis of the number of shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who participate in the Plan.
Each participant bears a proportionate share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gain
distributions. In each case, the cost per share of shares purchased for
each participant's account is the average cost, including brokerage
commissions, of any shares purchased in the open market plus the cost of
any shares issued by a fund.
The automatic reinvestment of dividends and distributions does not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends or distributions.
Experience under a Plan may indicate that changes are desirable.
Accordingly, each fund reserves the right to amend or terminate its Plan.
There is no direct service charge to participants in a Plan; however, each
fund reserves the right to amend the Plan to include a service charge
payable by the participants.
54
It may be necessary to suspend operation of Trust III's Plan for one or
two dividend payments immediately prior to the combination so that all
purchase activity under the Plan is settled in advance of the effective
date of merger. In that event all shareholders, including those in the
Plan, will receive those dividends in cash.
Dividends and distributions. Each fund has a policy to make monthly
distributions to common shareholders from net investment income. Monthly
distributions to common shareholders consist of the net investment income
of each fund remaining after the payment of dividends on the preferred
shares.
Net investment income of each fund consists of all interest and other
income (excluding capital gains and losses) accrued on portfolio assets,
less all expenses of each fund allocable thereto. Income and expenses of
each fund are accrued each day. Amounts which economically represent the
excess of realized capital gains over realized capital losses, if any, are
distributed to common shareholders at least annually to the extent not
necessary to pay dividends (including Additional Dividends) on or to meet
the liquidation preference of the preferred shares. However, for federal
income tax purposes, the common shareholders and the preferred
shareholders are treated as receiving their proportionate share of the
excess of each fund's realized capital gains over realized capital losses,
based upon the percentage of total dividends paid by the fund for the year
that is received by each class.
While there are any preferred shares outstanding, neither fund may declare
any cash dividend or other distribution on its common shares, unless at
the time of such declaration (1) all accrued dividends on the preferred
shares have been paid and (2) the value of each fund's total assets, less
all liabilities and indebtedness of the fund (determined after deducting
the amount of such dividend or other distribution), is at least 200% of
the liquidation preference of the outstanding
55
preferred shares (expected to equal the aggregate original purchase price
of the outstanding preferred shares plus any accrued and unpaid dividends
thereon). In addition to the requirements of the 1940 Act, each fund is
required to comply with other asset coverage requirements as a condition
of the fund obtaining a rating of the preferred shares from a nationally
recognized rating service. These requirements include, among other things,
an asset coverage test more stringent than under the 1940 Act. The
limitation on each fund's ability to make distributions on its common
shares could, in certain circumstances, impair the ability of each fund to
maintain its qualification for taxation as a regulated investment company
or might otherwise cause the fund to be subject to federal tax. Each fund
intends, however, to the extent possible, to repurchase 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 an effort to maintain the
fund's status as a regulated investment company and to relieve the fund of
any federal tax.
As noted above under "Information about the Funds-- Preferred Shares," the
terms of the preferred shares require that if, for any taxable year, any
portion of the dividends on the preferred shares is not designated by a
fund as exempt-interest dividends solely because that fund, in its
judgment, is required to allocate capital gains or taxable income to the
preferred shares, Additional Dividends will become payable on the
preferred shares in an amount such that the net after-tax return on the
preferred shares would be the same as the net after-tax return that would
have been derived if the dividends paid to the holders of the preferred
shares, not including any such Additional Dividends, had qualified in
their entirety as exempt-interest dividends. The amount of any dividend
payable to common shareholders will be reduced by the amount of any such
Additional Dividends.
56
To permit each fund to maintain a more stable monthly distribution, each
fund may from time to time pay out less than the entire amount of
available net investment income to common shareholders earned in any
particular period. Any such amount retained by a fund would be available
to stabilize future distributions. As a result, the distributions paid by
a fund for any particular period may be more or less than the amount of
net investment income actually earned by that fund during such period. For
information concerning the tax treatment of distributions to common
shareholders, see "Taxation." Both funds intend, however, to make such
distributions as are necessary to maintain qualification as a regulated
investment company.
Common shareholders may have their dividend or distribution checks sent to
parties other than themselves. A "Dividend Order" form is available from
Putnam Investor Services, mailing address: P.O. Box 41203, Providence,
Rhode Island 02940-1203. After Putnam Investor Services receives this
completed form with all registered owners' signatures guaranteed, the
common shareholder's distribution checks will be sent to the bank or other
person that the common shareholder has designated.
For information concerning the tax treatment of such dividends and
distributions to shareholders, see the discussion under "Taxation."
Declaration of Trust and Bylaws. Each fund's Agreement and 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
cause it to engage in certain transactions or to modify its structure. The
affirmative vote of at least two-thirds of the outstanding common and
preferred shares, each voting as a separate class, of a fund is required
to authorize any of the following actions: (1) merger or consolidation of
the fund, (2) sale of all or substantially all of the assets of the fund,
(3) liquidation or dissolution of the fund,
57
(4) conversion of the fund to an open-end investment company, or (5)
amendment of the Agreement and Declaration of Trust to reduce the
two-thirds vote required to authorize the actions in (1) through (4) above
unless with respect to any of the foregoing such action has been
authorized by the affirmative vote of two-thirds of the total number of
Trustees, in which case the affirmative vote of a majority of the common
and preferred outstanding shares, each voting as a separate class, is
required.
The Trustees have determined that the two-thirds voting requirements
described above, which are greater than the minimum requirements under the
1940 Act, are in the best interests of each fund and its shareholders
generally. Reference is made to the Agreement and Declaration of Trust of
each fund, on file with the SEC, for the full text of these provisions.
These provisions could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of a
fund in a tender offer or similar transaction and may have the net effect
of inhibiting the fund's conversion to open-end status.
If the merger is approved, the Bylaws of Trust III will be amended to make
explicit the authority of Trust III to distribute the Preferred Merger
Shares to its Preferred Shareholders and the Common Merger Shares to its
common shareholders. Similarly, the Bylaws of Trust II will be amended to
add provisions governing the Preferred Merger Shares (which provisions
will mirror those currently contained in the Bylaws of Trust III) and the
Additional Preferred Shares.
Taxation. The following federal tax discussion is based on the advice of
Ropes & Gray, counsel to the funds, and reflects provisions of the Code,
existing treasury regulations, rulings published by the Service, and other
applicable authority, as of the date of this Prospectus/Proxy Statement.
These authorities are subject to change by legislative or administrative
action.
58
The following discussion is only a summary of some of the important tax
considerations generally applicable to investments in Trust II. For more
detailed information regarding tax considerations, see the SAI. There may
be other tax considerations applicable to particular investors. In
addition, income earned through an investment in Trust II may be subject
to state and local taxes. Because Trust II will be the surviving fund if
the merger is approved, the discussion deals only with the taxation of
Trust II.
Trust II intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Code. If the fund so
qualifies, it will not be subject to federal income tax on income
distributed timely to its shareholders in the form of dividends or capital
gain distributions.
To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by Trust II to its shareholders,
including holders of its preferred shares, must qualify for the
dividends-paid deduction. In certain circumstances, the Service could take
the position that dividends paid on the preferred shares constitute
preferential dividends under section 562(c) of the Code, and thus do not
qualify for the dividends-paid deduction.
If at any time when preferred shares are outstanding Trust II does not
meet applicable asset coverage requirements, it will be required to
suspend distributions to common shareholders until the requisite asset
coverage is restored. Any such suspension may cause the fund to pay a 4%
federal excise tax (imposed on regulated investment companies that fail to
distribute for a given calendar year, generally, at least 98% of their net
investment income and capital gain net income), or may, in certain
circumstances, prevent Trust II from qualifying as a regulated investment
company. The fund may redeem preferred shares or pay "special dividends"
to the holders of the preferred shares in an effort to comply with the
distribu-
59
tion requirement applicable to regulated investment companies and to avoid
the excise tax.
Fund distributions designated as "tax-exempt dividends" are not generally
subject to federal income tax. In addition, an investment in the fund may
result in liability for federal alternative minimum tax, both for
individual and corporate shareholders.
The terms of the preferred shares require that if, for any taxable year,
any portion of the distributions paid by Trust II on the preferred shares
at the applicable rate is not designated by the fund as exempt-interest
dividends solely because the fund, in its judgment, is required to
allocate capital gains and taxable income to the preferred shares, then
the fund will be required to pay Additional Dividends to holders of the
preferred shares to compensate for the resulting reduction in the
after-tax return to such holders. It is anticipated that the allocation
rules described above will in many circumstances require Trust II to pay
such Additional Dividends. Such a distribution would reduce the amount
available for distribution to common shareholders.
The fund may at times buy tax-exempt investments at a discount from the
price at which they were originally issued, especially during periods of
rising interest rates. For federal income tax purposes, some or all of
this market discount will be included in the fund's ordinary income and
will be taxable to shareholders as such when it is distributed.
The fund's investments in certain debt obligations may cause the fund to
recognize taxable income in excess of the cash generated by such
obligations. Thus, the fund could be required at times to liquidate other
investments in order to satisfy its distribution requirements.
For federal income tax purposes, distributions of investment income other
than "tax-exempt dividends" are taxable as ordinary income. Generally,
gains realized by a fund on the sale
60
or exchange of investments will be taxable to its shareholders, even
though the income from such investments generally will be tax-exempt.
Taxes on distributions of capital gains are determined by how long the
fund owned the investments that generated them, rather than how long a
shareholder has owned his or her shares. Distributions are taxable to
shareholders even if they are paid from income or gains earned by the fund
before a shareholder's investment (and thus were included in the price the
shareholder paid). Distributions of gains from investments that the fund
owned for more than one year will be taxable as capital gains.
Distributions of gains from investments that the fund owned for one year
or less will be taxable as ordinary income. Distributions are taxable
whether shareholders receive them in cash or reinvest them in additional
shares through the Dividend Reinvestment Plan.
Any gain resulting from the sale or exchange of fund shares will generally
also be subject to tax. You should consult your tax advisor for more
information on your own tax situation, including possible state and local
taxes.
61
Trading Information. The following chart shows quarterly per common share
trading information for the past two fiscal years and the current fiscal
year of the funds, as listed on the NYSE in the case of Trust II and the
AMEX in the case of Trust III:
TRUST II
(Unaudited)
Market Market Closing
High Low Market Closing Discount or
Quarter Price Price Price NAV (Premium)
Ended ($) ($) ($) ($) to NAV (%)
- ----------------- ------------- ----------- ----------- --------- ------------
6/30/98 15.063 14.25 14.937 14.29 4.53
9/30/98 15.125 14.750 15.000 14.38 4.31
12/30/98 15.500 14.875 15.375 14.12 8.89
3/31/99 15.438 14.875 14.875 13.96 6.55
6/30/99 15.438 14.500 14.5625 13.44 8.35
9/30/99 14.938 11.250 11.250 12.96 -13.19
12/30/99 11.438 10.375 10.000 12.48 -15.87
3/31/99 11.438 10.500 10.9375 12.69 -13.81
6/30/00 11.125 10.563 11.0625 12.69 -12.83
9/30/00 12.000 11.063 11.625 12.86 -9.60
12/30/00 11.688 10.875 11.375 13.13 -13.37
2/28/01(a) 12.600 11.75 12.390 13.24 -6.42
- -------- ------ ------ ------- ----- ------
(a) For the period from January 1, 2001 to February 28, 2001.
62
TRUST III
(Unaudited)
Market Market Closing
High Low Market Discount or
Quarter Price Price Price Closing (Premium) to
Ended ($) ($) ($) NAV ($) NAV (%)
- ----------------- ------------- -------- ----------- --------- -------------
12/31/98 14.000 13.375 13.438 13.44 -0.01
3/31/99 13.750 13.125 13.563 13.34 1.67
6/30/99 13.750 12.625 12.688 12.89 -1.57
9/30/99 12.938 10.750 10.875 12.49 -12.93
12/30/99 10.938 10.000 10.125 12.06 -16.04
3/31/00 10.750 10.125 10.438 12.25 -14.79
6/30/00 10.625 10.000 10.625 12.27 -13.41
9/30/00 11.375 10.688 11.125 12.46 -10.71
12/31/00 11.375 10.375 11.375 12.70 -10.43
2/28/01(a) 12.170 11.500 12.070 12.82 -5.85
- -------- ------ ------ ------ ----- ------
(a) For the period from January 1, 2001 to February 28, 2001.
On February 28, 2001, the market price, net asset value per common share
and discount to net asset value were $12.39, $13.24, and 6.42%,
respectively for Trust II and $12.07, $12.82, and 5.85%, respectively, for
Trust III.
Further Information about Voting and the Meeting General.
This Prospectus/Proxy Statement is furnished in connection with the
proposed merger of Trust III into Trust II, the proposed authorization of
the issuance of the Additional Preferred Shares and the solicitation of
proxies by and on behalf of the Trustees for use at the Joint Meeting of
Shareholders (the "Meeting"). The Meeting is to be held on July 12, 2001,
at 2:00 p.m. at One Post Office Square, 8th Floor, Boston, Massachusetts,
or at such later time as is made necessary by adjournment. The Notice of
the Meeting, the combined Prospectus/Proxy Statement and the enclosed form
of proxy are being mailed to shareholders on or about April [--- ], 2001.
63
As of February 28, 2001, there were 4,007,092 outstanding common and 200
outstanding preferred shares of beneficial interest of Trust III, and
13,358,352 outstanding common and 1,260 outstanding preferred shares of
beneficial interest of Trust II. Only shareholders of record on [April
23], 2001 will be entitled to notice of and to vote at the Meeting. Each
share is entitled to one vote, with fractional shares voting
proportionally.
The Trustees know of no matters other than those set forth herein to be
brought before the Meeting. If, however, any other matters properly come
before the Meeting, it is the Trustees' intention that proxies will be
voted on such matters in accordance with the judgment of the persons named
in the enclosed form of proxy.
Required vote. Proxies are being solicited from each fund's shareholders
by its Trustees for the Meeting. Unless revoked, all valid proxies will be
voted in accordance with the specification thereon or, in the absence of
specifications, FOR approval of the Agreement and Plan of Reorganization
and, for preferred shareholders of Trust II only, FOR approval of the
authorization of Additional Preferred Shares. The transactions
contemplated by the Agreement and Plan of Reorganization will be
consummated only if approved by the affirmative vote of the (i) holders of
a majority of the outstanding common and preferred shares of beneficial
interest of Trust III entitled to vote (voting together), (ii) holders of
a majority of the outstanding preferred shares of Trust III, (iii) holders
of a majority of the outstanding common and preferred shares of beneficial
interest of Trust II entitled to vote (voting together) (or holders of a
majority of the outstanding common and preferred shares of beneficial
interest of Trust II voted, if holders of more than 50% of such shares
vote), and (iv) holders of a majority of the outstanding preferred shares
of Trust II. The proposal (for preferred shareholders of Trust II only) to
approve the authorization of the issuance of Additional Pre-
64
ferred Shares may be approved only by the affirmative vote of holders of a
majority of the outstanding preferred shares of Trust II.
Record date, quorum and method of tabulation. Shareholders of record of
each fund at the close of business on [April 23], 2001 (the "record date")
will be entitled to vote at the Meeting or any adjournment thereof. The
holders of a majority of the shares of each fund outstanding at the close
of business on the record date present in person or represented by proxy
will constitute a quorum for the Meeting.
Votes cast by proxy or in person at the meeting will be counted by persons
appointed by the relevant fund as tellers for the Meeting. The tellers
will count the total number of votes cast "for" approval of the proposal
for purposes of determining whether sufficient affirmative votes have been
cast. The tellers will count shares represented by proxies that reflect
abstentions and "broker non-votes" (i.e., shares held by brokers or
nominees as to which (i) instructions have not been received from the
beneficial owners or the persons entitled to vote and (ii) the broker or
nominee does not have the discretionary voting power on a particular
matter) as shares that are present and entitled to vote on the matter for
purposes of determining the presence of a quorum. Abstentions and broker
non-votes have the effect of a negative vote on the proposal.
Share ownership. [As of ---------- , 2001, the officers and Trustees of
each fund as a group beneficially owned less than 1% of the outstanding
shares of such fund.] To the knowledge of each fund, as of ---------- ---
, 2001, the following shareholders owned of record or beneficially 5% or
more of the outstanding shares of the fund:
Solicitation of proxies. In addition to soliciting proxies by mail, the
Trustees and employees of Putnam Management, Putnam Fiduciary Trust
Company and Putnam Retail Manage-
65
ment may solicit proxies in person or by telephone. Each fund may also
arrange to have votes recorded by telephone. The telephonic voting
procedure is designed to authenticate shareholders' identities, to allow
shareholders to authorize the voting of their shares in accordance with
their instructions and to confirm that their instructions have been
properly recorded. Each fund has been advised by counsel that these
procedures are consistent with the requirements of applicable law. If
these procedures were subject to a successful legal challenge, such votes
would not be counted at the Meeting. Neither fund is aware of any such
challenge at this time. Shareholders would be called at the phone number
the fund has in its records for their accounts, and would be asked for
their Social Security numbers or other identifying information. The
shareholders would then be given an opportunity to authorize the proxies
to vote their shares in accordance with their instructions. To ensure that
the shareholders' instructions have been recorded correctly, they will
also receive a confirmation of their instructions in the mail. A special
toll-free number will be available in the event the information in the
confirmation is incorrect.
[Shareholders may have the opportunity to vote via the Internet by
utilizing a program provided by a third-party vendor hired by Putnam
Management. The giving of such a proxy will not affect your right to vote
in person should you decide to attend the Meeting. To vote via the
Internet, you will need the 14-digit "control" number that appears with
your proxy materials. To vote via the Internet, please access the Internet
address found on your proxy card on the World Wide Web at
www.proxyweb.com/Putnam. The Internet voting procedures 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 voting via the Internet should
understand that there may be costs associated with electronic access, such
as
66
usage charges from Internet access providers and telephone companies, that
must be borne by the shareholders.]
Persons holding shares as nominees will, upon request, be reimbursed for
their reasonable expenses in soliciting instructions from their
principals. Each fund has retained at its own expense [D.F. King & Co.,
Inc., 77 Water Street, New York, New York 10005], to aid in the
solicitation of instructions for nominee and registered accounts for a fee
of [$---------- ], plus reasonable out-of-pocket expenses for mailing and
phone costs.
Revocation of proxies. Proxies, including proxies given by telephone, may
be revoked at any time before they are voted, by a written revocation
received by the Clerk of the funds (addressed to the funds' Clerk at the
principal office of the funds, One Post Office Square, Boston,
Massachusetts 02109), by properly executing a later-dated proxy or by
attending the Meeting and voting in person.
Date for receipt of shareholders' proposals for the next annual meeting.
It is currently anticipated that each fund's next annual meeting of
shareholders will be held in October, 2001. Shareholder proposals to be
included in each fund's proxy statement for that meeting must be received
by the fund before April 16, 2001. Shareholders who wish to make a
proposal at the October, 2001 meeting--other than one that will be
included in the fund's proxy materials--should notify the fund no later
than June 30, 2001. The Board Policy and Nominating Committee will
consider nominees recommended by shareholders of each fund to serve as
Trustees, provided that shareholders submit their recommendations by the
above date. If a shareholder who wishes to present a proposal fails to
notify the funds by this date, the proxies solicited for the meeting will
have discretionary authority to vote on the shareholder's proposal if it
is properly brought before the meeting. If a shareholder makes a timely
notification, the proxies may still exercise discretionary voting
authority under circumstances consistent with the SEC's
67
proxy rules. Shareholders who wish to propose one or more nominees for
election as Trustees, or to make a proposal fixing the number of Trustees,
at the October, 2001 annual meeting of each fund must provide written
notice to each fund (including all required information) so that such
notice is received in good order by each fund no earlier than July 7, 2001
and no later than August 6, 2001.
Adjournment. If sufficient votes in favor of the proposal are not received
by the time scheduled for the Meeting, the persons named as proxies may
propose adjournments of the Meeting for a reasonable time after the date
set for the original meeting to permit further solicitation of proxies.
Any adjournment will require the affirmative vote of a majority of the
votes cast on the question in person or by proxy at the session of the
Meeting to be adjourned. The persons named as proxies will vote in favor
of such adjournment those proxies which they are entitled to vote in favor
of the proposal. They will vote against any such adjournment those proxies
required to be voted against the proposal. Each fund pays the costs of any
additional solicitation and of any adjourned session for that fund.
68
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
April , 2001 in Boston, Massachusetts, by and between Putnam Investment
Grade Municipal Trust II, a Massachusetts business trust ("Trust II"), and
Putnam Investment Grade Municipal Trust III, a Massachusetts business
trust ("Trust III").
PLAN OF REORGANIZATION
(a) Trust III will sell, assign, convey, transfer and deliver to Trust II
on the Exchange Date (as defined in Section 6) all of its properties and
assets existing at the Valuation Time (as defined in Section 3(c)). In
consideration therefor, Trust II shall, on the Exchange Date, assume all
of the liabilities of Trust III existing at the Valuation Time and deliver
to Trust III (i) a number of full and fractional common shares of
beneficial interest of Trust II (the "Common Merger Shares") having an
aggregate net asset value equal to the value of the assets of Trust III
transferred to Trust II on such date less the value of the liabilities of
Trust III assumed by Trust II on such date (including the liquidation
preference of the Preferred Merger Shares (as defined below)) and (ii) a
number of full and fractional preferred shares of beneficial interest of
Trust II (the "Preferred Merger Shares") having an aggregate liquidation
preference equal to the aggregate liquidation preference of the
outstanding preferred shares of Trust III on such date. The preferences,
voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption and all other attributes of the
Preferred Merger Shares, shall be identical in all material respects to
those of Trust III's outstanding preferred shares, except that the terms
of the Preferred Merger Shares will authorize the issuance of additional
preferred shares with an aggregate initial liquidation preference of up to
$60 million ("Additional Preferred Shares"). Dividends on preferred shares
of Trust III shall accumulate to and including the day (which shall be a
A-1
Remarketing Date (as defined in the Bylaws of Trust III) before the
Closing Date and then cease to accumulate, and dividends on Preferred
Merger Shares shall accumulate in respect of their "Initial Rate Period"
from and including the Closing Date at the rate determined in connection
with the Remarketing (as defined in the Bylaws of Trust III) of the
outstanding preferred shares of Trust III on the day before the Closing
Date. The "Initial Rate Period" for the Preferred Merger Shares shall be a
28-day Dividend Period (as defined in the Bylaws of Trust III). The Common
Merger Shares and the Preferred Merger Shares shall be referred to
collectively as the "Merger Shares." It is intended that the
reorganization described in this Plan shall be a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) Upon consummation of the transactions described in paragraph (a) of
this Agreement, Trust III shall distribute in complete liquidation to its
common and preferred shareholders of record as of the Exchange Date Common
and Preferred Merger Shares, each shareholder being entitled to receive
that proportion of such Common or Preferred Merger Shares that the number
of common or preferred shares of beneficial interest of Trust III held by
such shareholder bears to the number of such common or preferred shares of
Trust III outstanding on such date. Certificates representing the Common
Merger Shares will be issued only if the shareholder so requests;
Certificates representing the Preferred Merger Shares will not be issued.
A-2
AGREEMENT
Trust II and Trust III agree as follows:
1. Representations and warranties of Trust II. Trust II represents and
warrants to and agrees with Trust III that:
(a) Trust II is a business trust duly established and validly existing
under the laws of The Commonwealth of Massachusetts, and has power to own
all of its properties and assets and to carry out its obligations under
this Agreement. Trust II is not required to qualify as a foreign
association in any jurisdiction. Trust II has all necessary federal, state
and local authorizations to carry on its business as now being conducted
and to carry out this Agreement.
(b) Trust II is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as a closed-end management investment company,
and such registration has not been revoked or rescinded and is in full
force and effect.
(c) A statement of assets and liabilities, statement of operations,
statement of changes in net assets and schedule of investments (indicating
their market values) of Trust II for the fiscal year ended April 30, 2000,
such statements and schedule having been audited by PricewaterhouseCoopers
LLP, independent accountants, and an unaudited statement of assets and
liabilities, statement of operations, statement of changes in net assets
and schedule of investments (indicating their market values) of Trust II
for the six months ended October 31, 2000, have been furnished to Trust
III. Such statements of assets and liabilities and schedules of
investments fairly present the financial position of Trust II as of the
dates thereof and such statements of operations and changes in net assets
fairly reflect the results of its operations and changes in net assets for
the periods covered thereby in conformity with generally accepted
accounting principles.
(d) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Trust II, threatened
A-3
against Trust II which assert liability or may, if successfully prosecuted
to their conclusion, result in liability on the part of Trust II, other
than as have been disclosed in the Prospectuses (as defined below).
(e) Trust II has no known liabilities of a material nature, contingent or
otherwise, other than those shown as belonging to it on its statement of
assets and liabilities as of April 30, 2000 and those incurred in the
ordinary course of Trust II's business as an investment company since such
date.
(f) No consent, approval, authorization or order of any court or governmental
authority is required for the consummation by Trust II of the transactions
contemplated by this Agreement, 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"), the 1940 Act, state
securities or blue sky laws (which term as used herein shall include the
laws of the District of Columbia and of Puerto Rico) or the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R Act").
(g) The registration statement and any amendment thereto (including any
post-effective amendment) (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") by Trust II on Form
N-14 relating to the Merger Shares issuable hereunder, the proxy statement
of Trust III included therein (the "Trust III Proxy Statement") and the
proxy statement of Trust II included therein (the "Trust II Proxy
Statement" and, together with the Trust III Proxy Statement, the "Proxy
Statements"), on the effective date of the Registration Statement (i) 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) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading; and at the time of the
shareholders' meeting referred
A-4
to in Section 7(a) and at the Exchange Date, each prospectus contained in
the Registration Statement (collectively, the "Prospectuses"), as amended
or supplemented by any amendments or supplements filed or requested to be
filed with the Commission by Trust III, will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided however, that none of the representations and
warranties in this subsection shall apply to statements in or omissions
from the Registration Statement, the Prospectuses or the Proxy Statements
made in reliance upon and in conformity with information furnished by
Trust III for use in the Registration Statement, the Prospectuses or the
Proxy Statements.
(h) There are no material contracts outstanding to which Trust II is a party,
other than as disclosed in the Registration Statement, the Prospectuses,
or the Proxy Statements.
(i) All of the issued and outstanding shares of beneficial interest of Trust
II have been offered for sale and sold in conformity with all applicable
federal securities laws.
(j) Trust II is and will at all times through the Exchange Date qualify for
taxation as a "regulated investment company" under Sections 851 and 852 of
the Code.
(k) The issuance of the Merger Shares pursuant to this Agreement will be in
compliance with all applicable federal securities laws.
(l) The Merger Shares to be issued to Trust III have been duly authorized and,
when issued and delivered pursuant to this Agreement, will be legally and
validly issued and will be fully paid and nonassessable by Trust II, and
no shareholder of Trust II will have any preemptive right of subscription
or purchase in respect thereof.
2. Representations and warranties of Trust III. Trust III represents and
warrants to and agrees with Trust II that:
A-5
(a) Trust III is a business trust duly established and validly existing under
the laws of The Commonwealth of Massachusetts, and has power to own all of
its properties and assets and to carry out its obligations under this
Agreement. Trust III is not required to qualify as a foreign association
in any jurisdiction. Trust III has all necessary federal, state and local
authorizations to carry on its business as now being conducted and to
carry out this Agreement.
(b) Trust III is registered under the 1940 Act as a closed-end management
investment company, and such registration has not been revoked or
rescinded and is in full force and effect.
(c) A statement of assets and liabilities, statement of operations, statement
of changes in net assets and schedule of investments (indicating their
market values) of Trust III for the fiscal year ended October 31, 2000,
such statements and schedule having been audited by PricewaterhouseCoopers
LLP, independent accountants, have been furnished to Trust II. Such
statements of assets and liabilities and schedule of investments fairly
present the financial position of Trust III as of October 31, 2000, and
such statements of operations and changes in net assets fairly reflect the
results of its operations and changes in net assets for the period covered
thereby in conformity with generally accepted accounting principles.
(d) There are no material legal, administrative or other proceedings pending
or, to the knowledge of Trust III, threatened against Trust III which
assert liability or may, if successfully prosecuted to their conclusion,
result in liability on the part of Trust III, other than as have been
disclosed in the Registration Statement.
(e) Trust III has no known liabilities of a material nature, contingent or
otherwise, other than those shown as belonging to it on its statement of
assets and liabilities as of October 31, 2000 and those incurred in the
ordinary course of Trust III's business as an investment company since
such date. Prior to the Exchange Date, Trust III will advise Trust II of
all mate-
A-6
rial liabilities, contingent or otherwise, incurred by it subsequent to
October 31, 2000, whether or not incurred in the ordinary course of
business.
(f) No consent, approval, authorization or order of any court or governmental
authority is required for the consummation by Trust III of the
transactions contemplated by this Agreement, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act, state securities
or blue sky laws, or the H-S-R Act.
(g) The Registration Statement, the Prospectuses and the Proxy Statements, on
the Effective Date of the Registration Statement and insofar as they do
not relate to Trust II (i) 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) will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and at
the time of the shareholders' meeting referred to in Section 7(a) below
and on the Exchange Date, the Prospectuses, as amended or supplemented by
any amendments or supplements filed or requested to be filed with the
Commission by Trust II, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided however, that the representations and warranties in this
subsection shall apply only to statements of fact relating to Trust III
contained in the Registration Statement, the Prospectuses or the Proxy
Statements, or omissions to state in any thereof a material fact relating
to Trust III, as such Registration Statement, Prospectuses and Proxy
Statements shall be furnished to Trust III in definitive form as soon as
practicable following effectiveness of the Registration Statement and
before any public distribution of the Prospectuses or Proxy Statements.
A-7
(h) There are no material contracts outstanding to which Trust III is a party,
other than as will be disclosed in the Prospectuses or the Proxy
Statements.
(i) All of the issued and outstanding shares of beneficial interest of Trust
III have been offered for sale and sold in conformity with all applicable
federal securities laws.
(j) Trust III is and will at all times through the Exchange Date qualify for
taxation as a "regulated investment company" under Sections 851 and 852 of
the Code.
(k) Trust III has filed or will file all federal and state tax returns which,
to the knowledge of Trust III's officers, are required to be filed by
Trust III and has paid or will pay all federal and state taxes shown to be
due on said returns or on any assessments received by Trust III. All tax
liabilities of Trust III have been adequately provided for on its books,
and to the knowledge of Trust III, no tax deficiency or liability of Trust
III 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.
(l) At both the Valuation Time and the Exchange Date, Trust III will have full
right, power and authority to sell, assign, transfer and deliver the
Investments and any other assets and liabilities of Trust III to be
transferred to Trust II pursuant to this Agreement. At the Exchange Date,
subject only to the delivery of the Investments and any such other assets
and liabilities as contemplated by this Agreement, Trust II will acquire
the Investments and any such other assets and liabilities subject to no
encumbrances, liens or security interests whatsoever and without any
restrictions upon the transfer thereof (except for such restrictions as
previously disclosed to Trust II by Trust III). As used in this Agreement,
the term "Investments" shall mean Trust III's investments shown on the
schedule of its investments as of October 31, 2000 referred to in Section
2(c) hereof, as supplemented with such changes as
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Trust III shall make, and changes resulting from stock dividends, stock
splits, mergers and similar corporate actions.
(m) No registration under the 1933 Act of any of the Investments would be
required if they were, as of the time of such transfer, the subject of a
public distribution by either of Trust II or Trust III, except as
previously disclosed to Trust II by Trust III.
(n) At the Exchange Date, Trust III will have sold such of its assets, if any,
as necessary to ensure that, after giving effect to the acquisition of the
assets of Trust III pursuant to this Agreement, Trust II will remain in
compliance with its mandatory investment restrictions as set forth in the
Registration Statement.
3. Reorganization.
(a) Subject to the requisite approval of the shareholders of Trust III and to
the other terms and conditions contained herein (including Trust III's
obligation to distribute to its shareholders all of its investment company
taxable income and net capital gain as described in Section 8(m) hereof),
Trust III agrees to sell, assign, convey, transfer and deliver to Trust
II, and Trust II agrees to acquire from Trust III, on the Exchange Date
all of the Investments and all of the cash and other properties and assets
of Trust III, whether accrued or contingent (including cash received by
Trust III upon the liquidation by Trust III of any investments purchased
by Trust III after October 31, 2000 and designated by Trust II as being
unsuitable for it to acquire), in exchange for that number of Merger
Shares provided for in Section 4 and the assumption by Trust II of all of
the liabilities of Trust III, whether accrued or contingent, existing at
the Valuation Time. Pursuant to this Agreement, Trust III will, as soon as
practicable after the Exchange Date, distribute all of the Common and
Preferred Merger Shares received by it to the common and preferred
shareholders, respectively, of Trust III, in complete liquidation of Trust
III.
A-9
(b) [Reserved.]
(c) Trust III will pay or cause to be paid to Trust II any interest, cash or
such dividends, rights and other payments received by it on or after the
Exchange Date with respect to the Investments and other properties and
assets of Trust III, whether accrued or contingent, received by it on or
after the Exchange Date. Any such distribution shall be deemed included in
the assets transferred to Trust II at the Exchange Date and shall not be
separately valued unless the securities in respect of which such
distribution is made shall have gone "ex" such distribution prior to the
Valuation Time, in which case any such distribution which remains unpaid
at the Exchange Date shall be included in the determination of the value
of the assets of Trust III acquired by Trust II.
(d) The Valuation Time shall be 4:00 p.m. Boston time on , 2001 or such
earlier or later day as may be mutually agreed upon in writing by the
parties hereto (the "Valuation Time").
4. Exchange date; valuation time. On the Exchange Date, Trust II will deliver
to Trust III (i) a number of full and fractional Common Merger Shares
having an aggregate net asset value equal to the value of assets of Trust
III attributable to common shares of Trust III transferred to Trust II on
such date less the value of the liabilities of Trust III attributable to
the common shares of Trust III assumed by Trust II on that date and (ii) a
number of full and fractional Preferred Merger Shares having an aggregate
net asset value equal to the value of the assets of Trust III attributable
to preferred shares of Trust III transferred to Trust II on such date less
the value of the liabilities of Trust III attributable to preferred shares
of Trust III assumed by Trust II on that date, determined as hereafter
provided in this Section 4.
(a) The net asset value of the Merger Shares to be delivered to Trust III, the
value of the assets attributable to the common and preferred shares of
Trust III and the value of the liabilities attributable to the common and
preferred shares of Trust
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III to be assumed by Trust II shall in each case be determined as of the
Valuation Time.
(b) The net asset value of the Common and Preferred Merger Shares, and the
value of the assets and liabilities of the common and preferred shares of
Trust III shall be determined by Trust II, in cooperation with Trust III,
pursuant to procedures customarily used by Trust II in determining the
fair market value of Trust II's assets and liabilities.
(c) No adjustment shall be made in the net asset value of either Trust III or
Trust II to take into account differences in realized and unrealized gains
and losses.
(d) Trust II shall issue the Merger Shares to Trust III in two certificates
registered in the name of Trust III, one for the Common Merger Shares and
one for the Preferred Merger Shares (excluding any fractional shares).
Trust III shall distribute the Common Merger Shares to the common
shareholders of Trust III by redelivering such certificates to Trust II's
transfer agent, which will as soon as practicable set up open accounts for
each common shareholder of Trust II in accordance with written
instructions furnished by Trust III. Trust III shall distribute the
Preferred Merger Shares to the preferred shareholders of Trust III by
redelivering such certificates to Trust II's transfer agent, which will as
soon as practicable set up open accounts for each preferred shareholder of
Trust III in accordance with written instructions furnished by Trust III.
With respect to any Trust III shareholder holding share certificates as of
the Exchange Date, Trust II will not permit such shareholder to receive
dividends and other distributions on the Merger Shares (although such
dividends and other distributions shall be credited to the account of such
shareholder), receive certificates representing the Merger Shares, or
pledge such Merger Shares until such shareholder has surrendered his or
her outstanding Trust III certificates or, in the event of lost, stolen,
or destroyed certificates, posted adequate bond. In the event that a
shareholder shall not be permitted to
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receive dividends and other distributions on the Merger Shares as provided
in the preceding sentence, Trust II shall pay any such dividends or
distributions in additional shares, notwithstanding any election such
shareholder shall have made previously with respect to the payment, in
cash or otherwise, of dividends and distributions on shares of Trust III.
Trust III will, at its expense, request the shareholders of Trust III to
surrender their outstanding Trust III certificates, or post adequate bond,
as the case may be.
(e) Trust II shall assume all liabilities of Trust III, whether accrued or
contingent, in connection with the acquisition of assets and subsequent
dissolution of Trust III or otherwise.
5. Expenses, fees, etc.
(a) All fees and expenses, including legal and accounting expenses, portfolio
transfer taxes (if any) or other similar expenses incurred in connection
with the consummation by Trust III and Trust II of the transactions
contemplated by this Agreement will be allocated ratably between Trust II
and Trust III in proportion to their net assets as of the Valuation Time,
except that (i) the costs of proxy materials and proxy solicitation for
each fund will be borne by that fund, and (ii) the costs of repositioning
the portfolio of Trust III to reflect the investment policies of Trust II
incurred prior to the Exchange Date shall be borne by Trust III; provided
however, that such expenses will in any event be paid by the party
directly incurring such expenses if and to the extent that the payment by
the other party of such expenses would result in the disqualification of
Trust II or Trust III, as the case may be, as a "regulated investment
company" within the meaning of Section 851 of the Code.
(b) In the event the transactions contemplated by this Agreement are not
consummated by reason of Trust II's being either unwilling or unable to go
forward (other than by reason of the nonfulfillment or failure of any
condition to Trust II's obligations referred to in Section 8) Trust II
shall pay directly all
A-12
reasonable fees and expenses incurred by Trust III in connection with such
transactions, including, without limitation, legal, accounting and filing
fees.
(c) In the event the transactions contemplated by this Agreement are not
consummated by reason of Trust III's being either unwilling or unable to
go forward (other than by reason of the nonfulfillment or failure of any
condition to Trust III's obligations referred to in Section 9) Trust III
shall pay directly all reasonable fees and expenses incurred by Trust II
in connection with such transactions, including without limitation legal,
accounting and filing fees.
(d) In the event the transactions contemplated by this Agreement are not
consummated for any reason other than (i) Trust II's or Trust III's being
either unwilling or unable to go forward or (ii) the nonfulfillment or
failure of any condition to Trust II's or Trust III's obligations referred
to in Section 8 or Section 9 of this Agreement, then each of Trust II and
Trust III shall bear all of its own expenses incurred in connection with
such transactions.
(e) Notwithstanding any other provisions of this Agreement, if for any reason
the transactions contemplated by this Agreement are not consummated, no
party shall be liable to the other party for any damages resulting
therefrom, including without limitation consequential damages, except as
specifically set forth above.
6. Exchange date. Delivery of the assets of Trust III to be transferred,
assumption of the liabilities of Trust III to be assumed and the delivery
of the Merger Shares to be issued shall be made at the offices of Ropes &
Gray, One International Place, Boston, Massachusetts, at 10:00 A.M. on the
next full business day following the Valuation Time, or at such other time
and date agreed to by Trust II and Trust III, the date and time upon which
such delivery is to take place being referred to herein as the "Exchange
Date."
A-13
7. Meeting of shareholders; dissolution.
(a) Trust III agrees to call a meeting of its shareholders as soon as is
practicable after the effective date of the Registration Statement for the
purpose of considering the sale of all of its assets to and the assumption
of all of its liabilities by Trust II as herein provided, adopting this
Agreement, and authorizing the liquidation and dissolution of Trust III.
(b) Trust III agrees that the liquidation and dissolution of Trust III will be
effected in the manner provided in the Agreement and Declaration of Trust
of Trust III in accordance with applicable law and that on and after the
Exchange Date, Trust III shall not conduct any business except in
connection with its liquidation and dissolution.
(c) Trust II has, after the preparation and delivery to Trust II by Trust III
of a preliminary version of the Proxy Statement which was satisfactory to
Trust II and to Ropes & Gray for inclusion in the Registration Statement,
filed the Registration Statement with the Commission. Each of Trust III
and Trust II will cooperate with the other, and each will furnish to the
other the information relating to itself required by the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder set
forth in the Registration Statement, including the Prospectuses and the
Proxy Statements.
8. Conditions to Trust II's obligations. The obligations of Trust II
hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote of
(i) at least two-thirds of the Trustees of Trust III (including a majority
of those Trustees who are not "interested persons" of Trust III, as
defined in Section 2(a)(19) of the 1940 Act), (ii) holders of a majority
of the outstanding common and preferred shares of beneficial interest of
Trust III entitled to vote (voting together), (iii) holders of a majority
of the outstanding preferred shares of Trust III, (iv) a
A-14
majority of the Trustees of Trust II (including a majority of those
Trustees who are not "interested persons" of Trust II, as defined in
Section 2(a)(19) of the 1940 Act), (v) holders of a majority of the
outstanding common and preferred shares of beneficial interest of Trust II
entitled to vote (voting together) (or holders of a majority of the
outstanding common and preferred shares of beneficial interest of Trust II
voted, if holders of more than 50% of such shares vote), and (vi) holders
of a majority of the outstanding preferred shares of Trust II.
(b) That Trust III shall have furnished to Trust II a statement of Trust III's
net assets, with values determined as provided in Section 4 of this
Agreement, together with a list of Investments with their respective tax
costs, all as of the Valuation Time, certified on Trust III's behalf by
Trust III's President (or any Vice President) and Treasurer (or any
Assistant Treasurer), and a certificate of both such officers, dated the
Exchange Date, to the effect that as of the Valuation Time and as of the
Effective Date there has been no material adverse change in the financial
position of Trust III since October 31, 2000 other than changes in the
Investments and other assets and properties since that date or changes in
the market value of the Investments and other assets of Trust III or
changes due to dividends paid or losses from operations.
(c) That Trust III shall have furnished to Trust II a statement, dated the
Exchange Date, signed on behalf of Trust III by Trust III's President (or
any Vice President) and Treasurer (or any Assistant Treasurer) certifying
that as of the Valuation Time and as of the Exchange Date all
representations and warranties of Trust III made in this Agreement are
true and correct in all material respects as if made at and as of such
dates, and that Trust III 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 Trust III shall have delivered to Trust II an agreed upon procedures
letter from PricewaterhouseCoopers LLP dated the Exchange Date, setting
forth the findings of PricewaterhouseCoopers LLP pursuant to its
performance of the
A-15
agreed upon procedures set forth therein relating to management's
assertions that for the fiscal period from November 1, 2000 to the
Exchange Date Trust III (i) qualified as a regulated investment company
under the Internal Revenue Code (the "Code"), (ii) as of the Exchange
Date, has no liability other than liabilities stated for federal or state
income taxes and (iii) as of the Exchange Date, has no liability for
federal excise tax purposes under section 4982 of the Code.
(e) That there shall not be any material litigation pending with respect to
the matters contemplated by this Agreement.
(f) That Trust II shall have received an opinion of Ropes & Gray, in form
satisfactory to Trust II and dated the Exchange Date, to the effect that
(i) Trust III is a business trust duly established and validly existing
under the laws of The Commonwealth of Massachusetts, and, to the knowledge
of such counsel, is not required to qualify to do business as a foreign
association in any jurisdiction except as may be required by state
securities or blue sky laws, (ii) this Agreement has been duly authorized,
executed, and delivered by Trust III and, assuming that the Registration
Statement, the Prospectuses and the Proxy Statements comply with the 1933
Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by Trust II, is a valid and
binding obligation of Trust III, (iii) Trust III has power to sell,
assign, convey, transfer and deliver the assets contemplated hereby and,
upon consummation of the transactions contemplated hereby in accordance
with the terms of this Agreement, Trust III will have duly sold, assigned,
conveyed, transferred and delivered such assets to Trust II, (iv) the
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby will not, violate Trust III's
Agreement and Declaration of Trust, as amended, or Bylaws or any provision
of any agreement known to such
A-16
counsel to which Trust III is a party or by which it is bound, it being
understood that with respect to investment restrictions as contained in
Trust III's Agreement and Declaration of Trust, Bylaws or then-current
prospectus or statement of additional information, such counsel may rely
upon a certificate of an officer of Trust III's whose responsibility it is
to advise Trust III with respect to such matters, and (v) no consent,
approval, authorization or order of any court or governmental authority is
required for the consummation by Trust III of the transactions
contemplated hereby, except such as have been obtained under the 1933 Act,
the 1934 Act, the 1940 Act and such as may be required under state
securities or blue sky laws and the H-S-R Act, and (vi) such other matters
as Trust II may reasonably deem necessary or desirable.
(g) That Trust II shall have received an opinion of Ropes & Gray dated the
Exchange Date (which opinion would be based upon certain factual
representations and subject to certain qualifications), to the effect
that, on the basis of the existing provisions of the Code, current
administrative rules and court decisions, for federal income tax purposes:
(i) the acquisition by Trust II of substantially all of the assets of
Trust III solely in exchange for Merger Shares and the assumption by Trust
II of liabilities of Trust III followed by the distribution of Trust III
to its shareholders of Merger Shares in complete liquidation of Trust III,
all pursuant to the plan of reorganization, constitutes a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and
Trust III and Trust II will each be a "party to a reorganization" within
the meaning of Section 368(b) of the Internal Revenue Code, (ii) no gain
or loss will be recognized by Trust II or its shareholders upon receipt of
the Investments transferred to Trust II pursuant to this Agreement in
exchange for the Merger Shares, (iii) the basis to Trust II of the
Investments will be the same as the basis of the Investments in the hands
of Trust III immediately prior to such exchange, (iv) Trust II's holding
periods
A-17
with respect to the Investments will include the respective periods for
which the Investments were held by Trust III; and (v) Trust II will
succeed to and take into account the items of Trust III described in
Section 381(c) of the Internal Revenue Code, subject to the conditions and
limitations specified in Sections 381, 382, 383 and 384 of the Internal
Revenue Code and Regulations thereunder.
(h) That the assets of Trust III to be acquired by Trust II will include no
assets which Trust II, by reason of charter limitations or of investment
restrictions disclosed in the Registration Statement in effect on the
Exchange Date, may not properly acquire.
(i) That the 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 Trust II, threatened by the Commission.
(j) That Trust II shall have received from the Commission, any relevant state
securities administrator, the Federal Trade Commission (the "FTC") and the
Department of Justice (the "Department") such order or orders as Ropes &
Gray deems reasonably necessary or desirable under the 1933 Act, the 1934
Act, the 1940 Act, any applicable state securities or blue sky laws and
the H-S-R Act in connection with the transactions contemplated hereby, and
that all such orders shall be in full force and effect.
(k) That all proceedings taken by Trust III in connection with the
transactions contemplated by this Agreement and all documents incidental
thereto shall be satisfactory in form and substance to Trust II and Ropes
& Gray.
(l) That, prior to the Exchange Date, Trust III shall have declared a dividend
or dividends which, together with all previous such dividends, shall have
the effect of distributing to the shareholders of Trust III (i) all of the
excess of (X) Trust III's investment income excludeable from gross income
under
A-18
Section 103 of the Code over (Y) Trust III's deductions disallowed under
Sections 265 and 171 of the Code, (ii) all of Trust III's investment
company taxable income (as defined in Section 852 of the Code) for its
taxable years ending on or after October 31, 2000, and on or prior to the
Exchange Date (computed in each case without regard to any deduction for
dividends paid), and (iii) all of its net capital gain realized after
reduction by any capital loss carryover in each of its taxable years
ending on or after October 31, 2000, and on or prior to the Exchange Date.
(m) That Trust III's custodian shall have delivered to Trust II a certificate
identifying all of the assets of Trust III held by such custodian as of
the Valuation Time.
(n) That Trust III's transfer agent shall have provided to Trust II (i) the
originals or true copies of all of the records of Trust III in the
possession of such transfer agent as of the Exchange Date, (ii) a
certificate setting forth the number of shares of Trust III outstanding as
of the Valuation Time, and (iii) the name and address of each holder of
record of any such shares and the number of shares held of record by each
such shareholder.
(o) That all of the issued and outstanding shares of beneficial interest of
Trust III shall have been offered for sale and sold in conformity with all
applicable state securities or blue sky laws and, to the extent that any
audit of the records of Trust III or its transfer agent by Trust II or its
agents shall have revealed otherwise, either (i) Trust III shall have
taken all actions that in the opinion of Trust II or its counsel are
necessary to remedy any prior failure on the part of Trust III to have
offered for sale and sold such shares in conformity with such laws or (ii)
Trust III shall have furnished (or caused to be furnished) surety, or
deposited (or caused to be deposited) assets in escrow, for the benefit of
Trust II in amounts sufficient and upon terms satisfactory, in the opinion
of Trust II or its counsel, to indemnify Trust II against any expense,
loss,
A-19
claim, damage or liability whatsoever that may be asserted or threatened
by reason of such failure on the part of Trust III to have offered and
sold such shares in conformity with such laws.
(p) That Trust II shall have received from PricewaterhouseCoopers LLP an
agreed upon procedures letter addressed to Trust II dated as of the
Exchange Date satisfactory in form and substance to Trust II setting forth
the findings of PricewaterhouseCoopers LLP pursuant to its performance of
the agreed upon procedures set forth therein relating to management's
assertion that as of the Valuation Time the value of the assets of Trust
III to be exchanged for the Merger Shares has been determined in
accordance with the provisions of Article 10 section 5 (10.5) of Trust
II's By-laws pursuant to the procedures customarily utilized by Trust II
in valuing its assets and issuing its shares.
(q) That Trust III shall have executed and delivered to Trust II an instrument
of transfer dated as of the Exchange Date pursuant to which Trust III will
assign, transfer and convey all of the assets and other property to Trust
II at the Valuation Time in connection with the transactions contemplated
by this Agreement.
(r) That Standard & Poor's Ratings Group and Moody's Investors Service, Inc.
shall have advised Trust II that the consummation of the transactions
described in paragraph (a) of this Agreement will not result in the
withdrawal of their current ratings of Trust II's outstanding preferred
shares.
(s) That the authorization of the issuance of Additional Preferred Shares
shall have been approved by holders of a majority of Trust II's
outstanding preferred shares.
(t) That the Common Merger Shares shall have been accepted for listing by the
New York Stock Exchange.
9. Conditions to Trust III's obligations. The obligations of Trust III
hereunder shall be subject to the following conditions:
A-20
(a) That this Agreement shall have been adopted and the transactions
contemplated hereby shall have been approved by the affirmative vote of
(i) at least two-thirds of the Trustees of Trust III (including a majority
of those Trustees who are not "interested persons" of Trust III, as
defined in Section 2(a)(19) of the 1940 Act), (ii) holders of a majority
of the outstanding common and preferred shares of beneficial interest of
Trust III entitled to vote (voting together), (iii) holders of a majority
of the outstanding preferred shares of Trust III, (iv) a majority of the
Trustees of Trust II (including a majority of those Trustees who are not
"interested persons" of Trust II, as defined in Section 2(a)(19) of the
1940 Act), (v) holders of a majority of the outstanding common and
preferred shares of beneficial interest of Trust II entitled to vote
(voting together) (or holders of a majority of the outstanding common and
preferred shares of beneficial interest of Trust II voted, if holders of
more than 50% of such shares vote), and (vi) holders of a majority of the
outstanding preferred shares of Trust II.
(b) That Trust II shall have furnished to Trust III a statement of Trust II's
net assets, together with a list of portfolio holdings with values
determined as provided in Section 4 of this Agreement, all as of the
Valuation Time, certified on behalf of Trust II by Trust II's President
(or any Vice President) and Treasurer (or any Assistant Treasurer), and a
certificate of both such officers, dated the Exchange Date, to the effect
that as of the Valuation Time and as of the Exchange Date there has been
no material adverse change in the financial position of Trust II since
April 30, 2000, other than changes in its portfolio securities since that
date, changes in the market value of its portfolio securities or changes
due to dividends paid or losses from operations.
(c) That Trust II shall have executed and delivered to Trust III an Assumption
of Liabilities dated as of the Exchange Date pursuant to which Trust II
will assume all of the liabilities of
A-21
Trust III existing at the Valuation Time in connection with the
transactions contemplated by this Agreement.
(d) That Trust II shall have furnished to Trust III a statement, dated the
Exchange Date, signed on behalf of Trust II by Trust II's President (or
any Vice President) and Treasurer (or any Assistant Treasurer) certifying
that as of the Valuation Time and as of the Exchange Date all
representations and warranties of Trust II made in this Agreement are true
and correct in all material respects as if made at and as of such dates,
and that Trust II 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.
(e) That there shall not be any material litigation pending or threatened with
respect to the matters by this Agreement.
(f) That Trust III shall have received an opinion of Ropes & Gray, in form
satisfactory to Trust III and dated the Exchange Date, to the effect that
(i) Trust II is a business trust duly established and validly existing in
conformity with the laws of The Commonwealth of Massachusetts, and, to the
knowledge of such counsel, is not required to qualify to do business as a
foreign association in any jurisdiction except as may be required by state
securities or blue sky laws, (ii) this Agreement has been duly authorized,
executed and delivered by Trust II and, assuming that the Prospectuses,
the Registration Statement and the Proxy Statements comply with the 1933
Act, the 1934 Act and the 1940 Act and assuming due authorization,
execution and delivery of this Agreement by Trust III, is a valid and
binding obligation of Trust II, (iii) the Merger Shares to be delivered to
Trust III as provided for by this Agreement are duly authorized and upon
such delivery will be validly issued and will be fully paid and
nonassessable by Trust II and no shareholder of Trust II has any
preemptive right to subscription or purchase in respect thereof, (iv) the
execution and delivery of this Agreement did not, and the consummation of
the transactions contemplated hereby
A-22
will not, violate Trust II's Agreement and Declaration of Trust, as
amended, or By-laws, or any provision of any agreement known to such
counsel to which Trust II is a party or by which it is bound, it being
understood that with respect to investment restrictions as contained in
Trust II's Agreement and Declaration of Trust, as amended, By-Laws or the
Registration Statement, such counsel may rely upon a certificate of an
officer of Trust II whose responsibility it is to advise Trust II with
respect to such matters, (v) no consent, approval, authorization or order
of any court or governmental authority is required for the consummation by
Trust II of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act, the 1940 Act, [and the Rules of
the New York Stock Exchange] and such as may be required under state
securities or blue sky laws and the H-S-R Act, and (vi) the Registration
Statement has become effective under the 1933 Act, and to the best of the
knowledge of such counsel, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the 1933
Act.
(g) That Trust III shall have received an opinion of Ropes & Gray dated the
Exchange Date (which opinion would be based upon certain factual
representations and subject to certain qualifications), to the effect
that, on the basis of the existing provisions of the Code, current
administrative rules and court decisions, for federal income tax purposes:
i) the acquisition by Trust II of substantially all of the assets of Trust
III solely in exchange for Merger Shares and the assumption by Trust II of
liabilities of Trust III followed by the distribution of Trust III to its
shareholders of Merger Shares in complete liquidation of Trust III, all
pursuant to the plan of reorganization, constitutes a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and
Trust III and Trust II will each be a "party to a reorganization" within
the mean-
A-23
ing of Section 368(b) of the Internal Revenue Code, (ii) no gain or loss
will be recognized by Trust III upon the transfer of the Investments to
Trust II and the assumption by Trust II of the liabilities of Trust III,
or upon the distribution of the Merger Shares by Trust III to its
shareholders, pursuant to this Agreement, (iii) no gain or loss will be
recognized by the Trust III shareholders on the exchange of their shares
of the Trust III for Merger Shares; (iv) the aggregate basis of the Merger
Shares a Trust III shareholder receives in connection with the transaction
will be the same as the aggregate basis of his or her Trust III shares
exchanged therefor, and (v) a Trust III shareholder's holding period for
his or her Merger Shares will be determined by including the period for
which he or she held Trust III shares exchanged therefor.
(h) That all proceedings taken by or on behalf of Trust II in connection with
the transactions contemplated by this Agreement and all documents
incidental thereto shall be satisfactory in form and substance to Trust
III and Ropes & Gray.
(i) That the 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 Trust II, threatened by the Commission.
(j) That Trust III shall have received from the Commission, any relevant state
securities administrator, the FTC and the Department such order or orders
as Ropes & Gray deems reasonably necessary or desirable under the 1933
Act, the 1934 Act, the 1940 Act, any applicable state securities or blue
sky laws and the H-S-R Act in connection with the transactions
contemplated hereby, and that all such orders shall be in full force and
effect.
(k) That the authorization of the issuance of Additional Preferred Shares
shall have been approved by holders of a majority of Trust II's
outstanding preferred shares.
A-24
(l) That the Common Merger Shares shall have been accepted for listing by the
New York Stock Exchange.
10. Indemnification.
(a) Trust III will indemnify and hold harmless, out of the assets of Trust III
but no other assets, Trust II, its trustees and its officers (for purposes
of this subparagraph, the "Indemnified Parties") against any and all
expenses, losses, claims, damages and liabilities at any time imposed upon
or reasonably incurred by any one or more of the Indemnified Parties in
connection with, arising out of, or resulting from any claim, action, suit
or proceeding in which any one or more of the Indemnified Parties may be
involved or with which any one or more of the Indemnified Parties may be
threatened by reason of any untrue statement or alleged untrue statement
of a material fact relating to Trust III contained in the Registration
Statement, the Prospectuses, the Proxy Statements or any amendment or
supplement to any of the foregoing, or arising out of or based upon the
omission or alleged omission to state in any of the foregoing a material
fact relating to Trust III required to be stated therein or necessary to
make the statements relating to Trust III therein not misleading,
including, without limitation, any amounts paid by any one or more of the
Indemnified Parties in a reasonable compromise or settlement of any such
claim, action, suit or proceeding, or threatened claim, action, suit or
proceeding made with the consent of Trust III. The Indemnified Parties
will notify Trust III in writing within ten days after the receipt by any
one or more of the Indemnified Parties of any notice of legal process or
any suit brought against or claim made against such Indemnified Party as
to any matters covered by this Section 10(a). Trust III shall be entitled
to participate at its own expense in the defense of any claim, action,
suit or proceeding covered by this Section 10(a), or, if it so elects, to
assume at its expense by counsel satisfactory to the Indemnified Parties
the defense of any such claim, action, suit or proceeding, and if Trust
III
A-25
elects to assume such defense, the Indemnified Parties shall be entitled
to participate in the defense of any such claim, action, suit or
proceeding at their expense. Trust III's obligation under this Section
10(a) to indemnify and hold harmless the Indemnified Parties shall
constitute a guarantee of payment so that Trust III will pay in the first
instance any expenses, losses, claims, damages and liabilities required to
be paid by it under this Section 10(a) without the necessity of the
Indemnified Parties' first paying the same.
(b) Trust II will indemnify and hold harmless, out of the assets of Trust II
but no other assets, Trust III, its trustees and its officers (for
purposes of this subparagraph, the "Indemnified Parties") against any and
all expenses, losses, claims, damages and liabilities at any time imposed
upon or reasonably incurred by any one or more of the Indemnified Parties
in connection with, arising out of, or resulting from any claim, action,
suit or proceeding in which any one or more of the Indemnified Parties may
be involved or with which any one or more of the Indemnified Parties may
be threatened by reason of any untrue statement or alleged untrue
statement of a material fact relating to Trust II contained in the
Registration Statement, the Prospectus, the Proxy Statements, or any
amendment or supplement to any thereof, or arising out of, or based upon,
the omission or alleged omission to state in any of the foregoing a
material fact relating to Trust II required to be stated therein or
necessary to make the statements relating to Trust II therein not
misleading, including without limitation any amounts paid by any one or
more of the Indemnified Parties in a reasonable compromise or settlement
of any such claim, action, suit or proceeding, or threatened claim,
action, suit or proceeding made with the consent of Trust II. The
Indemnified Parties will notify Trust II in writing within ten days after
the receipt by any one or more of the Indemnified Parties of any notice of
legal process or any suit brought against or claim made against such
Indemnified Party as to
A-26
any matters covered by this Section 10(b). Trust II shall be entitled to
participate at its own expense in the defense of any claim, action, suit
or proceeding covered by this Section 10(b), or, if it so elects, to
assume at its expense by counsel satisfactory to the Indemnified Parties
the defense of any such claim, action, suit or proceeding, and, if Trust
II elects to assume such defense, the Indemnified Parties shall be
entitled to participate in the defense of any such claim, action, suit or
proceeding at their own expense. Trust II's obligation under this Section
10(b) to indemnify and hold harmless the Indemnified Parties shall
constitute a guarantee of payment so that Trust II will pay in the first
instance any expenses, losses, claims, damages and liabilities required to
be paid by it under this Section 10(b) without the necessity of the
Indemnified Parties' first paying the same.
11. No broker, etc. Each of Trust III and Trust II represents that there is no
person who has dealt with it who by reason of such dealings is entitled to
any broker's or finder's or other similar fee or commission arising out of
the transactions contemplated by this Agreement.
12. Termination. Trust III and Trust II may, by mutual consent of their
trustees, terminate this Agreement, and Trust III or Trust II, after
consultation with counsel and by consent of their trustees or an officer
authorized by such trustees, may waive any condition to their respective
obligations hereunder. If the transactions contemplated by this Agreement
have not been substantially completed by December 31, 2001, this Agreement
shall automatically terminate on that date unless a later date is agreed
to by Trust III and Trust II.
13. Rule 145. Pursuant to Rule 145 under the 1933 Act, Trust II will, in
connection with the issuance of any Merger Shares to any person who at the
time of the transaction contemplated hereby is deemed to be an affiliate
of a party to the transaction pursuant to Rule 145(c), cause to be affixed
upon the certificates issued to such person (if any) a legend as follows:
A-27
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II OR ITS PRINCIPAL UNDERWRITER
UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (II) IN THE OPINION OF
COUNSEL REASONABLY SATISFACTORY TO PUTNAM INVESTMENT GRADE MUNICIPAL
TRUST II SUCH REGISTRATION IS NOT REQUIRED."
and, further, Trust II will issue stop transfer instructions to Trust II's
transfer agent with respect to such shares. Trust III will provide Trust
II on the Exchange Date with the name of any Trust III shareholder who is
to the knowledge of Trust III an affiliate of Trust III on such date.
14. Covenants, etc. deemed material. 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.
15. Sole agreement; amendments. This Agreement supersedes all previous
correspondence and oral communications between the parties regarding the
subject matter hereof, constitutes the only understanding with respect to
such subject matter, may not be changed except by a letter of agreement
signed by each party hereto, and shall be construed in accordance with and
governed by the laws of The Commonwealth of Massachusetts.
16. Agreement and declaration of trust. Copies of the Agreements and
Declarations of Trust of Trust III and Trust II are on file with the
Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed by the
A-28
Trustees of each Trust, respectively, as Trustees and not individually and
that the obligations of this instrument are not binding upon any of the
Trustees, officers or shareholders of Trust III or Trust II individually
but are binding only upon the assets and property of Trust III and Trust
II, respectively.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST II
By:
--------------------------------------------------------------
Executive Vice President
PUTNAM INVESTMENT GRADE
MUNICIPAL TRUST III
By:
--------------------------------------------------------------
Executive Vice President
A-29
For more information about
Trust II and Trust III
Trust II's statement of additional information (SAI) and the funds' annual
and semi-annual reports to shareholders include additional information
about the funds. The SAI, the independent accountant's reports and
financial statements included in the funds' most recent annual reports,
and the financial statements included in Trust II's most recent
semi-annual report are incorporated by reference into this
prospectus/proxy statement, which means they are part of this
prospectus/proxy statement for legal purposes. The annual and semi-annual
reports discuss the market conditions and investment strategies that
significantly affected the fund's performance during the relevant period.
Trust II's annual and semi-annual reports accompany the prospectus/proxy
statement received by its preferred shareholders. Shareholders of the
funds may get free copies of these materials, request other information
about the funds, or make shareholder inquiries, by contacting their
financial advisor, by visiting Putnam's Internet site, or by calling
Putnam toll-free at 1-800-225-1581.
P U T N A M INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
xxxxx x/xx
APPENDIX B
INFORMATION ABOUT THE FUNDS'
PREFERRED SHARES
Except as noted below, the terms of each fund's outstanding preferred shares,
the Preferred Merger Shares and the Additional Preferred Shares (collectively,
the "Preferred Shares") are essentially identical. Accordingly, the following
brief description of the Preferred Shares of Trust II applies equally to the
Preferred Shares of Trust III. This description does not purport to be complete
and is subject to and qualified in its entirety by reference to each fund's
Bylaws. A copy of Trust II's Bylaws has been filed as an exhibit to the
Registration Statement of which this Prospectus/Proxy Statement is a part and
may be inspected, and copies thereof may be obtained, as described under
"Further Information about Voting and the Meeting." Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Prospectus/Proxy, the Glossary, or in Exhibit B-2 to this Appendix.
Comparison of the outstanding Preferred Shares of Trust III (and the Preferred
Merger Shares) with the outstanding Preferred Shares of Trust II
As noted above, the terms of the outstanding Preferred Shares of Trust III (and
the Preferred Merger Shares) and the terms of the outstanding Preferred Shares
of Trust II are substantially similar. There are, however, certain differences.
First, if a holder of Preferred Shares fails to make an election in connection
with a Remarketing, he will be deemed to have tendered such shares if the
current Dividend Period or the succeeding Dividend Period is a Special Dividend
Period of more than 90 days, in the case of the outstanding Preferred Shares of
Trust III (and the Preferred Merger Shares), and 60 days, in the case of the
outstanding Preferred Shares of Trust II. Second, the Applicable Dividend Rate
for any Dividend
B-1
Period commencing during any Non-Payment Period, and the rate used to calculate
any applicable late charge, will generally be 250% of the Reference Rate (or
300% of such rate if the fund has provided a Tax Notification to the
Remarketing Agent with respect to that Dividend Period), in the case of the
outstanding Preferred Shares of Trust III (and the Preferred Merger Shares),
and will generally be 200% of the Reference Rate (or 275% of such rate if the
fund has provided a Tax Notification to the Remarketing Agent with respect to
that Dividend Period), in the case of the outstanding Preferred Shares of Trust
II. Third, each Dividend Period that commences during a Non-Payment Period
shall be a 28-day dividend period, unless, in the case of the outstanding
Preferred Shares of Trust II, but not in the case of the outstanding Preferred
Shares of Trust III (and the Preferred Merger Shares), the preceding Dividend
Period was a Special Dividend Period of less than 28 days. Fourth, a
Non-Payment Period, in the case of the outstanding Preferred Shares of Trust
II, but not in the case of the outstanding Preferred Shares of Trust III (and
the Preferred Merger Shares), will not end unless the fund shall have given at
least 14 days' written notice to the Paying Agent, the Remarketing Agent, the
Securities Depository and all holders of shares. Fifth, the discretion of the
Remarketing Agent to waive a holder's election to hold Preferred Shares in
connection with a Remarketing is contingent, in the case of the outstanding
Preferred Shares of Trust II, but not in the case of the outstanding Preferred
Shares of Trust III (and the Preferred Merger Shares), on the Remarketing
Agent's being able to remarket all shares tendered to it in such Remarketing.
Sixth, the 20-day minimum notice period prior to any redemption, in the case of
the outstanding Preferred Shares of Trust III (and the Preferred Merger
Shares), but not in the case of the outstanding Preferred Shares of Trust II,
applies only if a shorter period is not provided for under applicable law.
Seventh, the Remarketing Date and the Settlement Date are normally Thursday and
Friday, respectively, in the case of
B-2
the outstanding Preferred Shares of Trust III (and the Preferred Merger
Shares), and are normally Wednesday and Thursday, respectively, in the case of
the outstanding Preferred Shares of Trust II. Finally, in the event that the
fund notifies the Remarketing Agent prior to the Remarketing establishing the
Applicable Dividend Rate for any dividend that income subject to regular
federal income tax will be included in such dividend, the Maximum Dividend Rate
will be the Maximum Dividend Rate that would otherwise be applicable divided by
the quantity 1 minus the Gross-Up Tax Rate, in the case of the outstanding
Preferred Shares of Trust III (and the Preferred Merger Shares), and will be as
follows, in the case of the outstanding Preferred Shares of Trust II:
Applicable Applicable
Percentage Percentage
of Reference of Reference
Rate- Rate-
Moody's S&P No Tax Notification Tax Notification
- ------------------ --------------- --------------------- -----------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
Dividends and Dividend Periods
The Bylaws provide generally that holders of Preferred Shares will be
entitled to receive, when, as and if declared by the fund, out of funds legally
available therefor, cumulative cash dividends, at the Applicable Dividend Rate
for the applicable Dividend Period, 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,"
"Remarketing Procedures" and Exhibit B-1.
The Applicable Dividend Rate on Preferred Merger Shares for the Initial
Dividend Period will be the rate determined by the Remarketing Agent in
connection with the Remarketing occurring on the day before the Date of
Original
B-3
Issue Date. For each Dividend Period thereafter, except as otherwise described
herein, the Applicable Dividend Rate on the Preferred Merger Shares and all
other Preferred Shares will be the dividend rate per annum determined by the
Remarketing Agent in its sole discretion (which discretion will be conclusive
and binding on all holders) in accordance with the remarketing procedures
described below. See "Remarketing" and "Remarketing Procedures." The Initial
Dividend Period for Preferred Shares and each subsequent Dividend Period will
generally consist of 28 days (a "28-day Dividend Period"), unless the fund
elects, prior to any Remarketing, a Special Dividend Period. A "Special
Dividend Period" is a Dividend Period consisting of a specified number of days
(other than 28), evenly divisible by seven and not fewer than seven nor more
than 364 (a "Short Term Dividend Period"), or a Dividend Period consisting of a
specified period of one whole year or more but not greater than five years (a
"Long Term Dividend Period"). Dividends on Preferred Shares will be cumulative
from their Date of Original Issue and will be payable, when, as and if declared
by the Trustees, commencing on the last day of the Initial Dividend Period, and
generally on each Dividend Payment Date thereafter. The holder of a Preferred
Share may elect to tender such share or hold such share for the next Dividend
Period by providing notice to the Remarketing Agent in connection with the
Remarketing for that Dividend Period. See "Remarketing" and "Remarketing
Procedures."
Dividend Periods for the Preferred Shares. A Dividend Period for
Preferred Shares will commence on each (but not the final) Dividend Payment
Date for such share; provided, however, that any Dividend Payment Date, other
than the last Dividend Payment Date during such Dividend Period, occurring
after commencement of and during a Special Dividend Period of more than 35 days
will not give rise to a new Dividend Period. Each subsequent Dividend Period
for Preferred
B-4
Shares will comprise, beginning with and including the date on which it
commences, 28 consecutive days or, in the event the fund has designated such
Dividend Period as a Special Dividend Period, such number of consecutive days
as specified by the fund; provided that such number of days to be specified
shall be a multiple of seven and not more than 364 in the case of a Short Term
Dividend Period and shall consist of at least one full year (but not more than
five years) in the case of a Long Term Dividend Period. Notwithstanding the
foregoing, any adjustment of the remarketing schedule or of the length of a
Dividend Period as provided herein shall cause an adjustment of the relevant
Settlement Date, if necessary, so that such Settlement Date will be the first
day of the next Dividend Period.
Special Dividend Periods for Preferred Shares. With respect to each
Dividend Period, the fund may, at its sole option and to the extent permitted
by law, by telephonic or written notice (a "Request for Special Dividend
Period") to the Remarketing Agent, request that the next succeeding Dividend
Period for Preferred Shares will be a number of days (other than 28), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or a period of not less than one whole year and not
greater than five years in the case of a Long Term Dividend Period, specified
in such notice, provided that the fund may not give a Request for a Special
Dividend Period of greater than 28 days (and any such request shall be null and
void) unless the fund has given written notice thereof to Moody's and S&P and
unless, with respect to the Preferred Shares, full cumulative dividends, any
amounts due with respect to redemptions, and any Additional Dividends payable
prior to such date have been paid in full and, for any Remarketing occurring
after the initial Remarketing, all shares tendered were remarketed in the last
occurring Remarketing. Such Request for Special Dividend Period, in the case of
a
B-5
Short Term Dividend Period, shall be given on or prior to the fourth Business
Day but not more than seven Business Days prior to a Remarketing Date for the
Preferred Shares and, in the case of a Long Term Dividend Period, shall be
given on or prior to the 14th day but not more than 28 days prior to a
Remarketing Date for Preferred Shares. Upon receiving such a Request for
Special Dividend Period, the Remarketing Agent shall determine (i) whether
given the factors set forth below it is advisable that the fund issue a Notice
of Special Dividend Period for Preferred Shares as contemplated by such Request
for Special Dividend Period, (ii) the Optional Redemption Price of the
Preferred Shares during such Special Dividend Period and, (iii) the Specific
Redemption Provisions and shall give the fund written notice (a "Response") of
its determination by no later than the third Business Day prior to such
Remarketing Date. In making such determination, the Remarketing Agent will
consider (i) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (ii) existing market supply and demand for
short-term and long-term securities, (iii) existing yield curves for short-term
and long-term securities comparable to the Preferred Shares, (iv) industry and
financial conditions which may affect the Preferred Shares, (v) the investment
objective of the fund, and (vi) the Dividend Periods and dividend rates at
which current and potential beneficial holders of Preferred Shares would remain
or become beneficial holders. If the Remarketing Agent shall not give the fund
a Response by such third Business Day or if the Response states that given the
factors set forth above it is not advisable that the fund give a Notice of
Special Dividend Period for Preferred Shares, the fund may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend Period.
In the event the Response indicates that it is advisable that the fund give a
Notice of Special Dividend Period for the Preferred Shares, the fund may by no
later than the second Business Day prior to such Remarketing Date give a notice
(a "Notice
B-6
of Special Dividend Period") to the Remarketing Agent, the Paying Agent and to
the Securities Depository, which notice will specify (i) the duration of the
Special Dividend Period, (ii) the Optional Redemption Price as specified in the
related Response, and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The fund shall not give a Notice of Special
Dividend Period, or, if such Notice of Special Dividend Period shall have
already been given, shall give telephonic or written notice of its revocation
(a "Notice of Revocation") to the Remarketing Agent (in the case of clauses (x)
and (y)) and the Securities Depository (in the case of clauses (x), (y) and (z)
) on or prior to the Business Day prior to the relevant Remarketing Date if (x)
either the 1940 Act Preferred Shares Asset Coverage is not satisfied or the
fund shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to the relevant Remarketing Date
on an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period (using as a pro forma dividend rate with respect to
such Special Dividend Period the dividend rate which the Remarketing Agent
shall advise the fund is an approximately equal rate for securities similar to
the Preferred Shares with an equal dividend period), provided that (unless
Moody's advises the fund to the contrary), in calculating the aggregate
Discounted Value of Moody's Eligible Assets for this purpose, the Moody's
Exposure Period shall be deemed to be one week longer than the Moody's Exposure
Period that would otherwise apply as of the date of the Notice, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date for the Preferred Shares have not been irrevocably
deposited with the Paying Agent by the close of business on the third Business
Day preceding the Remarketing Date or (z) the Remarketing Agent advises the
fund that after
B-7
consideration of the factors listed above it has concluded that it is advisable
to give a Notice of Revocation. If the fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause (x),
(y), or (z) of the preceding sentence or if the fund gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for Preferred
Shares, the next succeeding Dividend Period for Preferred Shares will be a
28-day Dividend Period, provided that if the then-current Dividend Period is a
Special Dividend Period of less than 28 days, the next succeeding Dividend
Period for such shares will be the same length as the current Dividend Period.
In the event all Preferred Shares for which the fund has given a Notice
of Special Dividend Period tendered are not remarketed or a Remarketing is not
held for any reason, the fund may not again give a Notice of Special Dividend
Period (and any such attempted notice shall be null and void) until all
Preferred Shares tendered in any subsequent Remarketing with respect to a
28-day Dividend Period have been remarketed.
Dividend Payment Dates. Dividends on each Preferred Share will accumulate
from its Date of Original Issue and will be payable, when, as and if declared
by the Trustees, on the applicable Dividend Payment Dates. The Dividend Payment
Dates will be: (i) with respect to any 28-day Dividend Period and any Short
Term Dividend Period of 35 or fewer days, the day next succeeding the last day
thereof; and (ii) with respect to any Short Term Dividend Period of more than
35 days and with respect to any Long Term Dividend Period the first Business
Day of each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and the day next succeeding the last day of such period (each
such date referred to in clause (i) or (ii) being herein referred to as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, then
B-8
(i) the Dividend Payment Date shall be the first Business Day next succeeding
such Normal Dividend Payment Date if such Normal Dividend Payment Date is a
Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date shall
be the first Business Day next preceding such Normal Dividend Payment Date if
such Normal Dividend Payment Date is a Friday and in each case the length of
the current Dividend Period will be adjusted accordingly. If, however, in the
case of clause (ii) in the preceding sentence the Securities Depository shall
make available to its participants and members in funds immediately available
in New York City on Dividend Payment Dates the amount due as dividends on such
Dividend Payment Dates (and the Securities Depository shall have so advised the
fund), and if the Normal Dividend Payment Date is not a Business Day, then the
Dividend Payment Date shall be the next succeeding Business Day and the length
of the current Dividend Period will be adjusted accordingly. Although any
particular Dividend Payment Date may not occur on the originally scheduled date
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Trustees shall fix the Dividend Payment Date and the
length of the current Dividend Period will be adjusted accordingly, if
necessary. The Initial Dividend Period, 28-day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as "Dividend Periods."
Each dividend payment date determined as provided above is hereinafter referred
to as a "Dividend Payment Date."
Dividend Payments. So long as there is a Securities Depository with
respect to the Preferred Shares, each dividend on Preferred Shares will be paid
to the Securities Depository or its nominee as the record holder of all such
shares, and such payment shall for all purposes discharge the
B-9
fund's obligations in respect of such payment. The Securities Depository is
responsible for crediting the accounts of the Agent Members of the beneficial
owners of Preferred Shares in accordance with the Securities Depository's
procedures. Each Agent Member will be responsible for holding or disbursing
such payments to the holders of the Preferred Shares for which it is acting in
accordance with the instructions of such holders. If, and as long as, neither
the Securities Depository nor its nominee is the record holder of a Preferred
Share, dividends thereon will be paid in same-day funds directly to the record
holder thereof in accordance with the instructions of such holder. 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 holders thereof as of a date not exceeding five Business
Days preceding the date of payment thereof as may be fixed by the Trustees. Any
dividend payment made on Preferred Shares 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 Preferred Shares 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 under "Dividends and Dividend
Periods -- Non-Payment Period; Late Charge," holders of Preferred Shares will
not be entitled to any additional amount in respect of any dividend payment on
any Preferred Shares which may be in arrears.
The amount of cash dividends per Preferred Share payable (if declared) on
each Dividend Payment Date for each 28-day Dividend Period and the Dividend
Payment Date or Dates for each Short Term Dividend Period shall be computed by
the fund by multiplying the Applicable Dividend Rate for such Dividend Period
by a fraction, the numerator of which will be the number of days in such
Dividend Period such
B-10
shares were outstanding from and including the Date of Original Issue or the
preceding Dividend Payment Date, as the case may be, to and including the day
preceding such Dividend Payment Date and the denominator of which will be 365,
multiplying the amount so obtained by $50,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of dividends per share payable on any Dividend Payment Date shall be computed
by multiplying the Applicable Dividend Rate by a fraction, the numerator of
which shall be the number of days from either the Date of Original Issue, with
respect to the initial Dividend Payment Date, or otherwise from the last
Dividend Payment Date, and the denominator of which is 360, multiplying the
amount so obtained by $50,000, and rounding the amount so obtained to the
nearest cent.
In the event that the Remarketing Agent, the Paying Agent, the Securities
Depository, any Agent Member, and any beneficial owner fails for any reason to
perform any of its obligations in respect of a remarketing or otherwise, no
holder of record of, or of any beneficial interest in, any Preferred Shares
shall have any right in respect thereof against the fund or any Trustee or
officer of the fund, and the sole obligation of the fund in respect of the
determination of the amount and the payment of any dividend shall be to pay to
the Paying Agent, for the benefit of the holders of record of the Preferred
Shares, dividends when due at the Applicable Dividend Rate notified to it from
time to time.
Non-Payment Period; Late Charge. A Non-Payment Period will commence on
and include the day on which the fund fails to (i) declare, prior to 12:00
noon, New York City time, on any Dividend Payment Date for a Preferred Share,
for payment on or (to the extent permitted below) within three Business Days
after such Dividend Payment Date to the person who held such share as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
B-11
Date, the full amount of any dividend on such Preferred Share 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 (to the
extent permitted below) within three Business Days after any Dividend Payment
Date for a Preferred Share the full amount of any dividend on such share
(whether or not earned or declared) payable on such Dividend Payment Date or
(B) on or (to the extent permitted below) within three Business Days after any
redemption date for a Preferred Share called for redemption, the redemption
price of $50,000 per share plus the full amount of any dividends thereon
(whether or not earned or declared) accumulated but unpaid to such redemption
date plus, in the case of an optional redemption, the premium, if any, payable
as the result of the designation of a Premium Call Period. Such Non-Payment
Period will end on and include 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. The
Applicable Dividend Rate for each Dividend Period for Preferred Shares,
commencing during a Non-Payment Period, will be equal to the Non-Payment Period
Rate and any Preferred Shares for which a Special Dividend Period would
otherwise have commenced on the first day of or during a Non-Payment Period
will have a 28-day Dividend Period. The "Non-Payment Period Rate," initially,
will be 250% of the applicable Reference Rate (or 300% of such rate if the fund
has provided notification to the Remarketing Agent
B-12
prior to the Remarketing Date establishing the Applicable Dividend Rate for any
dividend that net capital gain or other taxable income will be included in such
dividend on Preferred Shares). The initial Non-Payment Period Rate may be
changed from time to time by the fund without shareholder approval, but only in
the event the fund receives written confirmation from Moody's and S&P that any
such change would not impair the ratings then assigned by Moody's and S&P to
Preferred Shares. Any dividend on Preferred Shares 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 may (if such non-payment occurs because the fund
is prevented from doing so by the Bylaws or applicable law) be paid pro rata 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, and 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; such late charge will be
taxable as interest. If the fund fails to pay a dividend on a Dividend Payment
Date or to redeem any Preferred Shares on the date set for such redemption
(otherwise than because it is prevented from doing so by the Bylaws or by
applicable law), the preceding sentence shall not apply and the Applicable
Dividend Rate for the Dividend Period commencing during such Non-Payment Period
resulting from such failure shall be the Non-Payment Period Rate. During a
Non-Call Period, Preferred Shares subject to such Non-Call Period will not be
subject to redemption
B-13
at the option of the fund, but may be subject to mandatory redemption as
provided below. See "Redemption" below.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
fund may not declare dividends or make other distributions on the 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 Preferred Shares would
be less than 200% (or such other percentage as may in the future be required by
law). Based on the composition of the fund's portfolio at December 31, 2000,
asset coverage with respect to Preferred Shares would have been approximately
% after the merger and % assuming issuance of the Additional Preferred
Shares.
In addition, for so long as any Preferred Shares are outstanding, the
fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, common shares or
other shares, if any, ranking junior to the Preferred Shares as to dividends
and upon liquidation) in respect of common shares or any other shares of the
fund ranking junior to or on a parity with the Preferred Shares 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 or
parity shares (except by conversion into or exchange for shares of the fund
ranking junior to the Preferred Shares as to dividends and upon liquidation),
unless (1) full cumulative dividends on Preferred Shares through their most
recent Dividend Payment Date shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Paying Agent,
(2) the fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the Bylaws, (3)
immediately after such transaction the aggregate
B-14
Discounted Value of Moody's Eligible Assets and S&P Eligible Assets would be at
least equal to the Preferred Shares Basic Maintenance Amount and (4) the fund
meets the requirements imposed by the 1940 Act. See "Asset Maintenance" and
"Redemption."
Under the Code the fund must, among other things, distribute each year at
least 90% of the sum of its investment company taxable income and net
tax-exempt income in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the fund's
ability to maintain such qualification. See "Taxation of Preferred Shares."
Upon any failure by the fund to pay dividends on the Preferred Shares for
two years or more, the holders of the Preferred Shares will acquire certain
additional voting rights. See "Voting Rights" below. Such rights shall be the
exclusive remedy of the holders of Preferred Shares upon any failure to pay
dividends on shares of the fund.
Additional Dividends. In the event of a redemption of all or a portion of
the outstanding Preferred Shares or the liquidation of the fund, the fund may,
after the close of its taxable year, be required, in order to comply with the
published position of the Internal Revenue Service (the "IRS") described below
under "Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income Dividend" concerning the allocation of various types of income between a
fund's classes and series of shares, to characterize all or a portion of a
dividend paid to holders of Preferred Shares during such taxable year as net
capital gain or other income subject to regular federal income tax, without
having either given advance notice of the inclusion of such income in such
dividend prior to the setting of the Applicable Dividend Rate for such dividend
or included an additional amount in the dividend to offset the tax effect of
the inclusion therein of such
B-15
taxable income. Accordingly, if the fund characterizes retroactively all or a
portion of a dividend already paid on Preferred Shares as consisting of net
capital gain or other income subject to regular federal income tax solely
because (i) the fund has redeemed all or a portion of the outstanding Preferred
Shares or has liquidated and (ii) the fund, in its judgment, believes it is
required, in order to comply with the published position of the IRS described
above, to allocate such taxable income to the Preferred Shares (the amount so
characterized referred to herein as a "Retroactive Taxable Allocation"), the
fund will, within 90 days after the end of such taxable year, provide notice of
the Retroactive Taxable Allocation made with respect to the dividend to the
Paying Agent and to each holder who received such dividend (initially Cede as
nominee of the Securities Depository) at such holder's address as the same
appears or last appeared on the share books of the fund. The fund will, within
30 days after such notice is given to the Paying Agent, pay to the Paying Agent
(who will then distribute to such holders), out of funds legally available
therefor, an amount equal to the aggregate of the Additional Dividends (as
defined below) payable to holders of Preferred Shares in respect of such
dividend. See "Taxation of Preferred Shares."
An "Additional Dividend" in respect of any dividend means payment to a
present or former holder of a Preferred Share of an amount which, giving effect
to the Retroactive Taxable Allocation made with respect to such dividend, would
cause such holder's after-tax return (taking into account both the dividend and
the Additional Dividend and assuming such holder is taxable at the Gross-Up Tax
Rate) to be equal to the after-tax return which the holder would have realized
if such retroactive allocation of taxable income had not been made. Such
Additional Dividend shall be calculated (i) without consideration being given
to the time value of money, (ii) assuming that no holder of Preferred Shares is
subject to the federal alternative minimum tax with respect to dividends
received
B-16
from the fund, and (iii) assuming that the holder of the Preferred Share in
respect of which a Retroactive Taxable Allocation was made is taxable at the
Gross-Up Tax Rate. An Additional Dividend will not include any amount to
compensate for the fact that either the Additional Dividend or the Retroactive
Taxable Allocation may be subject to state and local taxes. (For a description
of the Gross-Up Tax Rate, see "Remarketing--Remarketing Schedule: Advance
Notice of Allocation of Taxable Income: Inclusion of Taxable Income in
Dividend.") Except as provided in this "Description of Preferred
Shares--Dividends--Additional Dividends," the fund will not distribute any
additional amounts with respect to dividends previously paid to holders of
Preferred Shares. See "Taxation of Preferred Shares."
Special Dividends. The fund may declare Special Dividends on Preferred
Shares in order to comply with any distribution requirements or the Code,
provided that the declaration of a Special Dividend shall not cause the fund to
fail to maintain the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage. See "Taxation of Preferred Shares."
Applicable Dividend Rate. Except during a Non-Payment Period, the
Applicable Dividend Rate for any Dividend Period will not exceed the applicable
Maximum Dividend Rate. The Maximum Dividend Rate for Preferred Shares will
depend on the credit rating or ratings assigned to such shares. The Maximum
Dividend Rate for any Dividend Period will be the Applicable Percentage
(specified below) of the Reference Rate on the applicable Remarketing Date.
"Reference Rate" means (i) with respect to a 28-day Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable
B-17
"AA" Composite Commercial Paper Rate, (iii) with respect to any Short Term
Dividend Period having 183 or more but fewer than 365 days, the U.S. Treasury
Bill Rate and (iv) with respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate. The "Applicable Percentage" on any
Remarketing Date will be determined based on the lower of the credit rating or
ratings assigned on such date to Preferred Shares by Moody's and S&P (or if
Moody's or S&P 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 that only one such rating shall be available,
such rating) as follows:
Applicable
Percentage
of Reference
Moody's S&P Rate
- ------------------ --------------- -------------
"aa3" or higher AA- or higher 110%
"a3" to "al" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
"ba3" to "ba1" BB- to BB+ 200%
Below "ba3" Below BB- 250%
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 Preferred Shares 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
Gross-Up Tax Rate (as hereinafter defined). If the ratings for the Preferred
Shares are split between two of the foregoing credit rating categories, the
lower rating will determine the prevailing rating.
There is no minimum Applicable Dividend Rate in respect of any Dividend
Period.
The Applicable Dividend Rate for any Dividend Period commencing during
any Non-Payment Period, and the rate
B-18
used to calculate any applicable late charge, will generally be 250% of the
Reference Rate (or 300% of such rate if the fund has provided a Tax
Notification to the Remarketing Agent with respect to that Dividend Period).
Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividend
Dividends paid by the fund, to the extent paid from tax-exempt interest earned
on tax-exempt securities and properly designated as Exempt-Interest Dividends,
will be exempt from federal income tax, subject to the possible application of
the federal alternative minimum tax. The IRS has taken the position in a
published ruling that the fund is required for each taxable year to allocate
net capital gain and other income subject to regular federal income tax, if
any, proportionately between its common shares and the Preferred Shares in
accordance with the percentage of total fund distributions received by each
such class of shares with respect to such year. For example, the fund will
designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends among the holders of common shares and Preferred
Shares in proportion to the total dividends paid to each such class during or
with respect to the taxable year, or otherwise as required by law. Whenever the
fund intends to include any net capital gain or other income subject to regular
federal income tax in a dividend on Preferred Shares solely because the fund,
in its judgment, believes it is required, in order to comply with the published
position of the IRS, to allocate taxable income to such shares, the fund may
notify the Remarketing Agent of the amount to be so included at least five
Business Days prior to the Remarketing Date on which the Applicable Dividend
Rate for such dividend is to be established. Alternatively, if the fund has not
provided the notice referred to in the preceding sentence, and nevertheless
intends to include such income in a dividend on Preferred Shares solely because
the fund, in its judgment, believes it is
B-19
required, in order to comply with the published position of the IRS, to
allocate such income to Preferred Shares, it will (i) increase the dividend by
an amount such that the return to a holder of Preferred Shares with respect to
such dividend (as so increased and after giving effect to federal income tax at
the Gross-Up Tax Rate) equals the Applicable Dividend Rate and (ii) notify the
Paying Agent of the additional amount to be included in the dividend at least
five Business Days prior to the applicable Dividend Payment Date. In the event
the fund has provided notice of an inclusion of taxable income in an upcoming
dividend on Preferred Shares as referred to above, yet, after giving such
notice the fund intends to include additional taxable income in such dividend
solely because, in the judgment of the fund, it is required to do so in order
to comply with the IRS's published ruling, the fund will (i) increase the
dividend by an amount such that the return to a holder of Preferred Shares with
respect to such dividend (as so increased and after giving effect to federal
income tax at the Gross-Up Tax Rate) shall equal the return such holder of
Preferred Shares would have received, after application of federal income tax
(at the greater of the maximum federal individual or corporate income tax rate
applicable to the character of income reflected in such notice), if such
additional amount of taxable income had not been included in such dividend (and
such dividend had not been increased to take account of any additional taxable
income) and (ii) notify the Paying Agent of the additional amount to be
included in the dividend at least five Business Days prior to the applicable
Dividend Payment Date. Neither the underlying dividend nor the additional
amounts referred to in the two preceding sentences will be increased to
compensate for the fact that they may be subject to state and local taxes. The
Gross-Up Tax Rate shall be equal to the sum of (i) the percentage of the
taxable income included in the dividend that is taxable for federal income tax
purposes as ordinary income, multiplied by the greater of (A) the highest
marginal federal
B-20
corporate income tax rate (without regard to the phase-out of graduated rates)
applicable to ordinary income and (B) the highest marginal federal individual
income tax rate applicable to ordinary income (including any surtax but without
regard to any phase-out of personal exemptions or any limitation on itemized
deductions), and (ii) the percentage of the taxable income included in the
dividend that is taxable for federal income tax purposes as long-term capital
gain, multiplied by the greater of (A) the highest marginal federal corporate
income tax rate (without regard to the phase-out of graduated rates) applicable
to long-term capital gain and (B) the highest marginal federal individual income
tax rate applicable to long-term capital gain (including any surtax but without
regard to any phase-out of personal exemptions or any limitation on itemized
deductions). If for any reason it is determined after the payment of any
dividend that a portion of that dividend was subject to federal income tax, the
fund will not be required to pay any additional amount to compensate for any tax
payable on the dividend (other than Additional Dividends payable under the
circumstances described in this Appendix B). The fund will not be required to
provide any notice of the prospective inclusion of. or increase any dividend on
Preferred Shares as a result of the inclusion of, any taxable income in any
dividend (other than in the circumstances described above and in the
circumstances under which the fund is required to pay Additional Dividends). No
provision will be made to compensate holders of Preferred Shares for any
alternative minimum tax liability in respect of distributions on Preferred
Shares. See "Dividends and Dividend Period--Additional Dividends."
Remarketing
The Bylaws provide that the Applicable Dividend Rate for each Preferred
Share for each Dividend Period therefor (except the Initial Dividend Period)
will be (i) unless such Dividend Period commences during a Non-Payment Period
B-21
(described under "Dividends and Dividend Periods--Non-Payment Period; Late
Charge"), equal to the lower of (a) the rate per annum that the Remarketing
Agent determines on the Remarketing Date preceding the first day of such
Dividend Period pursuant to the procedures set forth in the Bylaws and (b) the
applicable Maximum Dividend Rate or (ii) if such Dividend Period commences
during a Non-Payment Period, equal to the Non-Payment Period Rate which is a
multiple (generally 200%) of the Reference Rate described below under
"Remarketing." During a Non-Payment Period, each Dividend Period that commences
will be a 28-day Dividend Period, the Preferred Shares will not be subject to
Tender and Dividend Reset, and the holders of Preferred Shares will not be able
to tender their shares in a Remarketing. See "Dividends and Dividend Period--
Non-Payment Period; Late Charge."
The fund will enter into a Paying Agent Agreement with [IBJ Schroeder
Bank & Trust Company]. The Paying Agent Agreement will provide, among other
things, that the Paying Agent will (i) act as transfer agent, registrar,
dividend and redemption price disbursing agent, settlement agent and agent for
certain, notifications (including notices of redemption) with respect to the
Preferred Shares and (ii) carry out certain other procedures. See "Redemption."
Prospective purchasers should carefully review the remarketing procedures
described below and more fully detailed in this Appendix, and should note that
(i) an election to tender Preferred Shares cannot be revoked except as provided
in the Bylaws and as more fully described in this Appendix B, (ii) each
Remarketing will be conducted through telephonic communications, (iii)
settlement for purchases and sales in a Remarketing will be made on the
Settlement Date, and (iv) each prospective purchaser and each holder of
Preferred Shares will be bound by the remarketing procedures,
B-22
including the Remarketing Agent's determination of the Applicable Dividend Rate
pursuant to the remarketing
procedures.
Remarketing Schedule. Each Remarketing for Preferred Shares will take
place over a two-Business Day period consisting of the Remarketing Date
(normally a Thursday) and the Settlement Date (normally a Friday). If, for
example, Thursday or Friday of a particular week is not a Business Day, the
normal remarketing schedule will be adjusted as follows: (i) if Thursday is not
a Business Day, Wednesday shall be the Remarketing Date and Friday shall be the
Settlement Date; and (ii) if Friday is not a Business Day, Thursday shall be
the Remarketing Date and Monday shall be the Settlement Date. If, for any
reason, neither of the foregoing clauses can be given effect, the Remarketing
Agent shall, in its sole discretion, adjust the remarketing schedule as
appropriate to complete such Remarketing. An example of the time sequence of
the events in a normal remarketing schedule is provided in Exhibit B-1 hereto.
The first Remarketing Date for the Preferred Merger Shares will be the last day
of the Initial Dividend Period.
Remarketing Date. By 9:00 a.m., 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 the next succeeding 28-day Dividend Period or
Special Dividend Period, as the case
may be.
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
DETER-
B-23
MINED UNTIL AFTER A HOLDER IS REQUIRED TO ELECT TO HOLD OR TENDER ITS PREFERRED
SHARES AND A NEW PURCHASER IS REQUIRED TO AGREE TO PURCHASE PREFERRED SHARES.
By 12:00 noon, New York City time, on any Remarketing Date with respect
to the Preferred Shares, each holder of Preferred Shares SUBJECT TO Tender And
Dividend Reset must notify the Remarketing Agent of its desire (on a
share-by-share basis) either to tender such share at a price of $50,000 per
share or to continue to hold such share for the next 28-day Dividend Period or,
if applicable, the designated Special Dividend Period. Holders of such
Preferred Shares who do not provide such notice shall be deemed to have elected
(i) to hold all their Preferred Shares if the current Dividend Period and
succeeding Dividend Period is a 28-day Dividend Period or a Special Dividend
Period of 90 days or less, and (ii) to tender all their Preferred Shares if the
current Dividend Period or succeeding Dividend Period is a Special Dividend
Period of more than 90 days. Any holder or prospective purchaser may informally
indicate to the Remarketing Agent its Applicable Dividend Rate preferences.
However, any notice given to the Remarketing Agent to tender or hold shares for
a particular Dividend Period is irrevocable and may not be conditioned upon the
level at which Applicable Dividend Rates are set. Accordingly, the Applicable
Dividend Rate with respect to a Dividend Period may be greater or less than
such rate preferences. Any notice of tender may not be revoked, except that the
Remarketing Agent may, in its sole discretion, (i) at the request of a
tendering holder that has tendered one or more Preferred Shares to the
Remarketing Agent, waive such holder's tender, and thereby enable such holder
to continue to hold such share or shares for a 28-day Dividend Period or a
designated Special Dividend Period, as agreed to by the holder and the
Remarketing Agent at such time, so long as such tendering holder has indicated
to the Remarket-
B-24
ing Agent that it would accept the new Applicable Dividend Rate for such
Dividend Period, such waiver to be contingent upon the Remarketing Agent's
being able to remarket all shares tendered to it in such Remarketing, and (ii)
at the request of a holder that has elected to hold one or more of its
Preferred Shares, waive such holder's election with respect thereto, such
waiver to be contingent upon the Remarketing Agent's being able to remarket all
shares tendered to it in such Remarketing. Subject to the last sentence of this
paragraph, holders of Preferred Shares 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 Dividend Period if each of the
current Dividend Period and the next Dividend Period is a 28-day Dividend
Period or a Special Dividend Period of 90 days or less. If, on a Remarketing
Date for Preferred Shares, the current Dividend Period is a Special Dividend
Period of more than 90 days, or the succeeding Dividend Period has been
designated by the Trustees as a Special Dividend Period of more than 90 days,
then holders of such shares that fail to elect to tender or hold such shares
will be deemed to have elected to tender such shares.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing. If any Preferred
Shares tendered in a Remarketing are not remarketed, a holder thereof may be
required to hold some or all of its shares at least until the end of the next
Dividend Period therefor or to sell its shares outside a Remarketing. In such
case, the remarketing procedures may require an allocation of Preferred Shares
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 Preferred Shares that is less than the number of Preferred
Shares specified in such holder's tender order. See "Remarketing Procedures."
B-25
Settlement Date. On a Settlement Date for Preferred Shares, which will be
the first Business Day following the related Remarketing Date and which will be
the first day of the new Dividend Period, each person purchasing Preferred
Shares as a result of a Remarketing must pay, or cause its Agent Member to pay
on its behalf, the purchase price against delivery of such shares by the holder
thereof or its Agent Member.
Settlement for purchases and sales of Preferred Shares in a Remarketing
will generally be made with respect to each Preferred Share through the
Securities Depository on the related Settlement Date therefor in accordance
with its normal procedures, which provide for payment in same-day funds.
Preferred Shares tendered in a Remarketing will be purchased solely out
of the proceeds received from purchasers of Preferred Shares in such
Remarketing. Neither the fund, nor the Paying Agent or the Remarketing Agent
will be obligated to provide funds to make payment upon any holder's tender in
a Remarketing unless, in the case of the Paying Agent or the Remarketing Agent,
the shares are purchased for its own account. Tendered Preferred Shares will
also be subject to purchase in a Remarketing by the Remarketing Agent for its
own account or as nominee for others, although the Remarketing Agent is not
obligated to purchase any shares.
Remarketing Agent. The Remarketing Agent for the outstanding Preferred
Shares of Trust III and for the Preferred Merger Shares, is [Smith Barney
Shearson Inc.] The Remarketing Agent for the outstanding Preferred Shares of
Trust II is . No Remarketing Agent has yet been designated for the Additional
Preferred Shares.
The fund will enter into a Remarketing Agreement with the Remarketing
Agent which will provide, among other things, that the Remarketing Agent will
follow certain procedures for remarketing Preferred Shares on behalf of holders
B-26
thereof as provided in the Bylaws for the purpose of determining the Applicable
Dividend Rate that will enable the Remarketing Agent to remarket Preferred
Shares tendered to it at a price of $50,000 per share for a 28-day Dividend
Period or a Special Dividend Period, as the case may be. Each periodic
operation of such procedures with respect to Preferred Shares is referred to as
a "Remarketing." Under certain circumstances. Preferred Shares tendered in a
Remarketing may be tendered or purchased by the Remarketing Agent for its own
account. See "Remarketing Procedures."
For its services in determining the Applicable Dividend Rate and
remarketing Preferred Shares for a 28-day Dividend Period, the Remarketing
Agent will receive from the fund a fee for such period calculated at a rate
equal to approximately .25% per annum of the average amount of Preferred Shares
outstanding during the Dividend Period. If the Dividend Period is a Special
Dividend Period, the fund will instead pay to the Remarketing Agent a fee, to
be determined by mutual consent of the fund and the Remarketing Agent, based on
the selling concession that would be applicable to an underwriting of a fixed
or variable rate preferred stock issue with a similar dividend period. The
Remarketing Agent will pay to selected broker-dealers a portion of the fees
described above, reflecting shares sold through such broker-dealers to
purchasers in Remarketings.
The fund and Putnam Management have agreed to indemnify the Remarketing
Agent against certain liabilities arising out of or in connection with its
duties under the Remarketing Agreement.
Any Remarketing Agent may resign and be discharged from its duties with
respect to the Preferred Shares under a Remarketing Agreement by giving at
least 60 days' prior notice in writing to the fund, the Securities Depository,
the Paying Agent and each other Remarketing Agent, if any, and the fund may
remove a Remarketing Agent under a Remar-
B-27
keting Agreement by giving at least 60 days' prior notice in writing to such
Remarketing Agent, the Securities Depository, the Paying Agent and any other
Remarketing Agent of such removal; provided that if (i) the resigning or
removed Remarketing Agent is at the time the sole Remarketing Agent, or (ii)
each other Remarketing Agent elects to resign or is removed within one week of
delivery of such notice, then neither any such resignation nor any such removal
will be effective until a successor remarketing agent which is a nationally
recognized broker-dealer shall have entered into a remarketing agreement with
the fund in which such successor remarketing agent shall have agreed to conduct
Remarketings with respect to the Preferred Shares in accordance with the terms
and conditions of the Bylaws.
A Remarketing Agent may also terminate a Remarketing Agreement or may
resign by giving notice in writing to the fund, the Securities Depository, the
Paying Agent and each other Remarketing Agent, if any, if any of the following
events has occurred and has not been cured prior to the proposed date of such
termination or resignation (in each case for a period of 30 days after notice
thereof has been given to the fund specifying the condition or event): (i) the
rating of the Preferred Shares shall have been downgraded or withdrawn by a
national rating service, the effect of which, in the opinion of the Remarketing
Agent or Remarketing Agent, as the case may be, is to affect materially and
adversely the market price of such Preferred Shares or the ability of the
Remarketing Agent to remarket such shares; (ii) all of the Preferred Shares
shall have been called for redemption; or (iii) without the prior written
consent of the Remarketing Agent, the Agreement and Declaration of Trust, the
Bylaws or the Paying Agent Agreement shall have been amended in any manner
that, in the opinion of the Remarketing Agent, as the case may be, materially
changes the nature of the Preferred Shares or the remarketing procedures with
respect thereto.
B-28
The Remarketing Agent is not obligated to set the Applicable Dividend
Rate or Rates on Preferred Shares or to remarket such shares during a
Non-Payment Period as provided in the Bylaws or at any time that certain
conditions specified in the Remarketing Agreement have not been met or any of
the events set forth in clauses (i), (ii) or (iii) of the immediately preceding
paragraph has occurred. Performance by the Remarketing Agent will be subject to
certain conditions. The Remarketing Agent may not terminate the Remarketing
Agreement except in accordance with the procedures set forth in such agreement.
See "Remarketing Procedures."
Restriction on Transfer
General. The Paying Agent will maintain a record of certain beneficial
owners of Preferred Shares, for purposes of determining such owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of such beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time.
Book Entry Only. DTC initially will act as Securities Depository for the
Agent Members with respect to Preferred Shares. Except as discussed below, as
long as DTC is the Securities Depository, one certificate for the outstanding
Preferred Shares 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 Preferred Shares. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions contained in the Bylaws.
Unless the fund shall have waived this requirement during a Non-Payment Period,
Preferred Shares may be held only in book entry form through the Securities
Depository (which, either directly or through a nominee, will be the registered
owner of Preferred Shares as described above), and the fund will issue
stop-transfer instructions to the Paying Agent for the Preferred Shares to this
effect. If the fund shall have
B-29
waived the foregoing requirement during a Non-Payment Period, a holder of
Preferred Shares may obtain a certificate or certificates for such shares. The
fund is advised that DTC is a New York-chartered limited purpose trust company,
which performs services for its participants (including the Agent Members),
some of which (and/or their representatives) own DTC. The fund is advised
further that DTC maintains lists of its participants and will maintain as
record holder the positions (beneficial ownership interests) held by each Agent
Member in the Preferred Shares, whether such Agent Member is a holder for its
own account or as a nominee for another holder. The fund shall have no
obligation, including without limitation any obligation to provide notice or to
make any payment (in respect of any dividend or otherwise) to any person
(including without limitation any holder of any beneficial interest in
Preferred Shares, whether or not such interest is reflected on the share
transfer books of the Paying Agent) other than the holders of record of the
Preferred Shares shown on the share transfer books of the Paying Agent from
time to time. The share transfer books of the fund as kept by the Paying Agent
shall be conclusive as to who is the holder of record of any Preferred Shares
at any time and as to the number of Preferred Shares held from time to time by
any such holder. No Remarketing Agent, Paying Agent, Securities Depository, or
Agent Member will have any obligation to any person having any interest in any
Preferred Share other than the holder of record and the beneficial owner
thereof as shown from time to time on the share transfer books kept by the
Paying Agent. The Paying Agent shall have no obligation to record any transfer
of record or beneficial ownership in any share unless and until it shall have
received proper notice and evidence of such transfer and the right of the
transferee in accordance with the Paying Agent's procedures in effect from time
to time.
B-30
The fund intends that any certificate for Preferred Shares will bear a
legend to the effect that such certificate is issued subject to certain
provisions restricting transfers of such shares.
Secondary Market
The Remarketing Agent has advised the fund that it currently intends to
make a secondary trading market in the Preferred Shares 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. The Remarketing Agent, however, has no
obligation to make a secondary market in the Preferred Shares outside of
Remarketings, and there can be no assurance that a secondary market for
Preferred Shares will exist at any particular time or, if it does exist, that
it will provide holders with liquidity of investment. The Preferred Shares will
not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotation System. If the Remarketing Agent
purchases Preferred Shares in the secondary market or in a Remarketing, it may
be in a position of holding for its own account or as nominee for others
Preferred Shares at the time it determines the Applicable Dividend Rate in a
Remarketing therefor, and may tender such shares in such Remarketing.
Remarketing Procedures
Tender by Holders. Each share of Preferred Shares is subject to Tender
and Dividend Reset only on the relevant Remarketing Date at the end of each
Dividend Period applicable to such share.
Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date in the Remarketing at the end of each Dividend Period, the
holder of a Preferred Share may elect to tender such share or hold such share
for the next Dividend Period. If the holder of such Preferred Share elects to
hold such share, such holder shall hold
B-31
such Preferred Share at the Applicable Dividend Rate for a 28-day Dividend
Period or a Special Dividend Period if the succeeding Dividend Period with
respect to such share has been designated by the Trustees as a Special Dividend
Period, provided that, except during a Non-Payment Period, if (i) there is no
Remarketing Agent, (ii) the Remarketing Agent is not required to conduct a
Remarketing or (iii) the Remarketing Agent is unable to remarket in the
Remarketing on such Remarketing Date all such Preferred Shares tendered (or
deemed tendered) to it at a price of $50,000 per share, then the next Dividend
Period for all Preferred Shares shall be a 28-day Dividend Period and the
Applicable Dividend Rate therefor shall be the applicable Maximum Dividend
Rate.
Preferred Shares may be tendered only in a Remarketing which commences on
the Remarking Date immediately prior to the end of the current Dividend Period
with respect thereto as described above in "Remarketing -- Remarketing Date."
When Preferred Shares are tendered in a Remarketing therefor, the
Remarketing Agent is required to 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 Preferred Shares tendered. Each
holder's right to tender Preferred Shares in a Remarketing therefor is 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
purchasers for tendered Preferred Shares at an Applicable Dividend Rate for a
28-day Dividend Period or a designated Special Dividend Period, as the case may
be, not in excess of any applicable Maximum Dividend Rate. If the Remarketing
Agent is unable to find a purchaser or purchasers for all Preferred Shares
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
B-32
the tendered shares. Each purchase or sale in a Remarketing will be made for
settlement on the related Settlement Date.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing therefor. If any
Preferred Shares so tendered are not remarketed, a holder thereof may be
required to continue to hold some or all of its shares until at least the end
of the next Dividend Period therefor or to sell such shares outside a
Remarketing.
Tendered Preferred Shares will also be subject to purchase in a
Remarketing therefor by the Remarketing Agent. If the Remarketing Agent holds
Preferred Shares for its own account after a Remarketing, it is required to
establish an Applicable Dividend Rate in such Remarketing that is no higher
than the Applicable Dividend Rate that would have been set if the Remarketing
Agent did not hold or had not purchased such shares. The Remarketing Agent may
purchase Preferred Shares for its own account in a Remarketing only if the
Remarketing Agent purchases for its own account or the account of others all
tendered (or deemed tendered) Preferred Shares subject to Tender and Dividend
Reset but not sold to other purchasers in such Remarketing. The Remarketing
Agent is not obligated to purchase any Preferred Shares that would otherwise
remain unsold in a Remarketing. If the Remarketing Agent holds any Preferred
Shares immediately prior to a Remarketing and if all other Preferred Shares
subject to Tender and Dividend Reset and tendered for sale by other owners have
been sold in such Remarketing, then the Remarketing Agent may sell in such
Remarketing such number of its shares which are subject to Tender and Dividend
Reset as there are outstanding orders to purchase that have not been filled by
shares tendered for sale on behalf of accounts other than that of the
Remarketing Agent. See "Secondary Market" above. Neither the fund, nor the
Paying Agent or the Remarketing Agent will be obligated in any case
B-33
to provide funds to make payment to any holder upon such holder's tender of its
Preferred Shares in any Remarketing. If the Remarketing Agent purchases
Preferred Shares in the secondary market or in a Remarketing, it may be in the
position of holding for its own account or as nominee for others Preferred
Shares subject to Tender and Dividend Reset in a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.
Applicable Dividend Rates. By 3:00 p.m. New York City time, on each
Remarketing Date, the Remarketing Agent will determine the Applicable Dividend
Rate to the nearest one-thousandth (0.001) of one percent per annum for the
next 28-day Dividend Period (or, if designated, a Special Dividend Period,
provided that, if the Remarketing Agent is unable to remarket on such
Remarketing Date all such tendered shares in a Remarketing at a price of
$50,000 per share, then the Remarketing Agent will assign no shares to any
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 Preferred Shares subject to
Tender and Dividend Reset in such Remarketing and tendered to it on such
Remarketing Date at a price of $50,000 per share. The Applicable Dividend Rate
for Preferred Shares 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 Preferred Shares. In determining such Applicable Dividend Rate, the
Remarketing Agent will, after taking into account market conditions as
reflected in 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 stocks determined for the
B-34
purpose of providing non-binding indications of the Applicable Dividend Rates
to holders and potential purchasers of Preferred Shares, (i) consider the
number of Preferred Shares tendered in the applicable Remarketing and the
number of Preferred Shares prospective purchasers are willing to purchase and
(ii) contact by telephone or otherwise current and prospective holders of the
Preferred Shares subject to Tender and Dividend Reset to ascertain the dividend
rates at which they would be willing to hold such shares. If no Applicable
Dividend Rate shall have been established on a Remarketing Date for the next
28-day Dividend Period, or Special Dividend Period, if any, for any reason
(other than because there is no Remarketing Agent, the Remarketing Agent is not
required to conduct a Remarketing pursuant to the terms of the Remarketing
Agreement or the Remarketing Agent is unable to remarket on the Remarketing
Date all Preferred Shares tendered (or deemed tendered) to it at a price of
$50,000 per share), then the Remarketing Agent, in its sole discretion, shall,
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 of fixed and
variable rate preferred stock, determine the Applicable Dividend Rate that
would be the rate per annum that would be the initial dividend rate fixed in an
offering on such Remarketing Date, assuming in each case a comparable dividend
period, issuer and security. If a Remarketing for Preferred Shares does not
take place because 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 all such Preferred Shares tendered (or deemed
tendered) to it at a price of $50,000 per share, then, except during a
Non-Payment Period, the Applicable Dividend Rate for the subsequent Dividend
Period for such shares will be the applicable Maximum Dividend Rate
B-35
for a 28-day Dividend Period and such subsequent Dividend Period shall be a
28-day Dividend Period.
Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period for Preferred Shares will not be more than the Maximum Dividend
Rate applicable to such shares.
The Maximum Dividend Rate for Preferred Shares will be the "Applicable
Percentage" (as described below) of the Reference Rate. The Remarketing Agent
will round each Maximum Dividend Rate to the nearest one-thousandth (0.001) of
one percent per annum, with any such number ending in five ten-thousandths
(0.0005) of one percent being rounded upwards to the nearest one-thousandth
(0.001) of one percent. The Remarketing Agent will not round the applicable
Reference Rate as part of its calculation of any Maximum Dividend Rate.
"Reference Rate" means (i) with respect to a Dividend Period having 28 or
fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but fewer than
183 days, the applicable "AA" Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having 183 or more but fewer than 365
days, the U.S. Treasury Bill Rate, and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
" 'AA' Composite Commercial Paper Rate," on any date of determination,
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 or "aa" by
Moody's or the equivalent of such rating by another nationally recognized
rating agency, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York
B-36
for the Business Day immediately preceding such date, or (ii) in the event that
the Federal Reserve Bank of New York does not make available such a rate, then
the arithmetic average of the Interest Equivalent of the rate 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 one
of the Commercial Paper Dealers does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
will be determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days (in each case
determined without regard to any adjustment in the length of a Dividend Period
or the remarketing schedule in respect of non-Business Days) shall be (i) 7 or
more days but 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 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper, (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper, (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper,
B-37
and (viii) 162 or more days but fewer than 183 days, such rate shall be the
Interest Equivalent of the 180-day rate on such commercial paper.
"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
comparable index 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 successor thereto from time to time selected by the fund 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"
(as defined in the Code) (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, 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 (A) the per annum rate expressed
on an Interest Equivalent basis equal to the most recent Kenny Index so made
available divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available
B-38
on a discount basis or otherwise on the Business Day immediately preceding such
date by the Federal Reserve Bank of New York in its Composite 3:30 p.m.
Quotations for U.S. Government Securities report for such Business Day, or (ii)
if such yield as so calculated is not available, the Alternate Treasury Bill
Rate on such date. "Alternate Treasury Bill Rate" on any date means the Interest
Equivalent of the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded Treasury Bill with a maturity
most nearly comparable to the length of the related Dividend Period, as
determined by bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized primary
U.S. Government securities dealers selected by the Remarketing Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Remarketing Agent.
B-39
The Maximum Dividend Rate for Preferred Shares will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage for the
Preferred Shares on each Remarketing Date will be determined based on the lower
of the credit rating or ratings assigned on such date to the Preferred Shares
by Moody's and S&P (or if Moody's or S&P 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 that only one
such rating shall be available, such rating), as discussed in "Dividends and
Dividend Periods -- Special Dividends."
Allocation of Shares; Failure to Remarket at $50,000 Per Share. If, in a
Remarketing of the Preferred Shares, the Remarketing Agent is unable to
remarket by 3:00 p.m., New York City time, on the Remarketing Date all
Preferred Shares tendered to it in such Remarketing (which are subject to
Tender and Dividend Reset in such Remarketing) at a price of $50,000 per share,
(i) each holder that tendered shares for sale will sell a number of Preferred
Shares 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 Preferred Shares in such Remarketing, and (ii) the next Dividend
Period for Preferred Shares will be a 28-day Dividend Period and the Applicable
Dividend Rate for such Dividend Period will be the Maximum Dividend Rate for a
28-day Dividend Period.
If the allocation procedures described above would result in the sale of
a fraction of a Preferred Share, the Remarketing Agent will, in its sole
discretion, round up or down the number of Preferred Shares sold by each holder
on the applicable Remarketing Date so that each share sold by each holder shall
be a whole Preferred Share, and the total number of shares sold equals the
total number of shares purchased on such Remarketing Date.
B-40
Notification of Results; Settlement. By telephone at approximately 3:30
p.m., New York City time, on each Remarketing Date with respect to Preferred
Shares, the Remarketing Agent will advise each holder of tendered Preferred
Shares and each purchaser thereof (or the Agent Member thereof who in turn will
advise such holder or purchaser) (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.
The transactions described above will be executed on the Settlement Date
through the Securities Depository in accordance with the Securities
Depository's procedures, and the accounts of the respective Agent Members of
the Securities Depository will be debited and credited and shares delivered by
book entry as necessary to effect the purchases and sales of Preferred Shares,
in each case as determined in the related Remarketing. Purchasers of Preferred
Shares will make payment through their Agent Members in same-day funds to the
Securities Depository against delivery by book entry of Preferred Shares
through their Agent members. The Securities Depository will make payment in
accordance with its procedures, which currently provide for payment in same-day
funds. If the certificates for Preferred Shares are not held by the Securities
Depository or its nominee, payment with respect to such shares will be made in
same-day funds to the Paying Agent against delivery of such certificates.
If any holder selling Preferred Shares 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 Preferred Shares in such Remarketing may deliver to
any
B-41
such other person a number of whole Preferred Shares that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of Preferred Shares to be so delivered will be determined by
such Agent Member. Delivery of such lesser number of Preferred Shares will
constitute good delivery.
As long as the Securities Depository or Cede or any other nominee
therefor holds the certificate or certificates representing the Preferred
Shares, no share certificates will need to be delivered by any selling holder
to reflect any transfer of Preferred Shares effected in a Remarketing.
The Remarketing Agent may, in its sole discretion, modify the settlement
procedures set forth above with respect to any Remarketing of Preferred Shares
so long as any such modification does not adversely affect any holders of such
shares.
Redemption
Optional Redemption. The fund may at its option after giving the
requisite Notice of Redemption, redeem Preferred Shares, in whole or in part,
on the next succeeding scheduled Dividend Payment Date applicable to those
Preferred Shares called for redemption, out of funds legally available
therefor, at a redemption price (the "Optional Redemption Price") of $50,000
per share plus an amount equal to dividends thereon accumulated but unpaid to
the date fixed for redemption plus the premium, if any, resulting from the
designation of a Premium Call Period; provided that no Preferred Share may be
redeemed at the option of the fund during (A) the Initial Dividend Period with
respect to such share or (B) a Non-Call Period to which such share is subject;
provided further that optional redemptions pursuant to this paragraph shall not
cause the fund to fail to maintain the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage. In addition, holders of
Preferred Shares may be entitled to receive Additional Dividends in the event
of the
B-42
redemption of such Preferred Shares to the extent provided above under
"Dividends and Dividend Periods--Additional Dividends." For so long as S&P
rates the Preferred Shares, the fund may not give a Notice of Redemption
relating to an optional redemption as described in this paragraph unless, at
the time of giving such Notice of Redemption, the fund has available "Deposit
Securities" with maturity or tender dates not later than the day preceding the
applicable redemption date and having a Discounted Value not less than the
amount due by reason of the redemption of Preferred Shares on such redemption
date.
Mandatory Redemption. The fund will be required to redeem, at a
redemption price (the "Mandatory Redemption Price") equal to $50,000 per share
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed by the Trustees for redemption, certain of the
Preferred Shares to the extent permitted under the 1940 Act and Massachusetts
law, if the fund fails to maintain the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage and such failure is not
cured on or before the Preferred Shares Basic Maintenance Cure Date or the 1940
Act Cure Date (herein referred to as a "Cure Date"), as the case may be. In
addition, holders of Preferred Shares may be entitled to receive Additional
Dividends in the event of the redemption of such Preferred Shares to the extent
provided above under "Dividends and Dividend Periods -- Additional Dividends."
The number of Preferred Shares to be redeemed will be equal to the lesser of
(a) the minimum number of Preferred Shares the redemption of which, if deemed
to have occurred immediately prior to the opening of business on such Cure
Date, would, together with all other shares of beneficial interest of the fund
having preference rights subject to redemption or retirement, result in the
satisfaction of the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Cov-
B-43
erage, 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 Preferred Shares then outstanding will be redeemed), and (b) the maximum
number of Preferred Shares, together with all other shares of beneficial
interest of the fund having preference rights subject to redemption and
retirement, that can be redeemed out of funds expected to be legally available
therefor.
The fund is required to effect such a Mandatory Redemption not later than
35 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 Preferred
Shares which are subject to Mandatory Redemption or the fund otherwise is
unable to effect such redemption on or prior to 35 days after such Cure Date,
the fund will redeem those Preferred Shares which it was unable to redeem on
the earliest practicable date on which it is able to effect such redemption.
Any Preferred Share will be subject to Mandatory Redemption regardless of
whether such share is subject to a Non-Call Period, provided that Preferred
Shares subject to a Non-Call Period will only be subject to redemption to the
extent that other Preferred Shares (not subject to a Non-Call Period) are not
available to satisfy the number of shares required to be redeemed. In such
event, such shares subject to a Non-Call Period will be selected for redemption
in an ascending order of outstanding Non-Call Period (with shares with the
lowest number of days remaining in the Non-Call Period to be called first) and
by lot in the event of shares having equal outstanding Non-Call Periods.
Allocation. If fewer than all the outstanding Preferred Shares are to be
redeemed, the number of Preferred Shares to be so redeemed will be a whole
number of shares and will be determined by the Trustees (subject to the
provisions described above under "Redemption"), provided that (i) no
B-44
such Preferred Share will be subject to optional redemption on any Dividend
Payment Date during a Non-Call Period to which it is subject and (ii) Preferred
Shares subject to a Non-Call Period will be subject to Mandatory Redemption
only on the basis described above under "Redemption." Unless certificates
representing Preferred Shares are held by persons other than the Securities
Depository or its nominee, the Securities Depository, upon receipt of such
Notice of Redemption, will determine by lot (or otherwise in accordance with
procedures in effect at that time) the number of Preferred Shares to be
redeemed from the account of each Agent Member (which may include an Agent
Member, including the Remarketing Agent, holding shares for its own account)
and 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 Preferred Shares are not held by the
Securities Depository or its nominee, the Preferred Shares to be redeemed will
be selected by the Paying Agent by lot.
Notice of Redemption. Any Notice of Redemption with respect to Preferred
Shares will be given by the fund via telephone to the Paying Agent, the
Securities Depository (and any other registered holder of such shares) and the
Remarketing Agent not later than 1:00 p.m., New York City time (and later
confirmed in writing), on a day not less than 20 nor more than 30 days, or such
shorter period as may be provided for under applicable law, prior to the
earliest date upon which any such redemption may occur and, in the case of a
Mandatory Redemption, not less than 20 nor more than 30 days prior to
B-45
the redemption date established by the Trustees and specified in such notice.
In the case of a partial redemption, the Paying Agent will use its reasonable
efforts to provide telephonic notice to each beneficial holder (as shown on the
records of such ownership maintained by it) of Preferred Shares 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 to each such beneficial holder of
Preferred Shares called for redemption, the Remarketing Agent and the
Securities Depository not later than the close of business on the Business Day
immediately following the day on which the Paying Agent determines the shares
to be redeemed. In the case of a redemption in whole, the Paying Agent will use
its reasonable efforts to provide telephonic notice to each holder of Preferred
Shares called for redemption not later than the close of business on the
Business Day immediately following the day on which the Paying Agent receives a
Notice of Redemption from the fund. Such telephonic notice will be confirmed
promptly in writing to each holder of Preferred Shares called for redemption,
the Remarketing Agent and the Securities Depository not later than the close of
business on the second Business Day following the day on which the Paying Agent
receives notice of redemption.
Every Notice of Redemption and other redemption notice with respect to
the Preferred Shares will state: (a) the redemption date, (b) the number of
Preferred Shares to be redeemed, (c) the redemption price, (d) that dividends
on the Preferred Shares to be redeemed will cease to accumulate as of such
redemption date and (e) the provision of the Agreement and Declaration of Trust
or the Bylaws pursuant to which such
B-46
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.
The Paying Agent will use its reasonable efforts to cause the publication of a
redemption notice in an Authorized Newspaper within two Business Days of the
date of the Notice of Redemption, but failure so to publish such notification
will not affect the validity or effectiveness of any such redemption
proceedings.
Other Redemption Procedures. To the extent that any redemption for which
Notice of Redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem
Preferred Shares 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.
Upon the deposit of funds sufficient to redeem Preferred Shares 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
Mandatory Redemption Price, as the case may be, but without any interest or
other additional amount (except for Additional Dividends described above under
"Dividends and Dividend Periods -- Additional Dividends"), 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 Preferred Shares called for redemption on such date and
(ii) all other amounts to which holders
B-47
of Preferred Shares called for redemption may be entitled. The fund will be
entitled to receive, from time to time after the date fixed for redemption, any
interest on the funds so deposited. Any funds 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 Preferred Shares 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. If any such unclaimed
funds are repaid to the fund, the fund shall invest such unclaimed funds in
Deposit Securities with a maturity of no more than one Business Day.
Except as described above with respect to redemptions, nothing contained
in the Bylaws limits any legal right of the fund or any affiliate of the fund
to purchase or otherwise acquire any Preferred Shares at any price.
The fund has the right in certain circumstances to arrange for others to
purchase from the holders thereof Preferred Shares which are to be redeemed as
described above.
The Remarketing Agent may, in its sole discretion, modify the procedures
concerning notification of redemption described above with respect to Preferred
Shares so long as any such modification does not adversely affect the holders
of the Preferred Shares or materially alter the obligation of the Paying Agent
without obtaining its consent and so long as the fund receives written
confirmation from S&P that any such modifications would not impair the ratings
then assigned by S&P to the Preferred Shares.
Liquidation/Bankruptcy
Upon a liquidation, dissolution or winding up of the affairs of the fund,
whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled, whether from capital or surplus, before any
assets of the fund will be distributed among or paid over to the holders of the
B-48
common shares or any other class or series of shares of the fund ranking junior
to the Preferred Shares as to liquidation payments, to be paid an amount equal
to the liquidation preference with respect to such shares. The liquidation
preference for the Preferred Shares is $50,000 per share plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to but excluding the date of final distribution in same-day funds. After
any such payment, the holders of Preferred Shares will not be entitled to any
further participation in any distribution of assets of the fund, except to the
extent that they may be entitled to Additional Dividends to the extent provided
above in "Dividends and Dividend Periods -- Additional Dividends." If, upon any
such liquidation, dissolution or winding up of the fund, the assets of the fund
shall be insufficient to make such full
payment to the holders of Preferred Shares and to the holders of any shares of
beneficial interest of the fund having preference rights ranking as to
liquidation, dissolution or winding up on a parity with the Preferred Shares,
then such assets will be distributed among the holders of Preferred Shares and
such parity holders ratably in accordance with the respective amounts which
would by payable on such Preferred Shares and any other such preferred shares
if all amounts thereof were paid in full.
Neither the consolidation nor the merger of the fund with or into any
entity or entities nor a reorganization of the fund alone nor the sale, lease
or transfer by the fund of all or substantially all of its assets shall be
deemed to be a dissolution or liquidation of the fund.
The fund has no intention to file a voluntary petition in bankruptcy so
long as the value of its assets is, and is reasonably foreseen as being,
greater than its liabilities.
Voting Rights
Except as indicated in Appendix B or except as expressly required by
applicable law or expressly set forth in
B-49
the Agreement and Declaration of Trust or Bylaws, each holder of Preferred
Shares and, each holder of common shares shall be entitled to one vote for each
share held on each matter submitted to a vote of shareholders of the Trust, and
the holders of outstanding Preferred Shares and of common shares shall vote
together as a single class.
Holders of Preferred Shares, voting as a class, will be entitled to elect
two of the fund's Trustees and the remaining Trustees will be elected by
holders of the common shares and the Preferred Shares voting together as a
single class. If at any time dividends on the fund's Preferred Shares shall be
unpaid in an amount equal to two full years' dividends thereon or if at any
time holders of any preferred shares of the fund other than the Preferred
Shares are entitled to elect a majority of the Trustees of the fund, then the
number of Trustees shall automatically be increased by the smallest number
that, when added to the two Trustees elected exclusively by the holders of
Preferred Shares as described above, would constitute a majority of the
Trustees as so increased and at a special meeting of shareholders which will be
called and held as soon as practicable, and at all subsequent meetings at which
Trustees are to be elected, the holders of Preferred Shares, voting as a
separate class, will be entitled to elect the smallest number of additional
Trustees that, together with the two Trustees which such holders will be in any
event entitled to elect, constitutes a majority of the total number of Trustees
of the fund as so increased. The terms of office of the persons who are
Trustees at the time of that election will continue. If the fund thereafter
shall pay, or declare and set apart for payment, in full all dividends payable
on all outstanding Preferred Shares for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease (subject always to
revesting in the event of the further occurrence of the circumstances described
above), and the terms of office of all the additional Trustees elected by the
holders of
B-50
Preferred Shares (but not of the Trustees with respect to whose election the
holders of common shares were entitled to vote or the two Trustees the holders
of Preferred Shares have the right to elect in any event) will terminate
automatically.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting separately as a class, would be required to amend,
alter or repeal any of the preferences, rights or powers of the Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or increase or decrease the number of Preferred Shares authorized to be
issued. Unless a higher percentage is provided for as described in Appendix B,
the affirmative vote of the holders of a majority of the outstanding Preferred
Shares, voting as a class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote
of security holders under Section 18(a) of the 1940 Act including, among other
things, changes in the investment restrictions described under "Investment
Restrictions."
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding Preferred Shares shall have been redeemed or
shall no longer be deemed to be outstanding.
Repurchase of Shares; Conversion to Open-End Status
Shares of closed-end investment companies often trade at a discount to
their net asset values, and the fund's common shares may likewise trade at a
discount to their net asset value. The market price of the fund's common shares
will be determined by such factors as relative demand for and supply of such
common shares in the market, the fund's net asset value, general market and
economic conditions, and other factors beyond the control of the fund. Although
the fund's Common shareholders will not have the right to redeem their Shares,
the fund may take action to repurchase common shares in the open market or make
tender or repurchase
B-51
offers for its common shares at their net asset value. This may have the effect
of reducing any market discount from net asset value. The fund's ability to
repurchase or to tender for its common shares may be limited by asset coverage
requirements and other restrictions in respect of the Preferred Shares
outstanding at the time. The fund may, by vote of its Common shareholders and
holders of Preferred Shares (each voting as a separate class), be converted to
an open-end investment company, which would make the fund's common shares
redeemable upon demand of shareholders at the common shares net asset value.
Conversion to an open-end company would require the redemption of the Preferred
Shares. Certain provisions of the fund's Agreement and Declaration of Trust
discussed above may have the effect of depriving Common shareholders of an
opportunity to sell their Shares at a premium over prevailing market prices and
may have the effect of inhibiting the fund's conversion to open-end status.
The fund has no present intention of taking any such action. There is no
assurance that if action is undertaken to repurchase or tender for common
shares, that such action will result in the common shares' trading at a price
which approximates their net asset value. Although common share repurchases and
tenders could have a favorable effect on the market price of the fund's common
shares, it should be recognized that the acquisition of common shares by the
fund will decrease the total assets of the fund and, therefore, have the effect
of increasing the fund's expense ratio. Any common share repurchases or tender
offers will be made in accordance with requirements of the Securities Exchange
Act of 1934, as amended, and the 1940 Act. If the fund were to make a tender or
repurchase offer for its common shares, Shareholders would receive any notice
thereof required by applicable law, including any required information
describing the offer and the means by which Shareholders might submit their
common shares. If the fund converted to an open-end company, it
B-52
could be required to liquidate its portfolio investments to meet requests for
redemption, and its common shares would no longer be listed on the American
Stock Exchange.
Holders of Record; Holders of Beneficial Interest
The fund shall have no obligation, including without limitation any
obligation to provide notice or to make any payment (in respect of any dividend
or otherwise), to any person (including without limitation any holder of any
beneficial interest in Preferred Shares, whether or not such interest is
reflected on the share transfer books of the Paying Agent) other than the
holders of record of the Preferred Shares shown on the share records of the
Paying Agent from time to time. The record books of the fund as kept by the
Paying Agent shall be conclusive as to who is the holder of record of any
Preferred Share at any time and as to the number of Preferred Shares held from
time to time by any such holder. No Remarketing Agent, Paying Agent, Securities
Depository, or Agent Member will have any obligation to any person having any
interest in any Preferred Shares other than the holder of record and the
beneficial owner thereof as shown from time to time on the share transfer books
kept by the Paying Agent. The Paying Agent shall have no obligation to record
any transfer of record or beneficial ownership in any share unless and until it
shall have received proper notice and evidence of such transfer and the right
of the transferee in accordance with the Paying Agents procedures in effect
from time to time.
Special Considerations Relating to Preferred Shares
The 1940 Act Preferred Shares Asset Coverage requirement and the rating
agency asset maintenance guidelines require that the fund maintain certain
asset levels with respect to the Preferred Shares. See "Asset Maintenance." In
the event that the fund's assets fall below these levels, the fund may be
required to redeem some or all of the then outstanding Preferred Shares. See
"Redemption."
B-53
The credit rating of the Preferred Shares could be reduced while an
investor holds the Preferred Shares. A decrease in the rating of the Preferred
Shares may reflect a reduction in the fund's ability to pay dividends and/or
the redemption price and liquidation value in respect of the Preferred Shares
in accordance with the terms of the Preferred Shares.
The actual Applicable Dividend Rate for any dividend period after the
Initial Dividend Period for Preferred Shares may be greater than or less than
the rate indicated in the non-binding indications of the Applicable Dividend
Rate furnished to holders of Preferred Shares (but, except during a Non-Payment
Period, not greater than the applicable Maximum Dividend Rate) and will not be
determined until after a holder is required to elect to hold or tender its
Preferred Shares.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing. If any Preferred
Shares tendered in a Remarketing are not remarketed, a holder thereof maybe
required to hold some or all of its shares at least until the end of the next
Dividend Period therefor (or longer if Remarketings continue to fail) or to
sell its shares outside a Remarketing. In such case, the remarketing procedures
may require an allocation of Preferred Shares 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 Preferred
Shares that is less than the number of Preferred Shares specified in such
holder's tender order. Thus, under certain circumstances, Preferred Shares may
be illiquid investments. See "Remarketing."
Neither the Remarketing Agent nor the fund is obligated to purchase
Preferred Shares in a Remarketing or otherwise, nor is the fund required to
redeem Preferred Shares in the event of failed Remarketings.
B-54
The Remarketing Agent has advised the fund that it currently intends to
maintain a secondary trading market in the Preferred Shares outside of
Remarketings: however, it has no obligation to do so and there can be no
assurance that a secondary market for the Preferred Shares will develop or, if
it does develop, that it will provide liquidity of investment. The Preferred
Shares will not be registered on any stock exchange or on the National
Association of Securities Dealers Automated Quotation system.
Ratings
[It is a condition of the merger that the Preferred Shares be issued with
a rating of "aaa" from Moody's and AAA from S&P.]
Rating Agency Guidelines
The composition of the fund's portfolio will reflect guidelines
established by Moody's and S&P in connection with the fund's receipt of a
rating for such shares on their date of original issue of at least "aaa" by
Moody's and AAA by S&P. Moody's and S&P, nationally recognized statistical
rating organizations, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines described under
"Asset Maintenance" and in Exhibit B-2 have been developed by Moody's and S&P
in connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stocks, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are generally designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by the fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for Preferred Shares, which ratings are generally
relied upon by institutional investors in purchasing such securities. The
B-55
guidelines include 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.
Asset Maintenance
The fund will be required to satisfy a number of asset maintenance
requirements under the terms of the Bylaws. These requirements are summarized
below.
1940 Act Preferred Shares Asset Coverage. The fund will be required under
the Bylaws to maintain, as of the last Business Day of each month in which any
Preferred Shares are outstanding, asset coverage of at least 200% with respect
to outstanding senior securities which are stock, including the Preferred
Shares (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 Preferred Shares Asset Coverage").
If the fund fails to maintain 1940 Act Preferred Shares Asset Coverage and such
failure is not cured as of the last Business Day of the month following the
date of such failure (the "1940 Act Cure Date"), the fund will be required
under certain circumstances to redeem certain of the Preferred Shares. See
"Redemption."
Based on the composition of the fund's portfolio at December 31, 2000,
1940 Act Preferred Shares Asset Coverage with respect to the Preferred Shares,
following the issuance of all Preferred Merger Shares [and Additional Preferred
Shares] [and after giving effect to the deduction of the merger costs,
estimated at [$450,000] and offering costs for the Additional Preferred Shares
estimated at $ 000,] would be computed as follows:
B-56
Value of fund assets less
liabilities not constituting
senior securities
- --------------------------------
Senior securities
representing indebtedness
plus liquidation value
of the Preferred Shares = $ = %
Preferred Shares Basic Maintenance Amount. In connection with their
respective ratings of the Preferred Shares, Moody's and S&P have each
established asset coverage guidelines which are incorporated into the Bylaws to
ensure the payment of the liquidation preference and the fund's other
obligations in respect of its outstanding Preferred Shares. These guidelines
require the fund among other things to maintain investment-grade assets with a
value (discounted in accordance with each rating agency's guidelines) equal to
the Preferred Shares Basic Maintenance Amount. These guidelines impose
restrictions on the securities in which the fund may invest, limit the fund's
use of futures, options and forward commitments, and prohibit the use of
borrowing for leverage and the fund's entering into short sales, securities
lending and reverse repurchase agreements. These requirements are explained in
greater detail in Exhibit B-2. If the fund fails to meet such requirements and
such failure is not cured, the fund will be required under certain
circumstances to redeem some or all of the Preferred Shares. See
"Redemption."
Minimum Liquidity Level. In connection with its rating of the Preferred
Shares, S&P has established dividend coverage guidelines, which are
incorporated into the Bylaws requiring the fund to maintain a sufficient level
of highly liquid assets to ensure certain dividend payments and certain expense
payments with respect to the Preferred Shares. Like the Preferred Shares Basic
Maintenance Amount requirements, these Minimum Liquidity Level guidelines
impose limitations on the
B-57
fund's investment activities. The Minimum Liquidity Level requirements are
explained in greater detail in Exhibit B-2.
General. The fund may, but is not required to, adopt any modifications to
these guidelines that may hereafter be established by Moody's or S&P. Failure
to adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. As set forth in the Bylaws, the Trustees may, without
shareholder approval, modify certain definitions or restrictions which have
been adopted by the fund pursuant to the rating agency guidelines, provided in
certain cases the Trustees have obtained written confirmation from Moody's and
S&P that any such change would not impair the ratings then assigned by Moody's
and S&P to the Preferred Shares.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell Preferred Shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. Nor do the rating
agency guidelines address the likelihood that a holder of Preferred Shares 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 Putnam Management and
information obtained from other sources. The outstanding Preferred Shares are
rated AAA by S&P and "aaa" by Moody's. 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.
B-58
Taxation of Preferred Shares
The following is a summary of some of the important tax considerations
applicable to investments in Preferred Shares of Trust II. See "Information
about the Funds -- Taxation" in the Prospectus/Proxy for a discussion of other
important tax considerations generally applicable to investments in Trust II.
If for any reason it is determined after the payment of any dividend that
a portion of that dividend was subject to Federal income tax, Trust II will not
be required to pay any additional amount to compensate for any tax payable on
the dividend (other than Additional Dividends payable under the circumstances
described in this Appendix B). The federal income tax consequences of
Additional Dividends under existing law are uncertain. For example, it is
unclear how Additional Dividends will be treated under the rules in Subchapter
M of the Code applicable to dividends paid following the close of a taxable
year in respect of a prior year's income. Trust II intends to treat such
Additional Dividends as paid during such prior taxable year for purposes of the
rules governing Trust II's treatment of such dividends, and to treat a holder
as receiving a dividend distribution in the amount of any Additional Dividend
only as and when such Additional Dividend is paid. Trust II will generally
designate Additional Dividends as Exempt-Interest Dividends to the extent it
determines such designation is consistent with the allocation principles, as
described in "Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividend." However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year in which
the dividend or dividends to which the Additional Dividend relates, was paid,
or in the taxable year in which the Additional Dividend is paid. Trust II will
not be required to pay any additional amount if it is determined that its
treatment of Additional Dividends was improper.
B-59
Existing authorities, including the revenue ruling previously discussed
(see "Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividend."), do not specifically address whether dividends (including
possible Additional Dividends) that are paid following the close of a taxable
year, but that are treated for tax purposes as derived from the income of such
prior taxable year, are treated as dividends "paid" during such prior taxable
year for purposes of determining each class's proportionate share of a
particular type of income. Trust II currently intends to treat such dividends
as having been "paid" in the prior taxable year for purposes of determining
each class's proportionate share of a particular type of income with respect to
such prior taxable year. Existing authorities also do not specifically address
the allocation of taxable income among the dividends paid to holders of a class
of shares during or with respect to a taxable year. It is possible that the IRS
could disagree with the fund's position concerning the treatment of dividends
paid after the close of a taxable year or with the fund's method of allocation,
in which case the IRS could attempt to recharacterize a portion of the
dividends paid to the holders of preferred shares and designated by the Fund as
Exempt-Interest Dividends as consisting instead of capital gains or other
taxable income. If the IRS were to prevail with respect to any such attempted
recharacterization, holders of preferred shares could be subject to tax on
amounts so recharacterized and the fund could be subject to Federal income and
excise tax. In such event, no additional amounts (including Additional
Dividends) would be paid by Trust II with respect to dividends so
recharacterized to compensate for any additional tax owed by holders of
preferred shares.
If, in connection with the selection of a Long-Term Dividend Period, (i)
Trust II provides that a Premium Call Period will follow a Non-Call Period,
(ii) based on all the facts and circumstances at the time of the designation of
the Long-Term
B-60
Dividend Period, Trust II is more likely than not to redeem the Preferred
Shares during the Premium Call Period, and (iii) the premium to be paid upon
redemption during the Premium Call Period exceeds a reasonable penalty for
early redemption, it is possible that the holders of preferred shares will be
required to accrue such premium as a dividend (to the extent of Trust II's
earnings and profits) over the term of the Non-Call Period. See "Dividends and
Dividend Periods," and "Glossary--Specific Redemption Provisions."
B-61
Glossary
" 'AA' Composite Commercial Paper Rate" has the meaning specified on page B-36
of this Appendix B.
"Additional Dividend" has the meaning set forth on page B-16 of this Appendix B.
"Agent Member" means a designated member of the Securities Depository that will
maintain records for a beneficial owner of one or more Preferred Shares.
"Agreement and Declaration of Trust" means the Agreement and Declaration of
Trust of Trust II, as amended from time to time.
"Alternate Treasury Note Rate" has the meaning set forth on page B-39 of this
Appendix B.
"Applicable Dividend Rate" means the rate of dividend per annum that (i) except
for a Dividend Period commencing during a Non-Payment Period, will be equal to
the lower of the rate of dividend 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 Bylaws 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" has the meaning described on page B-18 of this
Appendix B.
"Authorized Newspaper" means a newspaper of general circulation in the English
language generally published on Business Days in The City of New York.
B-62
"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.
"Bylaws" means the Bylaws of the Trust, as amended from time to time.
"Cede" means Cede & Co., the nominee of DTC in whose name the Preferred Shares
initially will be registered.
"Closing Transaction" means the termination of a futures contract or option
position by taking a position opposite thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means [Smith Barney Shearson Inc.] and such other
dealers as the fund may from time to time appoint, or in lieu of any thereof,
their respective affiliates or successors.
"Commission" means the Securities and Exchange Commission.
"Cure Date" has the meaning set forth on page B-43 of this Appendix B.
"Date of Original Issue" means, with respect to any Preferred Merger Shares,
the date on which the merger is consummated.
"Deposit Securities" has the meaning set forth on page B-43 of this Appendix B.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor, as
the case may be.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
B-63
"Dividend Coverage Amount," as of any Valuation Date, means (A) (i) the
aggregate amount of cash dividends that will accumulate on all Preferred Shares,
in each case to (but not including) the Business Day following the first
Dividend Payment Date for Preferred Shares that follows such Valuation Date plus
(ii) the aggregate amount of all liabilities existing on such Valuation Date
which are payable on or prior to the Business Day following such first Dividend
Payment Date less (B) the sum of (i) the combined Market Value of Deposit
Securities irrevocably deposited with the Paving Agent for the payment of cash
dividends on all Preferred Shares, (ii) the book value of Receivables for
Municipal Bonds sold as of or prior to such Valuation Date, if such receivables
are due within five Business Days of such Valuation Date and in any event on or
prior to such Dividend Payment Date, and (iii) interest on Municipal Bonds owned
by the fund which is scheduled to be paid on or prior to such Dividend Payment
Date.
"Dividend Coverage Assets," as of any Valuation Date, means Deposit Securities
with maturity or tender payment dates not later than the day preceding the
Business Day following the first Dividend Payment Date for Preferred Shares
that follows such Valuation Date.
"Dividend Payment Date" has the meaning set forth on page B-8 of this Appendix
B.
"Dividend Period" has the meaning set forth on page B-4 and of this Appendix B.
"DTC" means The Depository Trust Company.
"Exempt-Interest Dividend" has the meaning set forth on page B-19 of this
Appendix B.
"Gross-Up Tax Rate" has the meaning set forth on page B-20 of this Appendix B.
B-64
A "holder" of Preferred Shares 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 Preferred Shares.
"Initial Dividend Payment Date" and "Initial Dividend Payment Dates" have the
meanings set forth in the Bylaws of Trust II.
"Initial Dividend Period" means, with respect to Preferred Merger Shares, the
28-day Dividend Period commencing on the Date of Original Issue thereof.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract or an
option 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.
"IRS" means the Internal Revenue Service.
"Kenny Index" has the meaning set forth on page B-38 of this Appendix B.
"Long Term Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"Mandatory Redemption" has the meaning set forth on page B-43 of this Appendix
B.
"Mandatory Redemption Price" has the meaning set forth on page B-43 of this
Appendix B.
"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.
"Maximum Dividend Rate" has the meaning set forth on page B-17 of this Appendix
B.
B-65
"Minimum Liquidity Level" means, as of any Valuation Date, an aggregate Market
Value of Dividend Coverage Assets not less than the Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes a Moody's Eligible Asset, the
percentage determined by reference to (a) the rating by Moody's or S&P on such
Municipal Bond and (b) the Moody's Exposure Period, in accordance with the
table set forth below:
B-66
Rating Category
Moody's
Exposure Aaa(1) Aa(1) A(1) Baa(1) Other(2) VMIG-1(1),(3)
Period VP-1+(4)
7 weeks or
less 151% 159% 168% 202% 229% 136%
8 weeks or less
but greater
than 7 weeks 154 164 173 205 235 137
9 weeks or less
but greater
than 8 weeks 158 169 179 209 242 138
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 by Moody's, 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. For the purpose of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
(4) Municipal Bonds rated SP-1+ or A-l+ 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. For the purpose of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of
"A" by Moody's.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term Municipal Bonds, so long as such Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+
B-67
or AA by S&P and mature or have a demand feature at par exercisable within the
Moody's Exposure Period, and (ii) no Moody's Discount Factor will be applied to
cash or to Receivables for Municipal Bonds Sold. "Receivables for Municipal
Bonds Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means the aggregate of the following: (i) the book value of
receivables for Municipal Bonds 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 Discounted Value of
Municipal Bonds sold (applying the relevant Moody's Discount Factor to such
Bonds) as of or prior to such Valuation Date which generated such receivables,
if such receivables are due within five Business Days of such Valuation Date
but do not comply with either of conditions (x) or (y) of the preceding clause
(i).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds Sold, a
short-term Municipal Bond rated VMIG-1, MIG-1 or P-1 by Moody's or SP-1+ or
A-1+ by S&P or a Municipal Bond that (i) pays interest in cash; (ii) is
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated
by S&P, is rated at least BBB- by S&P (provided that, for purposes of
determining the Moody's Discount Factor applicable to any such S&P-rated
Municipal Bond, such Municipal Bond (excluding any short-term Municipal Bond
and any Municipal Bond rated BBB-, BBB or BBB+) 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 by Moody's; and (iv) is part
of an issue of Municipal Bonds of at least $10,000,000. In addition, Municipal
Bonds in the fund's portfolio will be included as
B-68
Moody's Eligible Assets only to the extent they meet the following
diversification requirements:
Maximum State
Minimum Maximum or Territory
Issue Size Underlying Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3)
- ----------- -------------- ---------------- --------------
Aaa 10 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Other (2) 10 4 12
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower
rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) of any territory are limited to 10% of Moody's Eligible Assets.
For purposes of the maximum underlying obligor requirement described
above, any such Bond backed by a guaranty, letter of credit or insurance issued
by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Bond.
When the fund sells a Municipal Bond and agrees to repurchase it at a
future date, such Bond will constitute a Moody's Eligible Asset and the amount
the fund is required to pay upon repurchase of such Bond will count as a
liability for purposes of calculating the Preferred Shares Basic Maintenance
Amount. When the fund purchases a Municipal Bond and agrees to sell it at a
future date to another party, cash receivable by the fund in connection
therewith will constitute
B-69
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
such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the fund for the payment of
dividends or redemption.
"Moody's Exposure Period" means the period commencing on and including a
given Valuation Date and ending 48 days thereafter.
"Moody's Volatility Factor" means 302% as long as there has not been
enacted an increase to the Marginal Tax Rate. If an increase is enacted to the
Marginal Tax Rate but not yet implemented, the Moody's Volatility Factor shall
be as follows:
B-70
% Change in Moody's
Marginal Tax Rate Volatility Factor
- ------------------- ------------------
< 5% 323%
>5% but < 10% 347%
>10% but < 15% 373%
>15% but < 20% 402%
>20% but < 25% 436%
>25% but < 30% 474%
>30% but < 35% 518%
>35% but < 40% 570%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the fund
in writing is applicable.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"1940 Act" means the Investment Company Act of 1940 as amended.
"1940 Act Cure Date" has the meaning set forth on page B-56 of this
Appendix B.
"1940 Act Preferred Shares Asset Coverage" has the meaning set forth on
page B-56 of this Appendix B.
"Non-Call Period" has the meaning described under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page B-11 of this
Appendix B.
"Non-Payment Period Rate" has the meaning set forth on page B-12 of this
Appendix B.
"Notice of Redemption" has the meaning set forth on page B-45 of this
Appendix B.
"Notice of Revocation" has the meaning set forth on page B-7 of this
Appendix B.
B-71
"Notice of Special Dividend Period" has the meaning set forth in the
Bylaws of Trust II.
"Optional Redemption Price" has the meaning set forth on page B-42 of this
Appendix B.
"Paying Agent" means [IBJ Schroeder Bank & 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 Preferred Shares in
accordance with such agreement.
"Paying Agent Agreement" has the meaning set forth on page B-22 of this
Appendix B.
"Preferred Shares" has the meaning set forth on page B-1 of this Appendix
B.
"Premium Call Period" has the meaning specified on page B-79 of this
Appendex B.
"Preferred Shares Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal to (i) the sum of (A) the product of the number
of Preferred Shares outstanding on such Valuation Date multiplied by the sum of
(a) $50,000 and (b) any applicable redemption premium per share attributable to
the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each Preferred Share outstanding, in each case, to (but not including) the end
of the Dividend Period for Preferred Shares in which such Valuation Date occurs
or to (but not including) the 49th day after such Valuation Date, whichever is
sooner; (C) the aggregate amount of cash dividends that
B-72
would accumulate at the Maximum Dividend Rate applicable to a Dividend Period
of 28 days on any Preferred Shares outstanding from the end of such Dividend
Period through the 49th day after such Valuation Date, multiplied by the larger
of the Moody's Volatility Factor and the S&P Volatility Factor, determined from
time to time by Moody's and S&P, respectively (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then current Non-Payment Period Rate); (D)
the amount of anticipated expenses of the fund for the 90 days subsequent to
such Valuation Date; (E) the amount of the fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i) (A) through
(i) (E) (including, without limitation, any amounts due and payable by the fund
pursuant to repurchase agreements and any payables for Municipal Bonds
purchased as of such Valuation Date) less (ii) either (A) the Discounted Value
of any of the fund's assets, or (B) the face value of any of the fund's assets
if such assets mature prior to or on the date of redemption of Preferred Shares
or payment of a liability and are either securities issued or guaranteed by the
U.S. Government or, with respect to Moody's, have a rating assigned by Moody's
of at least Aaa, P-1, VMIG-1 or MIG-1 and, with respect to S&P, have a rating
assigned by S&P of at least AAA, SP-1+ or A-l+, in both cases irrevocably
deposited by the fund for the payment of the amount needed to redeem Preferred
Shares subject to redemption or any of (i) (B) through (i) (F).
"Preferred Shares Basic Maintenance Cure Date," with respect to the
failure by the fund to satisfy the Preferred Shares Basic Maintenance Amount as
of a given Valuation Date, means the sixth Business Day following such
Valuation Date.
B-73
"Receivables for Municipal Bonds Sold," for purposes of determining
Moody's Eligible Assets and S&P Eligible Assets, has the meaning set forth on
page B-68 of this Appendix B.
A "record holder" of Preferred Shares 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 Preferred
Shares.
"Reference Rate" has the meaning set forth on page B-17 of this Appendix
B.
"Remarketing" means each periodic operation of the process for
remarketing Preferred Shares, as described in this Appendix B.
"Remarketing Agent" means [Smith Barney Shearson Inc.] and [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" has the meaning set forth on page B-26 of this
Appendix B.
"Remarketing Date" means any date on which (i) each holder of Preferred
Shares must provide to the Remarketing Agent irrevocable telephonic notice of
intent to tender shares in a Remarketing, and (ii) the Remarketing Agent (a)
determines the Applicable Dividend Rate for the ensuing Dividend Period, (b)
notifies holders, purchasers and tendering holders of Preferred Shares by
telephone, telex or otherwise of the results of the Remarketing and (c)
announces the Applicable Dividend Rate.
"Request for Special Dividend Period" has the meaning set forth on page
B-5 of this Appendix B.
"Response" has the meaning set forth on page B-6 of this Appendix B.
B-74
"Retroactive Taxable Allocation" has the meaning set forth on page B-16 of
this Appendix B.
"S&P" means Standard & Poor's Ratings Group.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on such
Municipal Bond and (b) the S&P Exposure Period, in accordance with the table
set forth below:
S&P Rating Category
--------------------------------
S&P 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
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such Municipal Bonds 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 Bonds are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's and such short-term Municipal Bonds referred to
in this clause (i) shall qualify as S&P Eligible Assets; provided, however,
such short-term Municipal Bonds rated by Moody's but not rated by S&P having a
demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term Municipal Bonds rated by Moody's but not rated by
S&P may comprise no more than 50% of short-term Municipal Bonds that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to
B-75
cash or to Receivables for Municipal Bonds Sold. "Receivables for Municipal
Bonds Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for Municipal Bonds sold as
of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1 by
Moody's, whether or not they mature or have a demand feature exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Bonds and shall qualify as S&P Eligible Assets.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold or
a Municipal Bond that (i) is issued by any of the 50 states, any territory or
possession of the United States, the District of Columbia, and any political
subdivision, instrumentality, county, city, town, village, school district or
agency (such as authorities and special districts created by the states) of any
of the foregoing and certain federally sponsored agencies such as local housing
authorities; (ii) is interest bearing and pays interest at least semi-annually;
(iii) is payable with respect to principal and interest in U.S. Dollars; (iv)
is publicly rated BBB or higher by S&P or, except in the case of Anticipation
Notes that are grant anticipation notes or bond anticipation notes which must
be rated by S&P to be included in S&P Eligible Assets, if not rated by S&P but
rated by Moody's, is rated at least A by Moody's (provided that such
Moody's-rated Municipal Bonds will be included in S&P Eligible Assets only to
the extent the Market Value of such Municipal Bonds does not exceed 50% of the
aggregate Market Value of the 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 Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its
B-76
Moody's rating); (v) is not part of a private placement of Municipal Bonds; and
(vi) is part of an issue of Municipal Bonds with an original issue size of at
least $20 million or, if of an issue with an original issue size below $20
million (but in no event below $10 million), is issued by an issuer with a
total of at least $50 million of securities outstanding. Notwithstanding the
foregoing:
(1) Municipal Bonds of any one issuer will be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal Bonds
does not exceed 10% of the aggregate Market Value of the 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 Bonds exceeds 5% of the aggregate Market Value of the S&P
Eligible Assets; and
(2) Municipal Bonds issued by issuers in any one state or territory will
be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Bonds does not exceed 20% of the aggregate
Market Value of S&P Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the Preferred Shares Basic
Maintenance Cure Date, that the fund has to cure any failure to maintain, as of
such Valuation Date, a Discounted Value of its portfolio at least equal to the
Preferred Shares Basic Maintenance Amount.
"S&P Volatility Factor" means, depending on the applicable Reference
Rate, the following:
B-77
Reference Rate
- -------------------------------------------------------
Taxable Equivalent of the Short-Term Municipal
Bond Rate 277%
30-day "AA" Composite Commercial Paper Rate 228%
60-day "AA" Composite Commercial Paper Rate 228%
90-day "AA" Composite Commercial Paper Rate 222%
120-day "AA" Composite Commercial Paper Rate 222%
180-day "AA" Composite Commercial Paper Rate 217%
1-year U.S. Treasury Bill Rate 198%
2-year U.S. Treasury Note Rate 185%
3-year U.S. Treasury Note Rate 178%
4-year U.S. Treasury Note Rate 171%
5-year U.S. Treasury Note Rate 169%
Notwithstanding the foregoing, the S&P Volatility Factor may mean such
other potential dividend rate increase factor as S&P advises the Trust in
writing is applicable.
"Securities Depository" means DTC or any successor company or other
entity selected by the fund as securities depository for Preferred Shares that
agrees to follow the procedures required to be followed by such securities
depository in connection with the Preferred Shares.
"Settlement Date" means the first Business Day after a Remarketing Date
applicable to a Preferred Share.
"Short Term Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"Special Dividend" has the meaning set forth on page B-17 of this Appendix
B.
"Special Dividend Period" means a Dividend Period established by the fund
for Preferred Shares as described on page B-4 of this Appendix B.
B-78
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period of 365 or more days, either, or any combination of the
designation of (i) a period (a "Non-Call Period") determined by the Trustees,
after consultation with the Remarketing Agent, during which the Preferred
Shares subject to such Dividend Period shall not be 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 Trustees, after consultation
with the Remarketing Agent, during each year of which the Preferred Shares
subject to such Dividend Period shall be redeemable at the Trust's option at a
price per share equal to $50,000 plus accumulated but unpaid dividends plus an
applicable premium, as determined by the Trustees after consultation with the
Remarketing Agent.
"Substitute Commercial Paper Dealers" means such substitute commercial
paper dealers as the fund may from time to time appoint or, in lieu of any
thereof, their respective affiliates or successors.
"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 Preferred Shares.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth in the Bylaws of the Trust.
"Tender and Dividend Reset" means the process pursuant to which Preferred
Shares may be tendered in a Remarketing or held and become subject to the new
Applicable Dividend Rate determined by the Remarketing Agent in such
Remarketing.
B-79
"Treasury Bonds" means U.S. Treasury Bonds with remaining maturities of
ten years or more.
"Trustees" means the Trustees of the fund.
"28-day Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"U.S. Treasury Bill Rate" has the meaning set forth on page B-38 of this
Appendix B.
"U.S. Treasury Note Rate" has the meaning set forth on page B-39 of this
Appendix B.
"Valuation Date" means, for purposes of determining whether the fund is
maintaining the Preferred Shares Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original Issue.
B-80
EXHIBIT B-1
NORMAL SCHEDULE FOR REMARKETING PREFERRED SHARES
The normal schedule for remarketing Preferred Shares is described below. As
described in this Appendix B, the events occurring on each day of a normal
remarketing schedule are subject to change in the event that certain days are
not Business Days. All references herein to a particular time of day shall be
to New York City time.
Remarketing Date
9:00 a.m. Deadline for the Remarketing Agent to make
available to holders of Preferred Shares non-binding
indications of Applicable Dividend Rate for the next
succeeding 28-day Dividend Period or, if applicable,
Special Dividend Period.
12:00 noon Deadline for each holder of Preferred Shares to
provide to the Remarketing Agent irrevocable
telephonic notice of intent to tender Preferred
Shares for sale in the current Remarketing.
Remarketing of tendered shares of Preferred Shares
formally commences.
3:00 p.m. Deadline for completion of Remarketing. The
Remarketing Agent determines the Applicable
Dividend Rate for the Dividend Period.
3:30 p.m. The Remarketing Agent notifies holders, purchasers
and tendering holders of Preferred Shares by
telephone, telex or otherwise of the results of the
Remarketing. Applicable Dividend Rate is announced.
Settlement Date Dividend Period begins. In addition, Preferred Shares
which have been tendered and sold in a
Remarketing are delivered against payment through
the Securities Depository.
B-81
EXHIBIT B-2
RATING AGENCY REQUIREMENTS
This Exhibit sets out certain procedures from the Bylaws of the fund containing
conditions determined by S&P and Moody's which the fund must meet in order to
maintain its AAA/"aaa" rating. Generally, these requirements. among other
things, impose limitations on the securities in which the fund may invest (and
the amount of its portfolio which may be invested in various types of securities
and securities of various issuers), limit the fund's use of futures, options and
forward commitments and may require the fund to redeem Preferred Shares. Any
capitalized terms used in this Exhibit but not defined herein are defined
elsewhere in this Appendix B.
B-82
DEFINITIONS
"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Deposit Securities" means cash and Municipal Bonds rated at least AAA, A-1+ or
SP-1+ by S&P.
"Independent Accountant" means 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.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract or an
option thereon.
"Market Value" of any asset of the fund means the market value thereof
determined by the Pricing Service. The Market Value of any asset shall include
any interest accrued thereon. The Pricing Service shall value 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 shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the fund from dealers who are members
of the National Association of Securities Dealers, Inc. and make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are
B-83
valued at closing prices for such instruments established by the exchange or
board of trade on which they are traded, or if market quotations are not
readily available, are valued at fair value on a consistent basis using methods
determined in good faith by the Trustees.
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional Dividends that would be payable with
respect to the Preferred Shares if the fund were to make Retroactive Taxable
Allocation, with respect to any fiscal year, estimated based upon dividends
paid and the amount of undistributed realized net capital gain and other income
subject to regular federal income tax 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.
"Moody's Hedging Transaction" has the meaning described on page B-92 of this
Appendix B.
"Preferred Shares Basic Maintenance Report" means a report signed by the
President, Treasurer or any Executive 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 the
aggregate), and the Preferred Shares Basic Maintenance Amount.
"Pricing Service" means Muller Investdata Corp., or any successor company or
entity, or any other entity designated from time to time by the Trustees.
Notwithstanding the foregoing, the Trustees will not designate a new Pricing
Service unless the fund has received a written confirmation from Moody's and
S&P that such action would not impair the ratings then assigned by Moody's and
S&P to Preferred Shares.
"Quarterly Valuation Date" means the last Business Day of each fiscal quarter
of the fund in each fiscal year of the fund.
B-84
"S&P Hedging Transactions" has the meaning described below.
"Variation Margin" means, in connection with an outstanding futures contract or
option thereon owned or sold by the fund, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract or option fluctuates.
Notwithstanding the foregoing, the Trustees may, without the vote or consent of
the holders of Preferred Shares, from time to time amend, alter or repeal
certain of the foregoing definitions (or definitions of other terms contained
in the fund's Bylaws) and any such amendment, alteration or repeal will be
deemed not to affect the preferences, rights or powers of Preferred Shares or
the holders thereof, provided the Trustees receive written confirmation from
both Moody's and S&P, that any such amendment, alteration or repeal would not
impair the ratings then assigned to Preferred Shares by the rating agency
providing such confirmation.
PREFERRED SHARES BASIC MAINTENANCE AMOUNT
Basic Requirement. The fund shall maintain, on each Valuation Date, and
shall verify to its satisfaction that it is maintaining on such Valuation Date,
S&P Eligible Assets having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets
having an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount. Upon any failure to maintain the required
Discounted Value, the fund will use its best efforts to alter the composition
of its portfolio to reattain the Preferred Shares Basic Maintenance Amount on
or prior to the Preferred Shares Basic Maintenance Cure Date. If, on any
Valuation Date, the fund shall have Moody's Eligible Assets with a Discounted
Value which exceeds the Preferred Shares Basic
B-85
Maintenance Amount by not more than 5%, the Adviser shall not alter the
composition of the fund's portfolio unless it determines that such action will
not cause the fund to have Moody's Eligible Assets with a Discounted Value less
than the Preferred Shares Basic Maintenance Amount.
Reporting Requirements. The fund will deliver a Preferred Shares Basic
Maintenance Report to the Remarketing Agent, the Paying Agent, Moody's and S&P
as of (i) each Quarterly Valuation Date, (ii) the first day of a Special
Dividend Period, and (iii) any other time when specifically requested by either
Moody's or S&P, in each case at or before 5:00 p.m., New York City time, on the
third Business Day after such day.
At 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 Moody's Eligible
Assets or S&P Eligible Assets, as the case may be, with an aggregate Discounted
Value which exceeds the Preferred Shares Basic Maintenance Amount by 5% or more
or to satisfy the Preferred Shares Basic Maintenance Amount, the fund shall
complete and deliver to the Remarketing Agent, the Paying Agent, Moody's and
S&P a Preferred Shares Basic Maintenance Report as of the date of such failure.
At or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the fund cures any failure to satisfy the
Preferred Shares Basic Maintenance Amount, the fund shall complete and deliver
to the Remarketing Agent, the Paying Agent, Moody's and S&P a Preferred Shares
Basic Maintenance Report as of the date of such cure.
A Preferred Shares Basic Maintenance Report or Accountant's Confirmation
will be deemed to have been delivered to the Remarketing Agent, the Paying
Agent, Moody's and S&P if the Remarketing Agent, the Paying Agent, Moody's and
S&P receive a copy or telecopy, telex or other
B-86
electronic transcription thereof and on the same day the fund mails to the
Remarketing Agent, the Paying Agent, Moody's and S&P for delivery on the next
Business Day the full Preferred Shares Basic Maintenance Report. A failure by
the fund to deliver a Preferred Shares Basic Maintenance Report shall be deemed
to be delivery of a Preferred Shares Basic Maintenance Report indicating that
the Discounted Value for all assets of the fund is less than the Preferred
Shares Basic Maintenance Amount, as of the relevant Valuation Date.
Whenever the fund delivers a Preferred Shares Basic Maintenance Report to
S&P as described above, it shall also deliver a Certificate of Minimum
Liquidity to the Remarketing Agent and the Paying Agent.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to a Quarterly Valuation Date, the Independent
Accountant will confirm in writing to the Remarketing Agent, the Paying Agent,
S&P and Moody's (i) the mathematical accuracy of the calculations reflected in
such Report (and in any other Preferred Shares Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the fund
during the quarter ending on such Quarterly Valuation Date); (ii) that, in such
Report (and in such randomly selected Report), (a) the fund determined in
accordance with the Bylaws whether the fund had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly selected Report),
S&P Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets withan
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, and (b) it has obtained confirmation from the Pricing
Service that the Market Value of portfolio securities as determined by the
Pricing Service equals the mean between the quoted bid and asked prices or
B-87
the yield equivalent (when quotations are readily available); (iii) that the
fund has excluded from the Preferred Shares Basic Maintenance Report assets not
qualifying as Eligible Assets; and (iv) with respect to such confirmation to
Moody's, that the fund has satisfied the requirements described below imposed
by Moody's with respect to transactions in options, futures and forward
commitments as of the Quarterly Valuation Date (and at the Valuation Date
addressed in such randomly selected Report) (such confirmation is herein called
the "Accountant's Confirmation"). In preparing the Accountant's Confirmation,
the Independent Accountant shall be entitled to rely, without further
investigation, on such interpretations of law by the fund as may have been
necessary for the fund to perform the computations contained in the Preferred
Shares Basic Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to any Valuation Date on which the fund failed to
satisfy the Preferred Shares Basic Maintenance Amount, the Independent
Accountant will provide to the Remarketing Agent, the Paying Agent, S&P and
Moody's an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to any Valuation Date on which the fund cured any
failure to satisfy the Preferred Shares Basic Maintenance Amount, the
Independent Accountant will provide to the Remarketing Agent, the Paying Agent,
S&P and Moody's an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.
If any Accountant's Confirmation delivered as required above shows that
an error was made in the Preferred Shares Basic Maintenance Report for a
particular Valuation Date for
B-88
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 or Moody's Eligible Assets, 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
Preferred Shares Basic Maintenance Report to the Remarketing Agent, the Paying
Agent, S&P and Moody's promptly following receipt by the fund of such
Accountant's Confirmation.
At or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the Preferred Shares, the fund will
complete and deliver to Moody's and S&P a Preferred Shares Basic Maintenance
Report as of the close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Independent Accountant will
provide to Moody's and S&P an Accountant's Confirmation as to such Preferred
Shares Basic Maintenance Report.
At or before 5:00 p.m., New York City time, on the first Business Day
following any date on which the fund repurchases any outstanding Common Shares,
the fund will complete and deliver to Moody's and S&P a Preferred Shares Basic
Maintenance Report as of the close of business on the date of the repurchase.
FUTURES AND OPTIONS TRANSACTIONS; FORWARD CONTRACTS
S&P Guidelines. For so long as any Preferred Shares are rated by S&P, the
fund will not purchase or sell futures contracts, write, purchase or sell
options on futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the rating then assigned to the
B-89
Preferred Shares by S&P, except that the fund may purchase or sell futures
contracts based on the Municipal Index or Treasury Bonds and write, purchase or
sell put and call options on such contracts (collectively "S&P Hedging
Transactions"), subject to the following limitations:
(A) the fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures
contract or option held by the fund by the fund's taking an opposite
position thereto ("Closing Transactions")), which would cause the fund
at the time of such transaction to own or have sold (1) 1,001 or more
outstanding futures contracts based on the Municipal Index, (2)
outstanding futures contracts based on the Municipal Index and on
Treasury Bonds exceeding in number 25% of the quotient of the 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 thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(B) the fund will 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 (1)
outstanding futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the 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
B-90
thirty days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(C) the fund will engage in Closing Transactions to close out any
outstanding futures contract which the fund owns or has sold or any
outstanding option thereon owned by the fund in the event (i) the fund
does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the Preferred Shares Basic Maintenance Amount
on two consecutive Valuation Dates, and (ii) the fund is required to
pay Variation Margin on the second such Valuation Date:
(D) 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 the securities deliverable under such
terms; and
(E) when the fund writes a futures contract or option thereon (including a
futures contract or option thereon which requires delivery of an
underlying security), it will either maintain an amount of cash, cash
equivalents or short-term, fixed-income 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 or on behalf of the fund's broker with respect to such
futures contract or option equals the Market Value of the futures
contract or option, or, in the event the fund writes a futures
contract or option thereon which requires delivery of an underlying
security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the fund has S&P Eligible Assets with
a Discounted Value that equals or
B-91
exceeds the Preferred Shares Basic Maintenance Amount, such Discounted Value
shall, unless the fund receives written confirmation from S&P to the contrary,
be reduced by an amount equal to (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 are owned by the fund.
Moody's Guidelines. For so long as any Preferred Shares are rated by
Moody's, the fund will not buy or sell futures contracts, write, purchase or
sell put or call options on futures contracts or write put or call options
(except covered call or put options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the Preferred Shares by Moody's, except that
the fund may purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively "Moody's
Hedging Transactions"), subject to the following limitations:
(A) the fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) which would
cause the fund at the time of such transaction to own or have sold (1)
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 thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal or
(2) outstanding futures contracts based on the Municipal Index
B-92
having a Market Value exceeding the Market Value of Municipal Bonds
constituting Moody's Eligible Assets owned by the fund;
(B) the fund will not engage in any Moody's 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 in the
aggregate (1) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 10% of the aggregate Market
Value of all Moody's Eligible Assets owned by the fund and rated Aaa
by Moody's, (2) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 50% of the aggregate 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 (3) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 90% of the aggregate 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 (A) and (B), the
fund shall be deemed to own the number of futures contracts that
underlie any outstanding options written by the fund);
(C) the fund will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
(D) 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
B-93
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;
(E) the fund will engage in Moody's Hedging Transactions only with respect
to futures contracts or options thereon having the next settlement
date for such type of futures contract or option, or the settlement
date immediately thereafter;
(F) the fund will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the
fund that to do so would not adversely affect Moody's then current
rating of the Preferred Shares; provided, however, that the fund will
not be deemed to have engaged in a futures or options transaction for
leveraging or speculative purposes so long as it has done so otherwise
in accordance with the foregoing; and
(G) 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 Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows (unless the fund receives written
confirmation to the contrary from Moody's): (i) assets subject to call options
written by the fund which are either exchange-traded and "readily reversible"
or which expire within 48 days after the
B-94
date as of which such valuation is made shall be valued at the lesser of (a)
Discounted Value and (b) the exercise price of the call option written by the
fund; (ii) assets subject to call options written by the fund not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the fund shall be valued at the lesser of (a)
the exercise price and (b) the Discounted Value of such security; and (iv)
futures contracts shall be valued at the lesser of (a) settlement price and (b)
the Discounted Value of the subject security, provided that, if a contract
matures within 48 days after the date as of which such valuation is made, where
the fund is the seller the contract may be valued at the settlement price and
where the fund is the buyer the contract may be valued at the Discounted Value
of the subject securities.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the following amounts shall be added to the Preferred
Shares Basic Maintenance Amount required to be maintained by the fund (unless
the fund receives written confirmation to the contrary from Moody's): (i) 10%
of the exercise price of a written call option; (ii) the exercise price of any
written put option; (iii) where the fund is the seller under a futures
contract, 10% of the settlement price of the futures contract; (iv) where the
fund is the purchaser under a futures contract, the settlement price of assets
to be purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the fund writes call options on futures contracts and does not own the
underlying contract.
For so long as any Preferred Shares are rated by Moody's, the fund will
not enter into any contract to purchase securities for a fixed price at a
future date beyond customary
B-95
settlement time (other than such contracts that constitute Moody's Hedging
Transactions that are permitted above) unless it receives written confirmation
from Moody's that engaging in such transactions would not impair the rating
then assigned to the Preferred Shares by Moody's except that the fund may enter
into such contracts to purchase newly-issued securities on the date such
securities are issued ("Forward Commitments"), subject to the following
limitations:
(A) the fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed income securities rated
P-1, MIG-1 or VMIG-l by Moody's and maturing prior to the date of the
Forward Commitment with a face value that equals or exceeds the amount
of the fund's obligations under any Forward Commitments to which it is
from time to time a party or long-term fixed income securities with a
Discounted Value that equals or exceeds the amount of the fund's
obligations under any Forward Commitments to which it is from time to
time a party; and
(B) the fund will not enter into a Forward Commitment 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
Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the fund is a party and of all securities deliverable to the fund
pursuant to such Forward Commitments shall be zero.
B-96
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
FORM N-14
PART B
STATEMENT OF ADDITIONAL INFORMATION
___________ __, 2001
This Statement of Additional Information ("SAI") contains material that may be
of interest to investors but that is not included in the Prospectus/Proxy
Statement (the "Prospectus") of Putnam Investment Grade Municipal Trust II
("Trust II") dated ____________ relating to the sale of all or substantially all
of the assets of Putnam Investment Grade Municipal Trust III ("Trust III" and,
together with Trust II, the "funds") to Trust II. This SAI is not a Prospectus
and is authorized for distribution only when it accompanies or follows delivery
of the Prospectus. This SAI should be read in conjunction with the Prospectus.
Investors may obtain a free copy of the Prospectus by writing Putnam Investor
Services, One Post Office Square, Boston, MA 02109 or by calling
1-800-225-1581.
1
TABLE OF CONTENTS
CHARGES AND EXPENSES
MISCELLANEOUS INVESTMENTS, INVESTMENT PRACTICES AND RISKS
TAXES
MANAGEMENT
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
SECURITIES RATINGS
2
CHARGES AND EXPENSES
MANAGEMENT FEES
For the past three fiscal years, pursuant to its management and administrative
services contracts, each fund incurred the following fees:
TRUST II
- ----------------------------------------------------------------------------------------------------------------------
REFLECTING A
REDUCTION IN THE
FOLLOWING AMOUNTS
FISCAL MANAGEMENT PURSUANT TO AN
YEAR FEE PAID EXPENSE LIMITATION
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2000 $1,649,027 $ --
- ----------------------------------------------------------------------------------------------------------------------
1999 $1,760,226 $ --
- ----------------------------------------------------------------------------------------------------------------------
1998 $1,776,755 $ --
- ----------------------------------------------------------------------------------------------------------------------
TRUST III
- ----------------------------------------------------------------------------------------------------------------------
REFLECTING A
REDUCTION IN THE
FOLLOWING AMOUNTS
FISCAL MANAGEMENT PURSUANT TO AN
YEAR FEE PAID EXPENSE LIMITATION
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
2000 $ 414,168 $ --
- ----------------------------------------------------------------------------------------------------------------------
1999 $ 437,362 $ --
- ----------------------------------------------------------------------------------------------------------------------
1998 $ 447,030 $ --
- ----------------------------------------------------------------------------------------------------------------------
BROKERAGE COMMISSIONS
The following table shows brokerage commissions paid during the fiscal periods
indicated:
TRUST II
- -------------------------------------------------------------------------------
FISCAL BROKERAGE
YEAR COMMISSIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2000 $ 7,704
- -------------------------------------------------------------------------------
1999 $ 6,370
- -------------------------------------------------------------------------------
1998 $ 5,200
- -------------------------------------------------------------------------------
TRUST III
3
- -------------------------------------------------------------------------------
FISCAL BROKERAGE
YEAR COMMISSIONS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2000 $ 2,803
- -------------------------------------------------------------------------------
1999 $ 2,262
- -------------------------------------------------------------------------------
1998 $ 3,743
- -------------------------------------------------------------------------------
4
ADMINISTRATIVE EXPENSE REIMBURSEMENT
The funds reimbursed Putnam Management for administrative services during fiscal
2000, including compensation of certain fund officers and contributions to the
Putnam Investments, Inc. Profit Sharing Retirement Plan for their benefit, as
follows:
- -------------------------------------------------------------------------------------------------------------------------
PORTION OF TOTAL REIMBURSEMENT FOR
TOTAL REIMBURSEMENT COMPENSATION AND CONTRIBUTIONS
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
TRUST II $6,335 $5,287
- -------------------------------------------------------------------------------------------------------------------------
TRUST III $3,809 $3,123
- -------------------------------------------------------------------------------------------------------------------------
TRUSTEE RESPONSIBILITIES AND FEES
The Trustees are responsible for generally overseeing the conduct of fund
business. Subject to such policies as the Trustees may determine, Putnam
Management furnishes a continuing investment program for each fund and makes
investment decisions on its behalf. Subject to the control of the Trustees,
Putnam Management also manages each fund's other affairs and business.
Each Trustee receives a fee for his or her services. Each Trustee also receives
fees for serving as Trustee of other Putnam funds. The Trustees periodically
review their fees to assure that such fees continue to be appropriate in light
of their responsibilities as well as in relation to fees paid to trustees of
other mutual fund complexes. The Trustees meet monthly over a two-day period,
except in August. The Board Policy Committee, which consists solely of Trustees
not affiliated with Putnam Management and is responsible for recommending
Trustee compensation, estimates that Committee and Trustee meeting time together
with the appropriate preparation requires the equivalent of at least three
business days per Trustee meeting. The following table shows the year each
Trustee was first elected a Trustee of the Putnam funds, the fees paid to each
Trustee by each fund for fiscal 2000 and the fees paid to each Trustee by all of
the Putnam funds during calendar year 1999:
5
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
ESTIMATED
PENSION OR PENSION OR ANNUAL
RETIREMENT RETIREMENT BENEFITS TOTAL
AGGREGATE BENEFITS AGGREGATE BENEFITS FROM ALL COMPENSATION
COMPENSATION ACCRUED COMPENSATION ACCRUED PUTNAM FUNDS FROM ALL
FROM THE AS PART OF FROM AS PART OF UPON PUTNAM
TRUSTEES/YEAR TRUST II(1) FUND EXPENSES TRUST III(1) FUND EXPENSES RETIREMENT(2) FUNDS(3)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Jameson A. Baxter/1994(4) $656 $127 $480 $107 $95,000 $200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Hans H. Estin/1972 658 296 481 240 95,000 200,500
- ------------------------------------------------------------------------------------------------------------------------------------
John A. Hill/1985(4)(5) 693 149 488 122 115,000 269,000
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald J. Jackson/1996(4) 656 160 480 150 95,000 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Paul L. Joskow/1997(4) 656 58 480 61 95,000 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Elizabeth T. Kennan/1992 655 189 478 159 95,000 199,500
- ------------------------------------------------------------------------------------------------------------------------------------
Lawrence J. Lasser/1992(7) 359 144 265 121 92,500 107,000
- ------------------------------------------------------------------------------------------------------------------------------------
John H. Mullin, III/1997(4) 653 88 476 91 95,000 199,000
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Patterson/1984 656 100 480 82 95,000 200,000
- ------------------------------------------------------------------------------------------------------------------------------------
William F. Pounds/1971(6) 370 335 268 278 111,000 127,000
- ------------------------------------------------------------------------------------------------------------------------------------
George Putnam/1957(6) 356 296 265 234 92,834 107,000
- ------------------------------------------------------------------------------------------------------------------------------------
George Putnam, III/1984(8) 671 68 484 56 95,000 225,000
- ------------------------------------------------------------------------------------------------------------------------------------
A.J.C. Smith/1986(7) 355 213 262 176 91,833 106,000
- ------------------------------------------------------------------------------------------------------------------------------------
W. Thomas Stephens/1997(4) 652 82 475 85 95,000 198,500
- ------------------------------------------------------------------------------------------------------------------------------------
W. Nicholas Thorndike/1992 647 265 471 223 95,000 197,000
- ------------------------------------------------------------------------------------------------------------------------------------
6
(1) Includes an annual retainer and an attendance fee for each meeting
attended.
(2) Assumes that each Trustee retires at the normal retirement date. For
Trustees who are not within three years of retirement, estimated
benefits for each Trustee are based on Trustee fee rates in effect
during calendar 2000.
(3) As of December 31, 2000, there were 124 funds in the Putnam family.
(4) Includes compensation deferred pursuant to a Trustee Compensation
Deferral Plan.
(5) Includes additional compensation for service as Vice Chairman of the
Putnam funds. Mr. Hill was elected Chairman of the Putnam Funds as of
July 1, 2000.
(6) Reflects retirement from the Board of Trustees of the Putnam funds on
June 30, 2000.
(7) Commencing July 1, 2000, Marsh & McLennan Companies, Inc., compensates
Mr. Lasser and Mr. Smith for their services as Trustees. The estimated
annual retirement benefits and related fund expenses shown in this
table for Messrs. Lasser and Smith reflect benefits earned under the
funds' retirement plan prior to that date.
(8) Includes additional compensation for services commencing July 1, 2000.
7
Under a Retirement Plan for Trustees of the Putnam funds (the "Plan"), each
Trustee who retires with at least five years of service as a Trustee of the
funds is entitled to receive an annual retirement benefit equal to one-half of
the average annual compensation paid to such Trustee for the last three years of
service prior to retirement. This retirement benefit is payable during a
Trustee's lifetime, beginning the year following retirement, for a number of
years equal to such Trustee's years of service. A death benefit, also available
under the Plan, assures that the Trustee and his or her beneficiaries will
receive benefit payments for the lesser of an aggregate period of (i) ten years
or (ii) such Trustee's total years of service.
The Plan Administrator (a committee comprised of Trustees that are not
"interested persons" of each fund, as defined in the Investment Company Act of
1940) may terminate or amend the Plan at any time, but no termination or
amendment will result in a reduction in the amount of benefits (i) currently
being paid to a Trustee at the time of such termination or amendment, or (ii) to
which a current Trustee would have been entitled had he or she retired
immediately prior to such termination or amendment.
For additional information concerning the Trustees, see "Management" below.
INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES
During the 2000 fiscal year, each fund incurred the following fees and
out-of-pocket expenses for investor servicing and custody services provided by
Putnam Fiduciary Trust Company:
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
TRUST II $196,536
- ---------------------------------------------------------------------------------------
TRUST III $ 55,770
- ---------------------------------------------------------------------------------------
MISCELLANEOUS INVESTMENTS, INVESTMENT PRACTICES AND RISKS
In addition to the investment strategies and risks described in the
Prospectus, each fund may employ other investment practices and may be subject
to other risks, which are described below. Certain investment strategies and
risks that are described briefly in the Prospectus are described in greater
detail below.
Each fund pursues its objective by investing primarily in a diversified
portfolio of "investment grade" tax-exempt securities that Putnam Management
believes does not involve undue risk to income or principal. Investment grade
tax-exempt securities are rated BBB or higher by Standard & Poor's ("S&P") or
Fitch Investors Service, Inc. ("Fitch") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's") (or equivalently rated by another nationally
recognized rating service) in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. Each fund may also
invest up to 20% of its total assets in securities rated at least B by a rating
agency and unrated securities determined by Putnam Management at the time of
investment to be of comparable quality.
8
As a non-fundamental policy that may be changed by approval of the
Trustees, each fund may invest up to 40% of its total assets in tax-exempt
securities the interest on which is subject to the federal alternative minimum
tax ("AMT"), and as a result, a portion of each fund's distributions may be
taxable to certain common shareholders. All or a portion of each fund's
distributions may be subject to state and local taxation.
TAX-EXEMPT SECURITIES. "Tax-exempt securities" are obligations issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel or
other counsel to the issuer of such securities, is at the time of issuance not
includable in gross income for federal income tax purposes. Under normal market
conditions, at least 80% of each fund's assets will be invested in tax-exempt
securities. The foregoing is a fundamental policy and cannot be changed without
shareholder approval. However, each fund may invest a portion of its assets in
tax-exempt securities that pay interest that is subject to the AMT for
individuals. Such investments are treated as tax-exempt securities for the
purpose of the 80% test. Investors should thus consider the possible effect of
the AMT on an investment in a fund. The suitability of a fund for investors who
may be (or may become as a result of investment in a fund) subject to the AMT
will depend upon a comparison of the yield likely to be provided from each fund
with the yield from comparable tax-exempt investments not subject to the AMT
with the yield from comparable fully taxable investments, in light of each such
investor's tax position. Subject to certain limitations, each fund may engage in
certain hedging transactions involving the use of futures contracts, options on
futures contracts, and options on indices of fixed income securities and on U.S.
Government securities. Such hedging transactions may give rise to taxable gains.
Tax-exempt securities include long-term obligations, often called
bonds, as well as short-term notes, participation certificates, municipal
leases, and tax-exempt commercial paper. Each fund may also invest in securities
representing interests in tax-exempt securities, known as "inverse floating
obligations" or "residual interest bonds," paying interest rates that vary
inversely to changes in the interest rates of specified short-term tax-exempt
securities or an index of short-term tax-exempt securities. The interest rates
on inverse floating obligations or residual interest bonds will typically
decline as short-term market interest rates increase and increase as short-term
market rates decline. Such securities have the effect of providing a degree of
investment leverage, since they will generally increase or decrease in value in
response to changes in market interest rates at a rate which is a multiple
(typically two) of the rate at which fixed-rate tax-exempt securities of
comparable maturity and credit quality increase or decrease in response to such
changes. As a result, the market values of inverse floating obligations and
residual interest bonds will generally be more volatile than the market values
of fixed-rate tax-exempt securities of comparable maturity and credit quality.
Long-term tax-exempt securities generally provide a higher yield than
short-term tax-exempt securities of comparable quality, and therefore each fund
invests primarily in long-term tax-exempt securities. Each fund may, however, be
primarily invested in short-term tax-exempt securities when yields on such
securities are greater than yields available on long-term tax-exempt securities,
to stabilize net asset value and for temporary defensive purposes.
-9-
The two principal classifications of tax-exempt bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"industrial revenue bonds" and "private activity bonds." General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of interest and the repayment of principal and, accordingly, the
capacity of the issuer of a general obligation bond as to the timely payment of
interest and the repayment of principal when due is affected by the issuer's
maintenance of its tax base. Revenue or special obligation bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special tax or other specific revenue
source such as from the users of the facility being financed; accordingly, the
timely payment of interest and the repayment of principal in accordance with the
terms of the revenue or special obligation bond is a function of the economic
viability of such facility or such revenue source. Although the ratings of S&P,
Fitch or Moody's of the tax-exempt securities in each fund's portfolio are
relative and subjective, and are not absolute standards of quality, such ratings
reflect the assessment of S&P, Fitch or Moody's, as the case may be, at the time
of issuance of the rating, 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, but
do not reflect an assessment of the market value of the obligation. A fund will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Putnam Management will monitor the
investment to determine whether continued investment in the security is
consistent with each fund's investment objective. The rating services undertake
no obligation to update their ratings of securities.
Also included within the general category of tax-exempt 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. [In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities.] Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
In addition, the tax treatment of such obligations in the event of
non-appropriation is unclear.
Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable.
Tax-exempt securities may have fixed or variable interest rates. Each
fund may purchase floating and variable rate demand notes, which are securities
normally having a stated maturity in excess of one year, but which permit the
holder to tender the notes for purchase at the principal
-10-
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 periodically
based on changes in such lending rate. 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 generally may be tendered for redemption
at face value.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax-exemption for
interest on various types of tax-exempt securities, and such proposals may well
be introduced in the future. If adopted, such proposals could have the effect of
limiting the availability of suitable investments for the funds. If it appeared
that the availability of tax-exempt securities for investment by the funds and
the value of each fund's portfolio could be materially affected by such changes
in law, the Trustees would reevaluate its investment objective and policies and
consider changes in the structure of the funds or their dissolution.
SELECTION OF INVESTMENTS. Putnam Management will buy and sell securities for
each fund's portfolio with a view to seeking a high level of current income
exempt from federal income tax and will select securities constituting a
portfolio that Putnam Management believes does not involve undue risk to income
or principal considered in relation to the particular investment policies of
each fund. As a result, each fund will not necessarily invest in the highest
yielding tax-exempt securities permitted by its investment policies if Putnam
Management determines that market risks or credit risks associated with such
investments would subject each fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. Although under current market
conditions Putnam Management expects to invest in a portfolio of longer-term
tax-exempt securities, Putnam Management will be free to take full advantage of
the entire range of maturities offered by tax-exempt securities and may adjust
the average maturity of each 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.
Each fund does not generally 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 related to the industry in which such non-governmental users
engage, and the 25% limitation would apply to such obligations. It is
nonetheless possible that each fund may invest more than 25% of its assets in a
broader segment of the municipal securities market, such as revenue obligations
of hospitals and other health care facilities, housing agency revenue
obligations, or airport revenue obligations. This would be the case only if
Putnam Management determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users or by the credit of 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
-11-
demand for their services or products) may have a general adverse effect on all
municipal securities in such a market segment. Each fund reserves the right to
invest more than 25% of its assets in industrial development bonds or private
activity bonds (subject to the limitation that under normal market conditions
not more than 20% of each fund's assets will be invested in private activity
bonds the interest on which may be subject to federal alternative minimum tax
for individuals) or in securities of issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state [and current rating agency requirements applicable to
each fund based upon the rating of the preferred shares limit such investment].
If a fund were to invest more than 25% of its assets in issuers located in the
same state, it would be more susceptible to adverse economic, business or
regulatory conditions in that state.
Each fund does not invest more than 5% of its total assets in the
tax-exempt securities of any single issuer, except that up to 25% of its total
assets may be invested without regard to this limitation. As a result, up to 25%
of each fund's total assets could be invested in tax-exempt securities of a
single issuer, with the result that its portfolio could be subject to greater
risks than that of a fund investing in a more broadly diversified portfolio.
DEFENSIVE STRATEGIES. At times Putnam Management may judge that conditions in
the markets for tax-exempt securities make pursuing a fund's basic investment
strategy inconsistent with the best interests of its shareholders. At such times
Putnam Management may use alternative strategies, primarily designed to reduce
fluctuations in the value of a fund's assets. In implementing these "defensive"
strategies, each fund may invest substantially all of its assets in high-quality
tax-exempt obligations. If these high-quality tax-exempt obligations are not
available or, in Putnam Management's judgment, do not afford sufficient
protection against adverse market conditions, each fund may invest in taxable
obligations. Such taxable obligations 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 Putnam Management
considers consistent with such strategy. To the extent that the use of certain
of these strategies produces taxable income, this taxable income will be
distributed to common and preferred shareholders based on each class's
proportionate share of such income as determined according to the percentage of
total dividends paid by each fund during a particular year that are paid to such
class. Such strategies may, under certain circumstances, require a fund to pay
Additional Dividends, thus reducing the amount of income available for
distributions on common shares. It is impossible to predict when, or for how
long, a fund will use these alternative strategies.
OTHER INVESTMENT PRACTICES. Each fund may also engage in the following
investment practices, each of which may involve certain special risks and may
result in the realization of taxable income or gains.
-12-
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. Each fund may write covered call options and covered
put options on optionable securities held in its portfolio, when in the opinion
of Putnam Management such transactions are consistent with each fund's
investment objective(s) and policies. Call options written by each fund give the
purchaser the right to buy the underlying securities from the fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the fund at a stated price.
Each fund may write only covered options, which means that, so long as the fund
is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, each fund
will hold cash and/or high-grade short-term debt obligations equal to the price
to be paid if the option is exercised. In addition, each fund will be considered
to have covered a put or call option if and to the extent that it holds an
option that offsets some or all of the risk of the option it has written. Each
fund may write combinations of covered puts and calls on the same underlying
security.
Each fund will receive a premium from writing a put or call option, which
increases the fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
-13-
underlying security, the amount of time remaining until expiration, current
interest rates, and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, a fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, a fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
Each fund may terminate an option that it has written prior to its expiration by
entering into a closing purchase transaction, in which it purchases an
offsetting option. The fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. If a fund writes a
call option but does not own the underlying security, and when it writes a put
option, the fund may be required to deposit cash or securities with its broker
as "margin," or collateral, for its obligation to buy or sell the underlying
security. As the value of the underlying security varies, the fund may have to
deposit additional margin with the broker. Margin requirements are complex and
are fixed by individual brokers, subject to minimum requirements currently
imposed by the Federal Reserve Board and by stock exchanges and other
self-regulatory organizations.
PURCHASING PUT OPTIONS. Each fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, a fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
PURCHASING CALL OPTIONS. Each fund may purchase call options to hedge against an
increase in the price of securities that each fund wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the fund,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of each fund's options strategies depends on the ability of
Putnam Management to forecast correctly interest rate and market movements. For
example, if a fund were to write a call option based on Putnam Management's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the fund were
to write a put option
-14-
based on Putnam Management's expectation that the price of the underlying
security would rise, but the price were to fall instead, the fund could be
required to purchase the security upon exercise at a price higher than the
current market price.
When a fund purchases an option, it runs the risk that it will lose its entire
investment in the option in a relatively short period of time, unless the fund
exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the fund will lose part or all
of its investment in the option. This contrasts with an investment by the fund
in the underlying security, since each fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on each fund's ability to terminate
option positions at times when Putnam Management deems it desirable to do so.
There is no assurance that the fund will be able to effect closing transactions
at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, a fund could no
longer engage in closing transactions. Lack of investor interest might adversely
affect the liquidity of the market for particular options or series of options.
A market may discontinue trading of a particular option or options generally. In
addition, a market could become temporarily unavailable if unusual events --
such as volume in excess of trading or clearing capability -- were to interrupt
its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may be prohibited. If an options market were to become
unavailable, a fund as a holder of an option would be able to realize profits or
limit losses only by exercising the option, and a fund, as option writer, would
remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased or
sold by a fund could result in losses on the options. If trading is interrupted
in an underlying security, the trading of options on that security is normally
halted as well. As a result, each fund as purchaser or writer of an option will
be unable to close out its positions until options trading resumes, and it may
be faced with considerable losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation or
other options markets may impose exercise restrictions. If a prohibition on
exercise is imposed at the time when trading in the option has also been halted,
a fund as purchaser or writer of an option will be locked into its position
until one of the two restrictions has been lifted. If the Options Clearing
Corporation were to determine that the available supply of an underlying
security appears insufficient to permit delivery by the writers of all
outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. A fund, as holder of such a put option, could lose its
entire investment if the prohibition remained in effect until the put option's
expiration.
-15-
Foreign-traded options are subject to many of the same risks presented by
internationally-traded securities. In addition, because of time differences
between the United States and various foreign countries, and because different
holidays are observed in different countries, foreign options markets may be
open for trading during hours or on days when U.S. markets are closed. As a
result, option premiums may not reflect the current prices of the underlying
interest in the United States.
Over-the-counter ("OTC") options purchased by a fund and assets held to cover
OTC options written by the fund may, under certain circumstances, be considered
illiquid securities for purposes of any limitation on the fund's ability to
invest in illiquid securities.
LOWER-RATED SECURITIES
Each fund may invest in lower-rated fixed-income securities (commonly known as
"junk bonds"). The lower ratings of certain securities held by each fund reflect
a greater possibility that adverse changes in the financial condition of the
issuer or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by each fund more volatile and could limit the fund's ability to
sell its securities at prices approximating the values the fund had placed on
such securities. In the absence of a liquid trading market for securities held
by it, a fund at times may be unable to establish the fair value of such
securities.
Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's Investors Service, Inc. or Standard & Poor's (or by any other nationally
recognized securities rating agency) does not reflect an assessment of the
volatility of the security's market value or the liquidity of an investment in
the security. See "Appendix A -- Securities ratings."
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of each fund's
assets. Conversely, during periods of rising interest rates, the value of each
fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by nationally recognized
securities rating agencies in their ratings of any fixed-income security and
changes in the ability of an issuer to make payments of interest and principal
may also affect the value of these investments. Changes in the value of
portfolio securities generally will not affect income derived from these
securities, but will affect each fund's net asset value. Each fund will not
necessarily dispose of a security when its rating is reduced below its rating at
the time of purchase.
-16-
However, Putnam Management will monitor the investment to determine whether its
retention will assist in meeting the fund's investment objective(s).
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be unable
to repay outstanding obligations at maturity by refinancing. The risk of loss
due to default in payment of interest or repayment of principal by such issuers
is significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
At times, a substantial portion of each fund's assets may be invested in an
issue of which the fund, by itself or together with other funds and accounts
managed by Putnam Management or its affiliates, holds all or a major portion.
Although Putnam Management generally considers such securities to be liquid
because of the availability of an institutional market for such securities, it
is possible that, under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, each fund could find
it more difficult to sell these securities when Putnam Management believes it
advisable to do so or may be able to sell the securities only at prices lower
than if they were more widely held. Under these circumstances, it may also be
more difficult to determine the fair value of such securities for purposes of
computing each fund's net asset value. In order to enforce its rights in the
event of a default, each fund may be required to participate in various legal
proceedings or take possession of and manage assets securing the issuer's
obligations on such securities. This could increase each fund's operating
expenses and adversely affect each fund's net asset value. In the case of
tax-exempt funds, any income derived from each fund's ownership or operation of
such assets would not be tax-exempt. The ability of a holder of a tax-exempt
security to enforce the terms of that security in a bankruptcy proceeding may be
more limited than would be the case with respect to securities of private
issuers. In addition, each fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code may limit the extent to
which the fund may exercise its rights by taking possession of such assets.
Certain securities held by each fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by a fund during a time of declining interest rates, the fund may not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
Each fund may invest without limit in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from their principal amount in lieu of paying interest periodically.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. Because zero-coupon
and payment-in-kind bonds do not pay current interest in cash, their value is
subject to greater fluctuation in response to changes in market interest rates
than bonds that pay interest currently. Both zero-coupon and payment-in-kind
bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks than
-17-
bonds paying interest currently in cash. Each fund is required to accrue
interest income on such investments and to distribute such amounts at least
annually to shareholders even though such bonds do not pay current interest in
cash. Thus, it may be necessary at times for each fund to liquidate investments
in order to satisfy its dividend requirements.
To the extent each fund invests in securities in the lower rating categories,
the achievement of the fund's goals is more dependent on Putnam Management's
investment analysis than would be the case if the fund were investing in
securities in the higher rating categories. This also may be true with respect
to tax-exempt securities, as the amount of information about the financial
condition of an issuer of tax-exempt securities may not be as extensive as that
which is made available by corporations whose securities are publicly traded.
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FLOATING RATE AND VARIABLE RATE DEMAND NOTES
Floating rate and variable rate demand notes and bonds may have a stated
maturity in excess of one year, but may have features that permit a holder to
demand payment of principal plus accrued interest upon a specified number of
days notice. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. The issuer has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal of the obligation plus accrued interest upon a specific
number of days notice to the holders. The interest rate of a floating rate
instrument may be based on a known lending rate, such as a bank's prime rate,
and is reset whenever such rate is adjusted. The interest rate on a variable
rate demand note is reset at specified intervals at a market rate.
-19-
HYBRID INSTRUMENTS
These instruments are generally considered derivatives and include indexed or
structured securities, and combine the elements of futures contracts or options
with those of debt, preferred equity or a depository instrument. A hybrid
instrument may be a debt security, preferred stock, warrant, convertible
security, certificate of deposit or other evidence of indebtedness on which a
portion of or all interest payments, and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by reference to
prices, changes in prices, or differences between prices, of securities,
currencies, intangibles, goods, articles or commodities (collectively,
"underlying assets"), or by another objective index, economic factor or other
measure, including interest rates, currency exchange rates, or commodities or
securities indices (collectively, "benchmarks"). Hybrid instruments may take a
number of forms, including, but not limited to, debt instruments with interest
or principal payments or redemption terms determined by reference to the value
of an index at a future time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in hybrid instruments reflect a combination of the risks
of investing in securities, options, futures and currencies. An investment in a
hybrid instrument may entail significant risks that are not associated with a
similar investment in a traditional debt instrument that has a fixed principal
amount, is denominated in U.S. dollars or bears interest either at a fixed rate
or a floating rate determined by reference to a common, nationally published
benchmark. The risks of a particular hybrid instrument will depend upon the
terms of the instrument, but may include the possibility of significant changes
in the benchmark(s) or the prices of the underlying assets to which the
instrument is linked. Such risks generally depend upon factors unrelated to the
operations or credit quality of the issuer of the hybrid instrument, which may
not be foreseen by the purchaser, such as economic and political events, the
supply and demand of the underlying
-20-
assets and interest rate movements. Hybrid instruments may be highly volatile
and their use by a fund may not be successful.
Hybrid instruments may bear interest or pay preferred dividends at below market
(or even relatively nominal) rates. Alternatively, hybrid instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to structure the
hybrid instrument. Leverage risk occurs when the hybrid instrument is structured
so that a given change in a benchmark or underlying asset is multiplied to
produce a greater value change in the hybrid instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transaction costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar-denominated hybrid instrument whose
redemption price is linked to the average three year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of less than par if rates were above the specified level. Furthermore, a
fund could limit the downside risk of the security by establishing a minimum
redemption price so that the principal paid at maturity could not be below a
predetermined minimum level if interest rates were to rise significantly. The
purpose of this arrangement, known as a structured security with an embedded put
option, would be to give each fund the desired European bond exposure while
avoiding currency risk, limiting downside market risk, and lowering transaction
costs. Of course, there is no guarantee that the strategy will be successful and
a fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the hybrid instrument.
Hybrid instruments are potentially more volatile and carry greater market risks
than traditional debt instruments. Depending on the structure of the particular
hybrid instrument, changes in a benchmark may be magnified by the terms of the
hybrid instrument and have an even more dramatic and substantial effect upon the
value of the hybrid instrument. Also, the prices of the hybrid instrument and
the benchmark or underlying asset may not move in the same direction or at the
same time.
Hybrid instruments may also carry liquidity risk since the instruments are often
"customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. Under certain conditions, the redemption value of
such an investment could be zero. In addition, because the purchase and sale of
hybrid investments could take place in an over-the-counter market without the
guarantee of a central clearing organization, or in a transaction between each
fund and the issuer of the hybrid instrument, the creditworthiness of the
counterparty of the issuer of the hybrid instrument would be an additional risk
factor each fund would have to consider and monitor. Hybrid instruments also may
not be subject to regulation by the CFTC, which generally regulates the trading
of commodity futures by U.S.
-21-
persons, the SEC, which regulates the offer and sale of securities by and to
U.S. persons, or any other governmental regulatory authority.
STRUCTURED INVESTMENTS. A structured investment is a security having a return
tied to an underlying index or other security or asset class. Structured
investments generally are individually negotiated agreements and may be traded
over-the-counter. Structured investments are organized and operated to
restructure the investment characteristics of the underlying security. This
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, or specified instruments (such as commercial bank loans)
and the issuance by that entity or one or more classes of securities
("structured securities") backed by, or representing interests in, the
underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued structured securities to create securities
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of such payments made
with respect to structured securities is dependent on the extent of the cash
flow on the underlying instruments. Because structured securities typically
involve no credit enhancement, their credit risk generally will be equivalent to
that of the underlying instruments. Investments in structured securities are
generally of a class of structured securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated structured
securities typically have higher yields and present greater risks than
unsubordinated structured securities. Structured securities are typically sold
in private placement transactions, and there currently is no active trading
market for structured securities. Investments in government and
government-related and restructured debt instruments are subject to special
risks, including the inability or unwillingness to repay principal and interest,
requests to reschedule or restructure outstanding debt and requests to extend
additional loan amounts.
SECURITIES OF OTHER INVESTMENT COMPANIES. Securities of other investment
companies, including shares of closed-end investment companies, unit investment
trusts and open-end investment companies, represent interests in professionally
managed portfolios that may invest in any type of instrument. These types of
instruments are often structured to perform in a similar fashion to a broad
based securities index. Investing in these types of securities involves
substantially the same risks as investing directly in the underlying
instruments, but may involve additional expenses at the investment
company-level, such as portfolio management fees and operating expenses. In
addition, these types of investments involve the risk that they will not perform
in exactly the same fashion, or in response to the same factors, as the index or
underlying instruments. Certain types of investment companies, such as
closed-end investment companies, issue a fixed number of shares that trade on a
stock exchange or over-the-counter at a premium or a discount to their net asset
value. Others are continuously offered at net asset value, but may also be
traded in the secondary market. The extent to which a fund can invest in
securities of other investment companies is limited by federal securities laws.
TAX-EXEMPT SECURITIES
GENERAL DESCRIPTION. As used in this SAI, the term "Tax-exempt securities"
includes debt obligations issued by a state, its political subdivisions (for
example, counties, cities, towns,
-22-
villages, districts and authorities) and their agencies, instrumentalities or
other governmental units, the interest from which is, in the opinion of bond
counsel, exempt from federal income tax and the corresponding state's personal
income tax. Such obligations are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities, such
as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Tax-exempt securities may be issued include the refunding of outstanding
obligations or the payment of general operating expenses.
Short-term Tax-exempt securities are generally issued by state and local
governments and public authorities as interim financing in anticipation of tax
collections, revenue receipts or bond sales to finance such public purposes.
In addition, certain types of "private activity" bonds may be issued by public
authorities to finance projects such as privately operated housing facilities;
certain local facilities for supplying water, gas or electricity; sewage or
solid waste disposal facilities; student loans; or public or private
institutions for the construction of educational, hospital, housing and other
facilities. Such obligations are included within the term Tax-exempt securities
if the interest paid thereon is, in the opinion of bond counsel, exempt from
federal income tax and state personal income tax (such interest may, however, be
subject to federal alternative minimum tax). Other types of private activity
bonds, the proceeds of which are used for the construction, repair or
improvement of, or to obtain equipment for, privately operated industrial or
commercial facilities, may also constitute Tax-exempt securities, although the
current federal tax laws place substantial limitations on the size of such
issues.
STAND-BY COMMITMENTS. When each fund purchases Tax-exempt securities, it has the
authority to acquire stand-by commitments from banks and broker-dealers with
respect to those Tax-exempt securities. A stand-by commitment may be considered
a security independent of the Tax-exempt security to which it relates. The
amount payable by a bank or dealer during the time a stand-by commitment is
exercisable, absent unusual circumstances, would be substantially the same as
the market value of the underlying Tax-exempt security to a third party at any
time. Each fund expects that stand-by commitments generally will be available
without the payment of direct or indirect consideration. Each fund does not
expect to assign any value to stand-by commitments.
YIELDS. The yields on Tax-exempt securities depend on a variety of factors,
including general money market conditions, effective marginal tax rates, the
financial condition of the issuer, general conditions of the Tax-exempt security
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The ratings of nationally recognized securities rating
agencies represent their opinions as to the credit quality of the Tax-exempt
securities which they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Tax-exempt securities with the same maturity and interest rate but with
different ratings may have the same yield. Yield disparities may occur for
reasons not directly related to the investment quality of particular issues or
the general movement of interest rates and may be due to such factors as changes
in the overall demand or supply of various types of Tax-exempt securities or
changes in the investment objectives of investors. Subsequent to
-23-
purchase by each fund, an issue of Tax-exempt securities or other investments
may cease to be rated, or its rating may be reduced below the minimum rating
required for purchase by each fund. Neither event will require the elimination
of an investment from a fund's portfolio, but Putnam Management will consider
such an event in its determination of whether the fund should continue to hold
an investment in its portfolio.
"MORAL OBLIGATION" BONDS. Each fund does not currently intend to invest in
so-called "moral obligation" bonds, where repayment is backed by a moral
commitment of an entity other than the issuer, unless the credit of the issuer
itself, without regard to the "moral obligation," meets the investment criteria
established for investments by each fund.
MUNICIPAL LEASES. Each fund may acquire participations in lease obligations or
installment purchase contract obligations (collectively, "lease obligations") of
municipal authorities or entities. Lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged. Certain of these 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. In the case of a "non-appropriation" lease, each
fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property, and
in any event, foreclosure of that property might prove difficult.
INVERSE FLOATERS have variable interest rates that typically move in the
opposite direction from movements in prevailing short-term interest rate levels
- - rising when prevailing short-term interest rate fall, and vice versa. The
prices of inverse floaters can be considerably more volatile than the prices of
bonds with comparable maturities.
ADDITIONAL RISKS. Securities in which each fund may invest, including Tax-exempt
securities, are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code (including special provisions related to municipalities and
other public entities), and laws, if any, that may be enacted by Congress or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the
power, ability or willingness of issuers to meet their obligations for the
payment of interest and principal on their Tax-exempt securities may be
materially affected.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on debt obligations issued by states and their political subdivisions.
Federal tax laws limit the types and amounts of tax-exempt bonds issuable for
certain purposes, especially industrial development bonds and private activity
bonds. Such limits may affect the future supply and yields of these types of
Tax-exempt securities. Further proposals limiting the issuance of Tax-exempt
securities may well be introduced in the future. If it appeared that the
availability of Tax-exempt securities for investment by each fund and the value
of each fund's portfolio could be materially affected by such changes in law,
the
-24-
Trustees would reevaluate each fund's investment objective and policies and
consider changes in the structure of the fund or its dissolution.
PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
-25-
Each fund may invest in securities that are purchased in private placements and,
accordingly, are subject to restrictions on resale as a matter of contract or
under federal securities laws. Because there may be relatively few potential
purchasers for such investments, especially under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, each fund could find it more difficult to sell such securities when
Putnam Management believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more widely held.
At times, it may also be more difficult to determine the fair value of such
securities for purposes of computing each fund's net asset value.
While such private placements may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities," i.e., securities which cannot be
sold to the public without registration under the Securities Act of 1933 or the
availability of an exemption from registration (such as Rules 144 or 144A), or
which are "not readily marketable" because they are subject to other legal or
contractual delays in or restrictions on resale.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for each fund to sell them promptly at an acceptable price. Each fund
may have to bear the extra expense of registering such securities for resale and
the risk of substantial delay in effecting such registration. Also market
quotations are less readily available. The judgment of Putnam Management may at
times play a greater role in valuing these securities than in the case of
publicly traded securities.
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the Securities Act of 1933. Each fund may be deemed to be an
"underwriter" for purposes of the Securities Act of 1933 when selling restricted
securities to the public, and in such event the fund may be liable to purchasers
of such securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading. The SEC
Staff currently takes the view that any delegation by the Trustees of the
authority to determine that a restricted security is readily marketable (as
described in the investment restrictions of the funds) must be pursuant to
written procedures established by the Trustees and the Trustees have delegated
such authority to Putnam Management.
FUTURES CONTRACTS AND RELATED OPTIONS
Subject to applicable law, each fund may invest without limit in futures
contracts and related options for hedging and non-hedging purposes, such as to
manage the effective duration of its portfolio or as a substitute for direct
investment. A financial futures contract sale creates an obligation by the
seller to deliver the type of financial instrument called for in the contract in
a specified delivery month for a stated price. A financial futures contract
purchase creates an
-26-
obligation by the purchaser to take delivery of the type of financial instrument
called for in the contract in a specified delivery month at a stated price. The
specific instruments delivered or taken, respectively, at settlement date are
not determined until on or near that date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (the
"CFTC"), and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call for
actual delivery or acceptance of commodities or securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by purchasing a
futures contract for the same aggregate amount of the specific type of financial
instrument or commodity with the same delivery date. If the price of the initial
sale of the futures contract exceeds the price of the offsetting purchase, the
seller is paid the difference and realizes a gain. Conversely, if the price of
the offsetting purchase exceeds the price of the initial sale, the seller
realizes a loss. If a fund is unable to enter into a closing transaction, the
amount of the fund's potential loss is unlimited. The closing out of a futures
contract purchase is effected by the purchaser's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
purchaser realizes a gain, and if the purchase price exceeds the offsetting sale
price, he realizes a loss. In general, 40% of the gain or loss arising from the
closing out of a futures contract traded on an exchange approved by the CFTC is
treated as short-term gain or loss, and 60% is treated as long-term gain or
loss.
Unlike when each a purchases or sells a security, no price is paid or received
by a fund upon the purchase or sale of a futures contract. Upon entering into a
contract, each fund is required to deposit with its custodian in a segregated
account in the name of the futures broker an amount of liquid assets. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds to finance the
transactions. Rather, initial margin is similar to a performance bond or good
faith deposit which is returned to each fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Futures
contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to and
from the broker (or the custodian) are made on a daily basis as the price of the
underlying security or commodity fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as "marking to
the market." For example, when a fund has purchased a futures contract on a
security and the price of the underlying security has risen, that position will
have increased in value and the fund will receive from the broker a variation
margin payment based on that increase in value. Conversely, when a fund has
purchased a security futures contract and the price of the underlying security
has declined, the position would be less valuable and the fund would be required
to make a variation margin payment to the broker.
-27-
Each fund may elect to close some or all of its futures positions at any time
prior to their expiration in order to reduce or eliminate a hedge position then
currently held by each fund. Each fund may close its positions by taking
opposite positions which will operate to terminate the fund's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the fund, and the fund
realizes a loss or a gain. Such closing transactions involve additional
commission costs.
Each fund does not intend to purchase or sell futures or related options for
other than hedging purposes, if, as a result, the sum of the initial margin
deposits on the fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the fund's net assets. For options that are "in-the-money" at the time of
purchase, the amount by which the option is "in-the-money" is excluded from this
calculation.
OPTIONS ON FUTURES CONTRACTS. Each fund may purchase and write call and put
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. In
return for the premium paid, options on futures contracts give the purchaser the
right to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. Each fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, each fund may purchase put options or write call options
on futures contracts rather than selling futures contracts. Similarly, each fund
may purchase call options or write put options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the fund expects to purchase. Such
options generally operate in the same manner as options purchased or written
directly on the underlying investments.
As with options on securities, the holder or writer of an option may terminate
his position by selling or purchasing an offsetting option. There is no
guarantee that such closing transactions can be effected.
Each fund will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements similar to those described above in connection with the
discussion of futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful use
of futures contracts by each fund is subject to Putnam Management's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to a fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
a fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
-28-
The use of options and futures strategies also involves the risk of imperfect
correlation among movements in the prices of the securities underlying the
futures and options purchased and sold by a fund, of the options and futures
contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge. The successful use of these
strategies further depends on the ability of Putnam Management to forecast
interest rates and market movements correctly.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a position held by a fund, the fund may seek to close out
such position. The ability to establish and close out positions will be subject
to the development and maintenance of a liquid secondary market. It is not
certain that this market will develop or continue to exist for a particular
futures contract or option. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain contracts or options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of contracts or options, or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange for such contracts or options (or in the class or series of
contracts or options) would cease to exist, although outstanding contracts or
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury security
futures contracts require the seller to deliver, or the purchaser to take
delivery of, the type of U.S. Treasury security called for in the contract at a
specified date and price. Options on U.S. Treasury security futures contracts
give the purchaser the right in return for the premium paid to assume a position
in a U.S. Treasury security futures contract at the specified option exercise
price at any time during the period of the option.
Each fund may, for hedging purposes, purchase and sell futures contracts and
related options with respect to U.S. Government securities, including U.S.
Treasury bills, notes and bonds and may purchase and sell options directly on
U.S. Government securities. Putnam Management believes that, under certain
market conditions, price movements in U.S. Government securities futures and
related options and in options on U.S. Government securities may correlate
closely with price movements in tax-exempt securities and may, as a result,
provide hedging opportunities for the funds. Such futures and options would be
used in a way similar to its use of index futures and options. Each fund will
only purchase or sell futures or options when, in the opinion of Putnam
Management, price movements in such futures and options are likely to correlate
closely with price movements in the tax-exempt securities which are the subject
of a hedge.
Successful use of U.S. Treasury security futures contracts by each fund is
subject to Putnam Management's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if a fund has sold U.S. Treasury security futures contracts in order to
hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the fund's
securities increase instead as a result of a decline in interest rates, the fund
will lose part or all of the benefit of the increased value of its securities
which it has hedged because it will have offsetting losses in
-29-
its futures positions. In addition, in such situations, if a fund has
insufficient cash, it may have to sell securities to meet daily maintenance
margin requirements at a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if a fund has hedged against a
decline in the values of tax-exempt securities held by it by selling Treasury
security futures and the values of Treasury securities subsequently increase
while the values of its tax-exempt securities decrease, the fund would incur
losses on both the Treasury security futures contracts written by it and the
tax-exempt securities held in its portfolio.
INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or sell
units of an index at a specified future date at a price agreed upon when the
contract is made. Entering into a contract to buy units of an index is commonly
referred to as buying or purchasing a contract or holding a long position in the
index. Entering into a contract to sell units of an index is commonly referred
to as selling a contract or holding a short position. A unit is the current
value of the index. Each fund may enter into stock index futures contracts, debt
index futures contracts, or other index futures contracts appropriate to its
objective(s). Each fund may also purchase and sell options on index futures
contracts.
Futures contracts on the long-term municipal bond index are traded on the
Chicago Board of Trade and may, as described below, be used for hedging purposes
by each fund. However, because the market for such contracts currently lacks
liquidity, for the purposes of hedging, each fund currently intends primarily to
purchase and sell futures contracts and related options with respect to U.S.
Government securities, including U.S. Treasury bills, notes and bonds and may
purchase and sell options directly on U.S. Government securities. Putnam
Management believes that, under certain market conditions, price movements in
U.S. Government securities futures and related options and in options on U.S.
Government securities may correlate closely with price movements in tax-exempt
securities and may, as a result, provide hedging opportunities for the funds.
Such futures and options would be used in a way similar to each fund's use of
index futures and options described below.
The Long-Term Municipal Bond Index, made up of high-quality tax-exempt municipal
securities with a remaining term to maturity of 19 years or longer, is intended
to represent a numerical measure of market performance for long-term tax-exempt
bonds. Each fund may purchase and sell futures contracts on this index (or any
other tax-exempt bond index approved for trading by the CFTC) to hedge against
general changes in market values of tax-exempt securities which it owns or
expects to purchase. For example, if Putnam Management expected interest rates
to increase, a fund might sell futures contracts on an index. If rates did
increase, the value of tax-exempt securities held by each fund would decline,
but this decline could be offset in whole or in part by an increase in the value
of its position in the index futures contracts. If, on the other hand, each fund
held cash reserves and short-term investments pending anticipated investment in
tax-exempt securities, and Putnam Management expected interest rates to decline,
it might purchase futures contracts on an index. Each fund could thus take
advantage of the anticipated rise in the values of tax-exempt securities without
actually buying them until the market had stabilized. Each fund may also
purchase and sell put and call options on index futures for hedging purposes. If
and when trading commences in put and call options on tax-exempt bond indices
directly, each fund may also purchase or sell these options for similar hedging
purposes.
There are several risks in connection with the use by a fund of index futures.
One risk arises because of the imperfect correlation between movements in the
prices of the index futures and movements in the prices of securities which are
the subject of the hedge. Putnam Management will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by each fund is also subject to Putnam
Management's ability to predict movements in the direction of the market. For
example, it is possible that, where a fund
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has sold futures to hedge its portfolio against a decline in the market, the
index on which the futures are written may advance and the value of securities
held in the fund's portfolio may decline. If this were to occur, the fund would
lose money on the futures and also experience a decline in value in its
portfolio securities. It is also possible that, if a fund has hedged against
the possibility of a decline in the market adversely affecting securities held
in its portfolio and securities prices increase instead, the fund will lose
part or all of the benefit of the increased value of those securities it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements at a time when it
is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation, or no
correlation at all, between movements in the index futures and the portion of
the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by Putnam Management may still not result in a
profitable position over a short time period.
OPTIONS ON STOCK INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the index futures contract,
at exercise, exceeds (in the case of a call) or is less than (in the case of a
put) the exercise price of the option on the index future. If an option is
exercised on the last trading day prior to its expiration date, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
OPTIONS ON INDICES
As an alternative to purchasing call and put options on index futures, each fund
may purchase and sell call and put options on the underlying indices themselves.
Such options would be used in a manner identical to the use of options on index
futures.
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INDEX WARRANTS
Each fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant; if the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value of
the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If each fund were not to exercise
an index warrant prior to its expiration, then each fund would lose the amount
of the purchase price paid by it for the warrant.
Each fund will normally use index warrants in a manner similar to its use of
options on securities indices. The risks of each fund's use of index warrants
are generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although each fund will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit each fund's ability to exercise
the warrants at such time, or in such quantities, as the fund would otherwise
wish to do.
SHORT-TERM TRADING
In seeking each fund's objective(s), Putnam Management will buy or sell
portfolio securities whenever Putnam Management believes it appropriate to do
so. From time to time each fund will buy securities intending to seek short-term
trading profits. A change in the securities held by a fund is known as
"portfolio turnover" and generally involves some expense to the fund. This
expense may include brokerage commissions or dealer markups and other
transaction costs on both the sale of securities and the reinvestment of the
proceeds in other securities. If sales of portfolio securities cause the fund to
realize net short-term capital gains, such gains will be taxable as ordinary
income. As a result of each fund's investment policies, under certain market
conditions the fund's portfolio turnover rate may be higher than that of other
mutual funds. Portfolio turnover rate for a fiscal year is the ratio of the
lesser of purchases or sales of portfolio securities to the monthly average of
the value of portfolio securities -- excluding securities whose maturities at
acquisition were one year or less. Each fund's portfolio turnover rate is not a
limiting factor when Putnam Management considers a change in the fund's
portfolio.
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SECURITIES LOANS
Each fund may make secured loans of its portfolio securities, on either a
short-term or long-term basis, amounting to not more than 25% of its total
assets, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. As a matter of policy, securities loans are made
to broker-dealers pursuant to agreements requiring that the loans be
continuously secured by collateral consisting of cash or short-term debt
obligations at least equal at all times to the value of the securities on loan,
"marked-to-market" daily. The borrower pays to each fund an amount equal to any
dividends or interest received on securities lent. Each fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. Although voting rights, or rights to consent,
with respect to the loaned securities may pass to the borrower, each fund
retains the right to call the loans at any time on reasonable notice, and it
will do so to enable the fund to exercise voting rights on any matters
materially affecting the investment. Each fund may also call such loans in order
to sell the securities.
REPURCHASE AGREEMENTS
Each fund may enter into repurchase agreements, amounting to not more than 25%
of its total assets. A repurchase agreement is a contract under which each fund
acquires a security for a relatively short period (usually not more than one
week) subject to the obligation of the seller to repurchase and the fund to
resell such security at a fixed time and price (representing each fund's cost
plus interest). It is each fund's present intention to enter into repurchase
agreements only with commercial banks and registered broker-dealers and only
with respect to obligations of the U.S. government or its agencies or
instrumentalities. Repurchase agreements may also be viewed as loans made by
each fund which are collateralized by the securities subject to repurchase.
Putnam Management will monitor such transactions to ensure that the value of the
underlying securities will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. If the seller
defaults, the fund could realize a loss on the sale of the underlying security
to the extent that the proceeds of the sale including accrued interest are less
than the resale price provided in the agreement including interest. In addition,
if the seller should be involved in bankruptcy or insolvency proceedings, the
fund may incur delay and costs in selling the underlying security or may suffer
a loss of principal and interest if the fund is treated as an unsecured creditor
and required to return the underlying collateral to the seller's estate. A
fund's investments in repurchase agreements generally will give rise to taxable
income.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
each fund may transfer uninvested cash balances into a joint account, along with
cash of other Putnam funds and certain other accounts. These balances may be
invested in one or more repurchase agreements and/or short-term money market
instruments.
FORWARD COMMITMENTS
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Each fund may enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time ("forward commitments") if the fund
sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the fund enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when a fund enters into a contract,
with the actual principal amount being within a specified range of the estimate.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the fund's other assets. Where such purchases are made through dealers, the
fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the fund of an advantageous yield or price. Although
each fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the fund may dispose of a commitment prior to
settlement if Putnam Management deems it appropriate to do so. Each fund may
realize short-term profits or losses upon the sale of forward commitments.
Each fund may enter into TBA sale commitments to hedge its portfolio positions
or to sell securities it owns under delayed delivery arrangements. Proceeds of
TBA sale commitments are not received until the contractual settlement date.
During the time a TBA sale commitment is outstanding, equivalent deliverable
securities, or an offsetting TBA purchase commitment deliverable on or before
the sale commitment date, are held as "cover" for the transaction. Unsettled TBA
sale commitments are valued at current market value of the underlying
securities. If the TBA sale commitment is closed through the acquisition of an
offsetting purchase commitment, the fund realizes a gain or loss on the
commitment without regard to any unrealized gain or loss on the underlying
security. If the fund delivers securities under the commitment, the fund
realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
SWAP AGREEMENTS
Each fund may enter into swap agreements and other types of over-the-counter
transactions with broker-dealers or other financial institutions. Depending on
their structures, swap agreements may increase or decrease each fund's exposure
to long-or short-term interest rates (in the United States or abroad), foreign
currency values, mortgage securities, corporate borrowing rates, or other
factors such as security prices or inflation rates. The value of each fund's
swap positions would increase or decrease depending on the changes in value of
the underlying rates, currency values, or other indices or measures. Each fund's
ability to engage in certain swap transactions may be limited by tax
considerations.
Each fund's ability to realize a profit from such transactions will depend on
the ability of the financial institutions with which it enters into the
transactions to meet their obligations to the fund. Under certain circumstances,
suitable transactions may not be available to the fund, or the fund
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may be unable to close out its position under such transactions at the same
time, or at the same price, as if it had purchased comparable publicly traded
securities.
DERIVATIVES
Certain of the instruments in which each fund may invest, such as futures
contracts, options and forward contracts, are considered to be "derivatives."
Derivatives are financial instruments whose value depends upon, or is derived
from, the value of an underlying asset, such as a security or an index. Further
information about these instruments and the risks involved in their use is
included elsewhere in the prospectus or in this SAI. Each fund's use of
derivatives may cause the fund to recognize higher amounts of short-term capital
gains, generally taxed to shareholders at ordinary income tax rates.
TAXES
TAXATION OF EACH FUND. Each fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify for the special tax treatment accorded
regulated investment companies and their shareholders, each fund must, among
other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities and foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its
taxable net investment income, its net tax-exempt income, and the excess, if
any, of net short-term capital gains over net long-term capital losses for such
year; and
(c) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of each fund's assets is represented by cash and
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities limited in respect of any one issuer to a value
not greater than 5% of the value of each fund's total assets and to not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities (other than
those of the U.S. Government or other regulated investment companies) of any one
issuer or of two or more issuers which each fund controls and which are engaged
in the same, similar, or related trades or businesses.
If each fund qualifies as a regulated investment company that is accorded
special tax treatment, each fund will not be subject to federal income tax on
income distributed timely to its shareholders in the form of dividends
(including capital gain dividends).
If each fund failed to qualify as a regulated investment company accorded
special tax treatment in any taxable year, each fund would be subject to tax on
its taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and
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net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, each fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded special tax
treatment.
If each fund fails to distribute in a calendar year substantially all of its
ordinary income for such year and substantially all of its capital gain net
income for the one-year period ending October 31 (or later if each fund is
permitted so to elect and so elects), plus any retained amount from the prior
year, each fund will be subject to a 4% excise tax on the undistributed amounts.
A dividend paid to shareholders in January of a year generally is deemed to have
been paid by each fund on December 31 of the preceding year, if the dividend was
declared and payable to shareholders of record on a date in October, November or
December of that preceding year. Each fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax.
FUND DISTRIBUTIONS. Distributions from each fund (other than exempt-interest
dividends, as discussed below) will be taxable to shareholders as ordinary
income to the extent derived from investment income and net short-term gains.
Distributions of net capital gains (that is, the excess of net gains from
capital assets held more than one year over net losses from capital assets held
for not more than one year) will be taxable to shareholders as such, regardless
of how long a shareholder has held the shares in each fund.
Each fund's expenses attributable to earning tax-exempt income do not
reduce that fund's current earnings and profits; therefore, distributions in
excess of that fund's net tax-exempt and taxable income may be treated as
taxable dividends to the extent of the fund's remaining "earnings and profits"
(which provides the measure of the fund's dividend-paying capacity for tax
purposes). Distribution of each fund's net tax-exempt and taxable income could
occur, for example, if the fund's book income exceeded its net tax-exempt and
taxable income. Differences in each fund's book income and its net tax-exempt
and taxable income may arise from certain of the fund's hedging and investment
activities. See "Hedging Transactions" below.
EXEMPT-INTEREST DIVIDENDS. Each fund will be qualified to pay exempt-interest
dividends to its shareholders only if, at the close of each quarter of each
fund's taxable year, at least 50% of the total value of each fund's assets
consists of obligations the interest on which is exempt from federal income tax
under Code Section 103(a). Distributions that each fund properly designates as
exempt-interest dividends are treated as interest excludable from shareholders'
gross income for federal income tax purposes but may be taxable for federal
alternative minimum tax purposes and for state and local purposes. If each fund
intends to be qualified to pay exempt-interest dividends, each fund may be
limited in its ability to enter into taxable transactions involving forward
commitments, repurchase agreements, financial futures and options contracts on
financial futures, tax-exempt bond indices and other assets.
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The receipt of exempt-interest dividends may affect the portion, if any, of a
person's Social Security and Railroad Retirement benefits that will be
includable in gross income subject to federal income tax. Up to 85% of Social
Security and Railroad Retirement benefits may be included in gross income in
cases where the recipient's combined income, consisting of adjusted gross income
(with certain adjustments), tax-exempt interest income and one-half of any
Social Security and Railroad Retirement benefits, exceeds an adjusted base
amount ($34,000 for a single individual and $44,000 for individuals filing a
joint return). Shareholders receiving Social Security or Railroad Retirement
benefits should consult their tax advisers.
Under the Code, the interest on certain "private activity bonds" issued after
August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in federal alternative minimum taxable income.
Each fund will furnish to shareholders annually a report indicating the
percentage of fund income treated as a preference item for AMT purposes. In
addition, for corporations, alternative minimum taxable income is increased by a
percentage of the excess of an alternative measure of income that includes
interest on all tax-exempt securities over the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of each fund's
dividends that would otherwise be tax-exempt to the shareholders may cause an
investor to be subject to the AMT or may increase the tax liability of an
investor who is subject to such tax.
Legislation has been introduced in recent years that would reinstate a
deductible tax (the "Environmental Tax") imposed through tax years beginning
before 1996, at a rate of 0.12% on a corporation's alternative minimum taxable
income (computed without regard to the AMT net operating loss deduction) in
excess of $2,000,000. If the Environmental Tax is reinstated, exempt-interest
dividends that are included in a corporate shareholder's alternative minimum
taxable income may subject corporate shareholders of each fund to the
Environmental Tax.
Under federal tax law in effect at the date of this SAI, a shareholder's
interest deduction generally will not be disallowed if the average adjusted
basis of the shareholder's tax-exempt obligations (including shares of preferred
stock) does not exceed two percent of the average adjusted basis of the
shareholder's trade or business assets (in the case of most corporations) or
portfolio investments (in the case of individuals). Legislation has been
introduced in recent years that would further limit or repeal this two-percent
de minimis exception, which could reduce the total after-tax yield of the
preferred shares to investors to when the de minimis exception would otherwise
apply.
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Each fund designates distributions made to the share classes as consisting of a
portion of each type of income distributed by the fund. The portion of each type
of income deemed received by each class of shareholders is equal to the portion
of total fund distributions received by such class. Thus, each fund will
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends between the preferred and common shareholders in proportion to
the total dividends paid to each class during or with respect to the taxable
year, or otherwise as required by applicable law. Long-term capital gain
distributions and other income subject to regular federal income tax will
similarly be allocated between the two (or more) classes. No dividend that each
fund pays will be increased to compensate for the fact that it may be subject to
state and local taxes.
Dividend and capital gains distributions will be taxable as described above
whether received in cash or in shares. A shareholder whose distributions are
reinvested in shares will be treated as having received the amount of cash
allocated to the shareholder for the purchase of shares on its behalf.
Part or all of the interest on indebtedness, if any, incurred or continued by a
shareholder to purchase or carry shares of each fund paying exempt-interest
dividends is not deductible. The
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portion of interest that is not deductible is equal to the total interest paid
or accrued on the indebtedness, multiplied by the percentage of each fund's
total distributions (not including distributions from net long-term capital
gains) paid to the shareholder that are exempt-interest dividends. Under rules
used by the Internal Revenue Service to determine when borrowed funds are
considered used for the purpose of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed funds
even though such funds are not directly traceable to the purchase of shares.
In general, exempt-interest dividends, if any, attributable to interest received
on certain private activity obligations and certain industrial development bonds
will not be tax-exempt to any shareholders who are "substantial users," within
the meaning of Section 147(a) of the Code, of the facilities financed by such
obligations or bonds or who are "related persons" of such substantial users.
Each fund which is qualified to pay exempt-interest dividends will inform
investors within 60 days of each fund's fiscal year-end of the percentage of its
income distributions designated as tax-exempt. The percentage is applied
uniformly to all distributions made during the year. The percentage of income
designated as tax-exempt for any particular distribution may be substantially
different from the percentage of each fund's income that was tax-exempt during
the period covered by the distribution.
HEDGING TRANSACTIONS. If each fund engages in hedging transactions, including
hedging transactions in options, futures contracts, and straddles, or other
similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to each fund, defer losses to
each fund, cause adjustments in the holding periods of each fund's securities,
convert long-term capital gains into short-term capital gains or convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. Income earned as a result of a fund's hedging activities will not
be eligible to be treated as exempt interest dividends when distributed to
shareholders. Each fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of each
fund.
Certain of each fund's hedging activities (including its transactions, if any,
in foreign currencies or foreign currency-denominated instruments) are likely to
produce a difference between its book income and its net tax-exempt and taxable
income. If each fund's book income exceeds its taxable income, the distribution
(if any) of such excess will be treated as (i) a dividend to the extent of each
fund's remaining earnings and profits (including earnings and profits arising
from tax-exempt income), (ii) thereafter as a return of capital to the extent of
the recipient's basis in the shares, and (iii) thereafter as gain from the sale
or exchange of a capital asset. If each fund's book income is less than its
taxable income, each fund could be required to make distributions exceeding book
income to qualify as a regulated investment company that is accorded special tax
treatment.
RETURN OF CAPITAL DISTRIBUTIONS. If each fund makes a distribution to you in
excess of its current and accumulated "earnings and profits" in any taxable
year, the excess distribution will be treated
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as a return of capital to the extent of your tax basis in your shares, and
thereafter as capital gain. A return of capital is not taxable, but it reduces
your tax basis in your shares, thus reducing any loss or increasing any gain on
a subsequent taxable disposition by you of your shares.
Dividends and distributions on each fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed each
fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when each fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when a fund's net asset value also reflects unrealized losses.
Distributions are taxable to a shareholder even if they are paid from income or
gains earned by each fund prior to the shareholders investment (and thus were
included in the price paid by the shareholders).
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. Each fund's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require each fund to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, each fund may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
CAPITAL LOSS CARRYOVER. Distributions from capital gains are generally made
after applying any available capital loss carryovers. The amounts and expiration
dates of any capital loss carryovers available to each fund are shown in Note 1
(federal income taxes) to the financial statements included in Part I of this
SAI or incorporated by reference into this SAI.
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SALE OR REDEMPTION OF SHARES. The sale, exchange or redemption of fund shares
may give rise to a gain or loss. In general, any gain or loss realized upon a
taxable disposition of shares will be treated as long-term capital gain or loss
if the shares have been held for more than 12 months. Otherwise the gain or loss
on the taxable disposition of fund shares will be treated as short-term capital
gain or loss. However, if a shareholder sells shares at a loss within six months
of purchase, any loss will be disallowed for federal income tax purposes to the
extent of any exempt-interest dividends received on such shares. In addition,
any loss (not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares held for six months or less will be treated
as long-term, rather than short-term, to the extent of any long-term capital
gain distributions received by the shareholder with respect to the shares. All
or a portion of any loss realized upon a taxable disposition of fund shares will
be disallowed if other shares of the same fund are purchased within 30 days
before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.
From time to time each fund may make a tender offer for its common shares. It is
expected that the terms of any such offer will require a tendering shareholder
to tender all common shares, and dispose of all preferred shares, held, or
considered under certain attribution rules of the Code to be held, by such
shareholder. Shareholders who tender all common shares and dispose of all
preferred shares held, or considered to be held, by them will be treated as
having sold their shares and generally will realize a capital gain or loss. If a
shareholder tenders fewer than all of its common shares, but retains a
substantial portion of its preferred shares, such shareholder may be treated as
having received a taxable dividend upon the tender of its common shares. In such
a case, there is a remote risk that non-tendering shareholders will be treated
as having received taxable distributions from a fund. Likewise, if each fund
redeems some but not all of the preferred shares held by a preferred shareholder
and such shareholder is treated as having received a taxable dividend upon such
redemption, there is a remote risk that common shareholders and non-redeeming
preferred shareholders will be treated as having received taxable distributions
from the fund. To the exent that the fund recognizes net gains on the
liquidation of portfolio securities to meet such tenders of common shares, the
fund will be required to make additional distributions to its shareholders.
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BACKUP WITHHOLDING. Each fund generally is required to withhold and remit to the
U.S. Treasury 31% of the taxable dividends and other distributions paid to any
individual shareholder who fails to furnish each fund with a correct taxpayer
identification number (TIN), who has under-reported dividends or interest
income, or who fails to certify to each fund that he or she is not subject to
such withholding.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up withholding and withholding tax
rules described above. The new regulations are generally effective for payments
made after December 31, 2000 (although transition rules will apply). In some
circumstances, the new rules will increase the certification and filing
requirements imposed on foreign investors in order to qualify for exemption from
the 31% back-up withholding tax rates and for reduced withholding tax rates
under income tax treaties. Foreign investors in a fund should consult their tax
advisers with respect to the potential application of these new regulations.
MANAGEMENT
TRUSTEES NAME (AGE)
JOHN A. HILL (58), Chairman and Trustee. Chairman and Managing Director, First
Reserve Corporation (a registered investment adviser investing in companies in
the world-wide energy industry on behalf of institutional investors). Director
of Snyder Oil Corporation, TransMontaigne Oil Company and various private
companies owned by First Reserve Corporation, and Member of the Board of
Advisors of Fund Directors.
JAMESON A. BAXTER (56), Trustee. President, Baxter Associates, Inc. (a
management consulting and private investments firm). Director of ASHTA
Chemicals, Inc., Banta Corporation (printing and digital imaging), and Ryerson
Tull, Inc. (America's largest steel service corporation). Chairman Emeritus of
the Board of Trustees, Mount Holyoke College.
+HANS H. ESTIN (72), Trustee. Chartered Financial Analyst and Vice Chairman,
North American Management Corp. (a registered investment adviser).
RONALD J. JACKSON (56), Trustee. Former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc. (a major toy manufacturer).
PAUL L. JOSKOW (53), Trustee. Professor of Economics and Management and Director
of the Center for Energy and Environmental Policy Research, Massachusetts
Institute of Technology. Director, New England Electric System (a public utility
holding company), State Farm Indemnity Company (an automobile insurance company)
and the Whitehead Institute for Biomedical Research (a non-profit research
institution). President of the Yale University Council.
-42-
ELIZABETH T. KENNAN (62), Trustee. President Emeritus and Professor, Mount
Holyoke College. Director, Bell Atlantic (a telecommunications company),
Northeast Utilities, Talbots (a distributor of women's apparel) and
Cambus-Kenneth Bloodstock (a limited liability company involved in thoroughbred
horse breeding and farming).
*LAWRENCE J. LASSER (57), Trustee and Vice President. President, Chief
Executive Officer and Director of Putnam Investments, LLC and Putnam Investment
Management, LLC. Director of Marsh & McLennan Companies, Inc. and the United
Way of Massachusetts Bay.
JOHN H. MULLIN, III (59), Trustee. Chairman and CEO of Ridgeway Farm. Director
of ACX Technologies, Inc. (a company engaged in the manufacture of industrial
ceramics and packaging products), Alex. Brown Realty, Inc., The Liberty
Corporation (a company engaged in the life insurance and broadcasting
industries) and Carolina Power & Light (a utility company).
+ROBERT E. PATTERSON (55), Trustee. President and Trustee of Cabot Industrial
Trust (a publicly traded real estate investment trust). Director of Brandywine
Trust Company.
*GEORGE PUTNAM III (49), President, Principal Executive Officer and Trustee.
President, New Generation Research, Inc. (a publisher of financial advisory and
other research services relating to bankrupt and distressed companies) and New
Generation Advisers, Inc. (a registered investment adviser). Director of The
Boston Family Office, L.L.C. (a registered investment advisor).
*A.J.C. SMITH (66), Trustee. Director of Marsh & McLennan Companies, Inc. and
Trident Corp. (a limited partnership with over 30 institutional investors).
W. THOMAS STEPHENS (58), Trustee. President and Chief Executive Officer of
MacMillan Bloedel Ltd. (a major forest products company). Director, Qwest
Communications, New Century Energies (a public utility company), Trans Canada
Pipeliners and Fletcher Challenger Canada.
W. NICHOLAS THORNDIKE (67), Trustee. Director of various corporations and
charitable organizations, including Courier Corporation (a book manufacturer),
Bradley Real Estate, Inc. and Providence Journal Co. Trustee of Cabot
Industrial Trust (a publicly traded real estate investment trust), Eastern
Utilities Associates and Northeastern University.
OFFICERS NAME (AGE)
CHARLES E. PORTER (62), Executive Vice President and Treasurer. Managing
Director of Putnam Investments, LLC and Putnam Management.
PATRICIA C. FLAHERTY (53), Vice President. Senior Vice President of Putnam
Investments, LLC and Putnam Management.
GORDON H. SILVER (53), Vice President. Director and Senior Managing Director of
Putnam Investments, LLC and Putnam Management.
-43-
BRETT C. BROWCHUK (37), Vice President. Managing Director of Putnam Management.
IAN C. FERGUSON (43), Vice President. Senior Managing Director of Putnam
Investments, LLC and Putnam Management.
RICHARD A. MONAGHAN (46), Vice President. Managing Director of Putnam
Investments, LLC, Putnam Management and Putnam Retail Management.
RICHARD G. LEIBOVITCH (36), Vice President. Managing Director of Putnam
Management. Prior to February 1999, Mr. Leibovitch was a Managing Director at
J.P. Morgan.
JOHN R. VERANI (61), Vice President. Senior Vice President of Putnam
Investments, LLC and Putnam Management.
MICHAEL T. HEALY (43), Assistant Treasurer (Principal Accounting Officer).
Managing Director of Putnam Investments, LLC.
JUDITH COHEN (55), Clerk.
*Trustees who are or may be deemed to be "interested persons" (as defined in the
Investment Company Act of 1940) of each fund, Putnam Management or Putnam Retail
Management.
Messrs. Putnam, III, Lasser and Smith are deemed "interested persons" by virtue
of their positions as officers or shareholders of each fund, or directors of
Putnam Management or Marsh & McLennan Companies, Inc., the parent company of
Putnam Management.
+Members of the Executive Committee of the Trustees. The Executive Committee
meets between regular meetings of the Trustees as may be required to review
investment matters and other affairs of each fund and may exercise all of the
powers of the Trustees.
ADDITIONAL OFFICERS
In addition to the persons listed above, each of the following persons is an
officer of the funds and certain other Putnam funds. Officers of Putnam
Management hold the same offices in Putnam Management's parent company, Putnam
Investments, LLC.
OFFICERS NAME (AGE)
STEPHEN M. ORISTAGLIO (45), Vice President. Senior Managing Director of Putnam
Management. Prior to July 1998, Mr. Oristaglio was a Managing Director at Swiss
Bank Corp.
JEROME J. JACOBS (42), Vice President. Managing Director of Putnam Management.
Prior to October 1996, Mr. Jacobs was a Managing Director at the Vanguard
Group.
The mailing address of each of the officers and Trustees is One Post Office
Square, Boston, Massachusetts 02109.
Except as stated below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO,
respectively, of Marsh & McLennan Companies, Inc. Prior to September 1998, Mr.
Joskow was a consultant to National Economic Research Associates. Prior to
1996, Mr. Stephens was Chairman of the Board of Directors, President and Chief
Executive Officer of Johns Manville Corporation. Prior to April 1996, Mr.
Ferguson was CEO at Hong Kong Shanghai Banking Corporation. Prior to February
1998, Mr. Patterson was Executive Vice President and
-44-
Director of Acquisitions of Cabot Partners Limited Partnership. Prior to
November 1998, Mr. Monaghan was Managing Director at Merrill Lynch.
Each Trustee of each fund receives an annual fee and an additional fee for each
Trustees' meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional fees
for attendance at certain committee meetings and for special services rendered
in that connection. All of the Trustees are Trustees of all the Putnam funds and
each receives fees for his or her services. FOR DETAILS OF TRUSTEES' FEES PAID
BY EACH FUND AND INFORMATION CONCERNING RETIREMENT GUIDELINES FOR THE TRUSTEES,
SEE "CHARGES AND EXPENSES - TRUSTEE RESPONSIBILITIES AND FEES" ABOVE.
The Agreement and Declaration of Trust of each fund provides that each fund will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with each fund, except if it is determined in the manner specified in
the Agreement and Declaration of Trust that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of each fund
or that such indemnification would relieve any officer or Trustee of any
liability to each fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of his or her duties. Each fund,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
PUTNAM MANAGEMENT AND ITS AFFILIATES
Putnam Management is one of America's oldest and largest money management firms.
Putnam Management's staff of experienced portfolio managers and research
analysts selects securities and constantly supervises each fund's portfolio. By
pooling an investor's money with that of other investors, a greater variety of
securities can be purchased than would be the case individually; the resulting
diversification helps reduce investment risk. Putnam Management has been
managing mutual funds since 1937. As of December 31, 2000, the firm serves as
the investment manager for the funds in the Putnam Family, with over $275
billion in assets in nearly 13 million shareholder accounts. An affiliate, The
Putnam Advisory Company, LLC, manages domestic and foreign institutional
accounts and mutual funds, including the accounts of many Fortune 500 companies.
Another affiliate, Putnam Fiduciary Trust Company, provides investment advice to
institutional clients under its banking and fiduciary powers. At December 31,
2000, Putnam Management and its affiliates managed $370 billion in assets.
Putnam Management and Putnam Fiduciary Trust Company are subsidiaries of Putnam
Investments, LLC, a holding company which in turn is, except for a minority
stake owned by employees, owned by Marsh & McLennan Companies, Inc., a
publicly-owned holding company whose principal businesses are international
insurance and reinsurance brokerage, employee benefit consulting and investment
management.
Trustees and officers of each fund who are also officers of Putnam Management or
its affiliates or who are stockholders of Marsh & McLennan Companies, Inc. will
benefit from the advisory fees,
-45-
sales commissions, distribution fees, custodian fees and transfer agency fees
paid or allowed by each fund.
THE MANAGEMENT CONTRACT
Under a Management Contract between each fund and Putnam Management, subject to
such policies as the Trustees may determine, Putnam Management, at its expense,
furnishes continuously an investment program for each fund and makes investment
decisions on behalf of each fund. Subject to the control of the Trustees, under
a Management Contract for Trust II and under the Administrative Services
Contract for Trust III, Putnam Management also manages, supervises and conducts
the other affairs and business of each fund, furnishes office space and
equipment, provides bookkeeping and clerical services (including determination
of each fund's net asset value, but excluding shareholder accounting services)
and places all orders for the purchase and sale of each fund's portfolio
securities. Putnam Management may place fund portfolio transactions with
broker-dealers that furnish Putnam Management, without cost to it, certain
research, statistical and quotation services of value to Putnam Management and
its affiliates in advising each fund and other clients. In so doing, Putnam
Management may cause each fund to pay greater brokerage commissions than it
might otherwise pay.
Putnam Management's compensation under the Management Contract may also be
reduced if the amount of dividends payable with respect to any Preferred Shares
during any period for which regular payments of dividends or other distributions
on such Preferred Shares are payable (each, a "Dividend Period") plus expenses
attributable to such Preferred Shares for such Dividend Period exceeds the
portion of the fund's net income and not short-term capital gains (but not
long-term capital gains) accruing during such Dividend Period as a result of the
fact that such Preferred, Shares were outstanding during such Period, then the
fee payable to Putnam under the Management Contract will be reduced by the
amount of such excess; PROVIDED, HOWEVER, that the amount of such reduction for
any such Period shall not exceed the amount determined by multiplying (i) the
aggregate liquidation preference of the average number of Preferred Shares
outstanding during the Period, by (ii) the percentage of the aggregate net asset
value of the Fund which the fee payable to Putnam during such Period pursuant to
this Section 3 would constitute without giving effect to such reduction.
In addition to the fee paid to Putnam Management, each fund reimburses Putnam
Management for the compensation and related expenses of certain officers of each
fund and their assistants who provide certain administrative services for each
fund and the other Putnam funds, each of which bears an allocated share of the
foregoing costs. The aggregate amount of all such payments and reimbursements is
determined annually by the Trustees.
-46-
THE AMOUNT OF THIS REIMBURSEMENT FOR EACH FUND'S MOST RECENT FISCAL YEAR IS
INCLUDED IN "CHARGES AND EXPENSES - ADMINISTRATIVE EXPENSE REIMBURSEMENT" ABOVE.
Putnam Management pays all other salaries of officers of each fund. Each fund
pays all expenses not assumed by Putnam Management including, without
limitation, auditing, legal, custodial, investor servicing and shareholder
reporting expenses. Each fund pays the cost of typesetting for its prospectuses
and the cost of printing and mailing any prospectuses sent to its shareholders.
Putnam Retail Management pays the cost of printing and distributing all other
prospectuses.
The Management Contract provides that Putnam Management shall not be subject to
any liability to each fund or to any shareholder of each fund for any act or
omission in the course of or connected with rendering services to each fund in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties on the part of Putnam Management.
The Management Contract may be terminated without penalty by vote of the
Trustees or the shareholders of each fund, or by Putnam Management, on 30 days'
written notice. It may be amended only by a vote of the shareholders of each
fund. The Management Contract also terminates without payment of any penalty in
the event of its assignment. The Management Contract provides that it will
continue in effect only so long as such continuance is approved at least
annually by vote of either the Trustees or the shareholders, and, in either
case, by a majority of the Trustees who are not "interested persons" of Putnam
Management or each fund. In each of the foregoing cases, the vote of the
shareholders is the affirmative vote of a "majority of the outstanding voting
securities" as defined in the Investment Company Act of 1940.
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS. Investment decisions for each fund and for the other
investment advisory clients of Putnam Management and its affiliates are made
with a view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic suitability for
the particular client involved. Thus, a particular security may be bought or
sold for certain clients even though it could have been bought or sold for other
clients at the same time. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling the security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in Putnam Management's opinion is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES. Transactions on U.S. stock exchanges,
commodities markets and futures markets and other agency transactions involve
the payment by each fund of negotiated brokerage commissions. Such commissions
vary among different brokers. A particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign investments often involve the payment of
fixed brokerage
-47-
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the
over-the-counter markets, but the price paid by each fund usually includes an
undisclosed dealer commission or mark-up. In underwritten offerings, the price
paid by each fund includes a disclosed, fixed commission or discount retained
by the underwriter or dealer. It is anticipated that most purchases and sales
of securities by funds investing primarily in tax-exempt securities and certain
other fixed-income securities will be with the issuer or with underwriters of
or dealers in those securities, acting as principal. Accordingly, those funds
would not ordinarily pay significant brokerage commissions with respect to
securities transactions. SEE "CHARGES AND EXPENSES - BROKERAGE COMMISSIONS"
ABOVE FOR INFORMATION CONCERNING COMMISSIONS PAID BY THE FUNDS.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive brokerage and research services (as defined in the Securities Exchange
Act of 1934, as amended (the "1934 Act")) from broker-dealers that execute
portfolio transactions for the clients of such advisers and from third parties
with which such broker-dealers have arrangements. Consistent with this practice,
Putnam Management receives brokerage and research services and other similar
services from many broker-dealers with which Putnam Management places each
fund's portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as
economic analysis, investment research and database services, industry and
company reviews, evaluations of investments, recommendations as to the purchase
and sale of investments, performance measurement services, subscriptions,
pricing services, quotation services, news services and computer equipment
(investment-related hardware and software) utilized by Putnam Management's
managers and analysts. Where the services referred to above are used by Putnam
Management not exclusively for research purposes, Putnam Management, based upon
its own allocations of expected use, bears that portion of the cost of these
services which directly relates to their non-research use. Some of these
services are of value to Putnam Management and its affiliates in advising
various of their clients (including each fund), although not all of these
services are necessarily useful and of value in managing each fund. The
management fee paid by each fund is not reduced because Putnam Management and
its affiliates receive these services even though Putnam Management might
otherwise be required to purchase some of these services for cash.
Putnam Management places all orders for the purchase and sale of portfolio
investments for each fund and buys and sells investments for each fund through a
substantial number of brokers and dealers. In so doing, Putnam Management uses
its best efforts to obtain for each fund the most favorable price and execution
available, except to the extent it may be permitted to pay higher brokerage
commissions as described below. In seeking the most favorable price and
execution, Putnam Management, having in mind each fund's best interests,
considers all factors it deems relevant, including, by way of illustration,
price, the size of the transaction, the nature of the market for the security or
other investment, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions.
-48-
As permitted by Section 28(e) of the 1934 Act, and by the Management Contract,
Putnam Management may cause each fund to pay a broker-dealer which provides
"brokerage and research services" (as defined in the 1934 Act) to Putnam
Management an amount of disclosed commission for effecting securities
transactions on stock exchanges and other transactions for each fund on an
agency basis in excess of the commission which another broker-dealer would have
charged for effecting that transaction. Putnam Management's authority to cause
each fund to pay any such greater commissions is subject to such policies as the
Trustees may adopt from time to time. Putnam Management does not currently
intend to cause each fund to make such payments. It is the position of the staff
of the Securities and Exchange Commission that Section 28(e) does not apply to
the payment of such greater commissions in "principal" transactions. Accordingly
Putnam Management will use its best effort to obtain the most favorable price
and execution available with respect to such transactions, as described above.
The Management Contract provides that commissions, fees, brokerage or similar
payments received by Putnam Management or an affiliate in connection with the
purchase and sale of portfolio investments of each fund, less any direct
expenses approved by the Trustees, shall be recaptured by each fund through a
reduction of the fee payable by each fund under the Management Contract. Putnam
Management seeks to recapture for each fund soliciting dealer fees on the tender
of each fund's portfolio securities in tender or exchange offers. Any such fees
which may be recaptured are likely to be minor in amount.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such other policies as the Trustees may determine, Putnam
Management may consider sales of shares of each fund (and, if permitted by law,
of the other Putnam funds) as a factor in the selection of broker-dealers to
execute portfolio transactions for each fund.
PERSONAL INVESTMENTS BY EMPLOYEES OF PUTNAM MANAGEMENT AND OFFICERS AND
TRUSTEES OF THE FUNDS
Employees of Putnam Management and officers and Trustees of the funds are
subject to significant restrictions on engaging in personal securities
transactions. These restrictions are set forth in the Codes of Ethics adopted by
Putnam Management and Putnam Retail Management (The Putnam Investments' Code of
Ethics) and by each fund (the Putnam Funds' Code of Ethics). The Putnam
Investments' Code of Ethics and the Putnam Funds' Code of Ethics, in accordance
with Rule 17j-1 of the Investment Company Act of 1940, as amended, contain
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of each
fund.
The Putnam Investments' Code of Ethics does not prohibit personnel from
investing in securities that may be purchased or held by each fund. However, the
Putnam Investments' Code, consistent with standards recommended by the
Investment Company Institute's Advisory Group on Personal Investing and
requirements established by Rule 17j-1, among other things, prohibits personal
securities investments without pre-clearance, imposes time periods during which
personal
-49-
transactions may not be made in certain securities by employees with access to
investment information, and requires the timely submission of broker
confirmations and quarterly reporting of personal securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process.
The Putnam Funds' Code of Ethics incorporates and applies the restrictions of
Putnam Investments' Code of Ethics to officers and Trustees of each fund who are
affiliated with Putnam Investments. The Putnam Funds' Code does not prohibit
unaffiliated officers and Trustees from investing in securities that may be held
by each fund; however, the Putnam Funds' Code regulates the personal securities
transactions of unaffiliated Trustees of each fund, including limiting the time
periods during which they may personally buy and sell certain securities and
requiring them to submit quarterly reports of personal securities transactions.
Each fund's Trustees, in compliance with Rule 17j-1, approved Putnam
Investments' and the Putnam Funds' Codes of Ethics and are required to approve
any material changes to these Codes. The Trustees also provide continued
oversight of personal investment policies and annually evaluate the
implementation and effectiveness of the Codes of Ethics.
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INVESTOR SERVICING AGENT AND CUSTODIAN
Putnam Investor Services, a division of Putnam Fiduciary Trust Company ("PFTC"),
is each fund's investor servicing agent (transfer, plan and dividend disbursing
agent), for which it receives fees that are paid monthly by each fund as an
expense of all its shareholders. The fee paid to Putnam Investor Services is
determined on the basis of the number of shareholder accounts, the number of
transactions and the assets of each fund. Putnam Investor Services has won the
DALBAR Service Award eight times in the past nine years. In 1997 and 1998,
Putnam was the only company to win all three DALBAR Awards: for service to
investors, to financial advisors, and to variable annuity contract holders.
DALBAR, Inc. an independent research firm, presents the awards to financial
services firms that provide consistently excellent service. Putnam Investor
Services' address is P.O. Box 41203, Providence, Rhode Island 02940-1203.
PFTC is the custodian of each fund's assets. In carrying out its duties under
its custodian contract, PFTC may employ one or more subcustodians whose
responsibilities include safeguarding and controlling each fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on each fund's investments. PFTC and any subcustodians
employed by it have a lien on the securities of each fund (to the extent
permitted by each fund's investment restrictions) to secure charges and any
advances made by such subcustodians at the end of any day for the purpose of
paying for securities purchased by each fund. Each fund expects that such
advances will exist only in unusual circumstances. Neither PFTC nor any
subcustodian determines the investment policies of each fund or decides which
securities each fund will buy or sell. PFTC pays the fees and other charges of
any subcustodians employed by it. Each fund may from time to time pay custodial
expenses in full or in part through the placement by Putnam Management of each
fund's portfolio transactions with the subcustodians or with a third-party
broker having an agreement with the subcustodians. Each fund pays PFTC an annual
fee based on each fund's assets, securities transactions and securities holdings
and reimburses PFTC for certain out-of-pocket expenses incurred by it or any
subcustodian employed by it in performing custodial services.
SEE "CHARGES AND EXPENSES - INVESTOR SERVICING AND CUSTODY FEES AND EXPENSES"
ABOVE FOR INFORMATION ON FEES AND REIMBURSEMENTS FOR INVESTOR SERVICING AND
CUSTODY RECEIVED BY PFTC. THE FEES MAY BE REDUCED BY CREDITS ALLOWED BY PFTC.
-51-
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110, are
the independent accountants for both Trust II and Trust III, providing audit
services, tax return review and other tax consulting services and assistance and
consultation in connection with the review of various Securities and Exchange
Commission filings for the Trust II. The following documents are incorporated by
reference into this Statement of Additional Information: (1) the Report of
Independent Accountants and financial statements included in the Trust II's
Annual Report for the fiscal year ended April 30, 2000, filed electronically on
June 19, 2000 (File No. 811-07270), and (ii) the Report of Independent
Accountants and financial statements included in Trust III's Annual Report for
the fiscal year ended October 31, 2000, filed electronically on December 15,
2000 (File No. 811-07099). The audited financial statements for Trust II and
Trust III incorporated by reference into the Prospectus/Proxy Statement and this
Statement of Additional Information have been so included and incorporated in
reliance upon the reports of PricewaterhouseCoopers LLP, given on their
authority as experts in auditing and accounting.
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Putnam Investment Grade Municipal Trust II
and
Putnam Investment Grade Municipal Trust II
Proforma Combining Financial Statements
(Unaudited)
The accompanying unaudited proforma combining investment portfolio and statement
of assets and liabilities assumes that the exchange described in the next
paragraph occurred as of October 31, 2000 and the unaudited proforma combining
statement of operations for the twelve months ended October 31, 2000 presents
the results of operations of Putnam Investment Grade Municipal Trust II as if
the combination with Putnam Investment Grade Municipal Trust III had been
consummated at November 1, 1999. The proforma results of operations are not
necessarily indicative of future operations or the actual results that would
have occurred had the combination been consummated at November 1, 1999. These
historical statements have been derived from Putnam Investment Grade Municipal
Trust II's and Putnam Investment Grade Municipal Trust III's books and records
utilized in calculating daily net asset value at October 31, 2000, and for the
twelve month period then ended.
The proforma statements give effect to the proposed transfer of all of the
assets of Putnam Investment Grade Municipal Trust III to Putnam Investment Grade
Municipal Trust II in exchange for the assumption by Putnam Investment Grade
Municipal Trust II of all of the liabilities of Putnam Investment Grade
Municipal Trust III and for a number of Putnam Investment Grade Municipal Trust
II's shares equal in value to the value of the net assets of Putnam Investment
Grade Municipal Trust III transferred to Putnam Investment Grade Municipal Trust
II. Under generally accepted accounting principles, the historical cost of
investment securities will be carried forward to the surviving entity and the
results of operations of Putnam Investment Grade Municipal Trust II for
pre-combination periods will not be restated. The proforma statement of
operations does not reflect the expenses of either fund in carrying out its
obligations under the Agreement and Plan of Reorganization.
The unaudited proforma combining statements should be read in conjunction with
the separate financial statements of Putnam Investment Grade Municipal Trust II
and Putnam Investment Grade Municipal Trust III incorporated by reference in
this statement of additional information.
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Proforma Combining
Statement of Operations
Twelve months ended October 31,2000 (Unaudited)
Investment Grade Investment Grade Pro Forma Pro Forma
Municipal Trust II Municpal Trust III Adjustments Combined
- -----------------------------------------------------------------------------------------------------------------------------------
Tax Exempt Interest Income 15,351,219 3,976,847 $19,328,066
Expenses:
Compensation of Manager 1,623,891 414,168 2,038,059
Investor servicing and custodian fees 180,751 55,770 (23,469) A 213,052
Compensation of Trustees 11,678 9,131 (2,809) A 18,000
Administrative Services 5,844 3,809 (3,653) A 6,000
Preferred share remarketing fee 177,780 16,255 194,035
Auditing 43,211 30,600 (38,811) A 35,000
Exchange Listing fees 32,347 11,583 2,900 A 46,830
Legal 8,475 4,343 (3,318) A 9,500
Reports to shareholders 13,266 9,960 23,226
Postage 11,290 1,994 13,284
Other Expenses 20,713 13,049 33,762
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expenses 2,129,246 570,662 (122,859) 2,630,748
- -----------------------------------------------------------------------------------------------------------------------------------
Expense reduction (77,638) (41,689) (119,327)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,051,608 528,973 (122,859) 2,511,421
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 13,299,611 3,447,874 122,859 16,816,645
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized loss on investments (1,156,121) (43,283) (1,199,404)
Net realized gain on futures contracts 1,090,593 708,884 1,799,477
Net unrealized appreciation of investments
and futures contracts during the year 4,143,129 501,234 4,644,363
- -----------------------------------------------------------------------------------------------------------------------------------
Net gain on investments 4,077,601 1,166,835 5,244,436
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations $17,377,212 $4,614,709 $122,859 $22,061,081
- -----------------------------------------------------------------------------------------------------------------------------------
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Investment Grade Municipal
Trust II
(Unaudited)
Pro Forma Combining
Statement of Assets and Liabilities
31-Oct-00
Assets Investment Grade Investment Grade Pro Forma Pro Forma
Municipal Trust II Municipal Trust III Adjustments Combined
Investments in securities, at value
(identified cost $236,658,256,
$60,357,682 and
$297,015,938 respectively) $232,666,132 $59,306,609 $291,972,741
Cash 195,367 57,700 253,067
Interest receivable 4,739,771 1,421,469 6,161,240
Total assets 237,601,270 60,785,778 298,387,048
Liabilities
Payable for variation margin 40,906 40,906 81,812
Distributions payable to shareholders 854,782 246,413 1,101,195
Payable for compensation of Manager 425,862 108,296 534,158
Payable for investor servicing and 37,412 8,660 46,072
Payable for compensation of Trustees 13,895 11,555 25,450
Payable for administrative services 1,940 1,263 3,203
Other accrued expenses 52,133 62,772 526,000 B 640,905
Total liabilities 1,426,930 479,865 526,000 2,432,795
Net assets $236,174,340 $60,305,913 (526,000) 295,954,253
Common Shares
Net assets $173,051,879 $50,284,310 (526,000) B $ 222,810,189
Shares outstanding 13,357,092 4,007,092 (133,138) C 17,231,046
Net asset value per share $12.96 $12.55 $ 12.93
Preferred Shares
Net assets $63,122,461 $10,021,603 $ 73,144,064
Shares outstanding 1,260 200 1,460
-55-
The Proforma Combining Investment Portfolio
of Putnam Investment Grade Municipal Trust II and
Putnam Investment Grade Municipal Trust III
October 31, 2000 (Unaudited)
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
Alaska 0.9%
- -----------------------------------------------------------------------------------------
Valdez, Marine Term. Rev. Bonds (Sohio AA+ $2,000,000 $2,095,660
Pipeline), 7 1/8s, 12/1/25
Arkansas 0.6%
- -----------------------------------------------------------------------------------------
Baxter Cnty., Hosp. Rev. Bonds, Ser. B, 5 5/8s, Baa2 1,600,000 1,322,000
9/1/28
California 2.5%
- -----------------------------------------------------------------------------------------
CA Hlth. Fac. Fin. Auth. IFB (Catholic Aaa 5,000,000 4,837,500
Healthcare West), AMBAC, 6.068s, 7/1/17
CA Statewide Cmntys. Dev. Auth. COP (The BBB 1,250,000 1,075,000
Internext Group), 5 3/8s, 4/1/30
San Diego Cnty., Wtr. Auth. IF COP, FGIC, Aaa
8.498s, 4/23/08
------------
5,912,500
Colorado 9.2%
- -----------------------------------------------------------------------------------------
CO Pub. Hwy. Auth. Rev. Bonds (E-470 Pub. Baa3 34,000,000 2,550,000
Hwy.), Ser. B, zero%, 9/1/35
CO Springs Hosp. Rev. Bonds, 6 3/8s, 12/15/30 A3 2,500,000 2,503,125
Denver, City & Cnty. Arpt. Rev. Bonds
Ser. A, 8 3/4s, 11/15/23 A2 3,675,000 3,872,274
Ser. A, 8 3/4s, 11/15/23, Prerefunded AAA 1,325,000 1,406,514
Ser. A, 8 1/2s, 11/15/23 A2 2,285,000 2,333,533
Ser. A, 8s, 11/15/25 A2 735,000 755,051
Ser. A, 8s, 11/15/25, Prerefunded A2 1,525,000 1,557,147
Ser. D, 7 3/4s, 11/15/13 A2 1,000,000 1,186,250
SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Bonds Aaa 5,250,000 5,624,063
(Newport Village), Ser. A-8, FSA, 7.1s, 1/1/30
------------
21,787,957
Florida 9.4%
- -----------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
(SES Broward Cnty. LP South), 7.95s, A3 9,100,000 9,304,750
12/1/08
(Waste-Energy LP North), 7.95s, 12/1/08 A3 990,000 1,012,275
Escambia Cnty., Hlth. Facs. Auth. Rev. Bonds A3 3,000,000 2,501,250
(Baptist Hosp. & Baptist Manor), 5 1/8s, 10/1/19
Lee Cnty., Board of Directors Hosp. IFB (Lee Aaa 5,000,000 5,275,000
Memorial Hosp.), MBIA, 8.269s, 3/26/20
Martin Cnty., Indl. Dev. Auth. Rev. Bonds Baa3 1,625,000 1,657,500
(Indian Cogeneration), Ser. A, 7 7/8s, 12/15/25
Orange Cnty., Hlth. Facs. Auth. Rev. Bonds A2 2,500,000 2,471,875
(Regl. Hlth. Care Syst.), Ser. E, 6s, 10/1/26
------------
22,222,650
-56-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Alaska 1.7% 1.1%
- -------------------------------------------------------------------------------------------------------------------------
Valdez, Marine Term. Rev. Bonds (Sohio AA+ $1,000,000 $1,047,930 $3,000,000 $3,143,590
Pipeline), 7 1/8s, 12/1/25
Arkansas 0.6% 0.6%
- -------------------------------------------------------------------------------------------------------------------------
Baxter Cnty., Hosp. Rev. Bonds, Ser. B, 5 5/8s, Baa2 400,000 330,500 2,000,000 1,652,500
9/1/28
California 2.6% 2.5%
- -------------------------------------------------------------------------------------------------------------------------
CA Hlth. Fac. Fin. Auth. IFB (Catholic Aaa 5,000,000 4,837,500
Healthcare West), AMBAC, 6.068s, 7/1/17
CA Statewide Cmntys. Dev. Auth. COP (The BBB 500,000 430,000 1,750,000 1,505,000
Internext Group), 5 3/8s, 4/1/30
San Diego Cnty., Wtr. Auth. IF COP, FGIC, Aaa 1,000,000 1,146,250 1,000,000 1,146,250
8.498s, 4/23/08
------------ -------------
1,576,250 7,488,750
Colorado 12.3% 9.9%
- --------------------------------------------------------------------------------------------------------------------------
CO Pub. Hwy. Auth. Rev. Bonds (E-470 Pub. Baa3 8,700,000 652,500 42,700,000 3,202,500
Hwy.), Ser. B, zero%, 9/1/35
CO Springs Hosp. Rev. Bonds, 6 3/8s, 12/15/30 A3 1,000,000 1,001,250 3,500,000 3,504,375
Denver, City & Cnty. Arpt. Rev. Bonds
Ser. A, 8 3/4s, 11/15/23 A2 2,205,000 2,323,364 5,880,000 6,195,638
Ser. A, 8 3/4s, 11/15/23, Prerefunded AAA 795,000 843,908 2,120,000 2,250,422
Ser. A, 8 1/2s, 11/15/23 A2 1,370,000 1,399,099 3,655,000 3,732,632
Ser. A, 8s, 11/15/25 A2 735,000 755,051
Ser. A, 8s, 11/15/25, Prerefunded A2 1,525,000 1,557,147
Ser. D, 7 3/4s, 11/15/13 A2 1,000,000 1,186,250 2,000,000 2,372,500
SCA Tax Exempt Trust Multi-Fam. Mtge. Rev. Aaa 5,250,000 5,624,063
Bonds (Newport Village), Ser. A-8, FSA, 7.1s,
1/1/30
------------ -------------
7,406,371 29,194,328
Florida 6.5% 8.8%
- --------------------------------------------------------------------------------------------------------------------------
Broward Cnty., Resource Recvy. Rev. Bonds
(SES Broward Cnty. LP South), 7.95s, A3 830,000 848,675 9,930,000 10,153,425
12/1/08
(Waste-Energy LP North), 7.95s, 12/1/08 A3 1,695,000 1,733,138 2,685,000 2,745,413
Escambia Cnty., Hlth. Facs. Auth. Rev. Bonds A3 1,000,000 833,750 4,000,000 3,335,000
(Baptist Hosp. & Baptist Manor), 5 1/8s, 10/1/19
Lee Cnty., Board of Directors Hosp. IFB (Lee Aaa 5,000,000 5,275,000
Memorial Hosp.), MBIA, 8.269s, 3/26/20
Martin Cnty., Indl. Dev. Auth. Rev. Bonds Baa3 1,625,000 1,657,500
(Indian Cogeneration), Ser. A, 7 7/8s, 12/15/25
Orange Cnty., Hlth. Facs. Auth. Rev. Bonds A2 500,000 494,375 3,000,000 2,966,250
(Regl. Hlth. Care Syst.), Ser. E, 6s, 10/1/26
------------ -------------
3,909,938 26,132,588
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
Georgia 2.9%
- -----------------------------------------------------------------------------------------
Burke Cnty., Dev. Auth. Poll. Control Rev. Aaa 6,340,000 6,958,150
Bonds (Oglethorpe Pwr. Co. Vogtle), MBIA, 8s,
1/1/22 (SEG)
GA Med. Ctr. Hosp. Auth. IFB, MBIA
8.09s, 8/1/10 Aaa
7.888s, 8/1/10 Aaa
------------
6,958,150
Hawaii 1.8%
- -----------------------------------------------------------------------------------------
HI State Arpt. Syst. Rev. Bonds, FGIC, 7s, Aaa 4,000,000 4,141,480
7/1/10
Illinois 5.2%
- -----------------------------------------------------------------------------------------
Central Lake Cnty., Joint Action Wtr. Agcy. Aa2 6,250,000 6,429,688
G.O. Bonds, 6s, 2/1/19
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds (American Airlines,
Inc.)
8.2s, 12/1/24 Baa1 2,000,000 2,215,000
Ser. A, 7 7/8s, 11/1/25 Baa1 2,250,000 2,322,518
IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks Med. AAA
Ctr.), Ser. D, 9 1/2s, 11/15/15
IL, Dev. Fin. Auth. Hosp. Rev. Bonds (Adventist Baa1 1,500,000 1,271,250
Hlth. Syst./Sunbelt Obligation), 5.65s, 11/15/24
-------------
12,238,456
Indiana 0.9%
- -----------------------------------------------------------------------------------------
Marion Cnty., Ind. Convention & Rectl. Fac. Aaa 2,000,000 2,064,400
Auth. Rev. Bonds (Excise Tax Rev. Lease
Rental), Ser. A, AMBAC, 7s, 6/1/21
Kansas 1.1%
- -----------------------------------------------------------------------------------------
Burlington, Poll. Ctrl. Rev. Bonds (Kansas Gas Aaa 2,600,000 2,686,294
& Electric Co.), MBIA, 7s, 6/1/31
Kentucky 4.2%
- -----------------------------------------------------------------------------------------
Boone Cnty., Poll. Control Rev. Bonds (Dayton A2
Pwr. & Lt. Co.), Ser. A, 6 1/2s, 11/15/22
Jefferson Cnty., Cap. Corp. Rev. Bonds, MBIA, 5 Aaa 2,000,000 1,982,500
1/2s, 6/1/28
Jefferson Cnty., Hosp. Rev. Bonds, MBIA, Aaa 2,200,000 2,290,750
6.436s, 10/1/14
Kenton Cnty., Special Fac. Arpt. Rev. Bonds Baa3 4,000,000 4,145,000
(Delta Airlines), Ser. A, 7 1/2s, 2/1/12
KY Econ. Dev. Fin. Auth. Hlth. System Rev. BBB 1,475,000 1,439,969
Bonds (Norton Healthcare, Inc.), Ser. A, 6
5/8s, 10/1/28
------------
9,858,219
-57-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Georgia 0.9% 2.5%
- --------------------------------------------------------------------------------------------------------------------------
Burke Cnty., Dev. Auth. Poll. Control Rev. Aaa 6,340,000 6,958,150
Bonds (Oglethorpe Pwr. Co. Vogtle), MBIA, 8s,
1/1/22 (SEG)
GA Med. Ctr. Hosp. Auth. IFB, MBIA
8.09s, 8/1/10 Aaa 200,000 218,000 200,000 218,000
7.888s, 8/1/10 Aaa 300,000 330,000 300,000 330,000
------------ -------------
548,000 7,506,150
Hawaii 0.0% 1.4%
- --------------------------------------------------------------------------------------------------------------------------
HI State Arpt. Syst. Rev. Bonds, FGIC, 7s, Aaa 4,000,000 4,141,480
7/1/10
Illinois 6.5% 5.5%
- --------------------------------------------------------------------------------------------------------------------------
Central Lake Cnty., Joint Action Wtr. Agcy. Aa2 6,250,000 6,429,688
G.O. Bonds, 6s, 2/1/19
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(American Airlines, Inc.)
8.2s, 12/1/24 Baa1 1,500,000 1,661,250 3,500,000 3,876,250
Ser. A, 7 7/8s, 11/1/25 Baa1 2,250,000 2,322,518
IL Hlth. Fac. Auth. Rev. Bonds (Glenoaks Med. AAA 1,605,000 1,639,379 1,605,000 1,639,379
Ctr.), Ser. D, 9 1/2s, 11/15/15
IL, Dev. Fin. Auth. Hosp. Rev. Bonds (Adventist Baa1 750,000 635,625 2,250,000 1,906,875
Hlth. Syst./Sunbelt Obligation), 5.65s, 11/15/24
------------ -------------
3,936,254 16,174,710
Indiana 3.4% 1.4%
- --------------------------------------------------------------------------------------------------------------------------
Marion Cnty., Ind. Convention & Rectl. Fac. Aaa 2,000,000 2,064,400 4,000,000 4,128,800
Auth. Rev. Bonds (Excise Tax Rev. Lease
Rental), Ser. A, AMBAC, 7s, 6/1/21
Kansas 4.1% 1.7%
- --------------------------------------------------------------------------------------------------------------------------
Burlington, Poll. Ctrl. Rev. Bonds (Kansas Gas Aaa 2,400,000 2,479,656 5,000,000 5,165,950
& Electric Co.), MBIA, 7s, 6/1/31
Kentucky 2.3% 3.8%
- --------------------------------------------------------------------------------------------------------------------------
Boone Cnty., Poll. Control Rev. Bonds (Dayton A2 1,000,000 1,026,250 1,000,000 1,026,250
Pwr. & Lt. Co.), Ser. A, 6 1/2s, 11/15/22
Jefferson Cnty., Cap. Corp. Rev. Bonds, MBIA, 5 Aaa 2,000,000 1,982,500
1/2s, 6/1/28
Jefferson Cnty., Hosp. Rev. Bonds, MBIA, Aaa 2,200,000 2,290,750
6.436s, 10/1/14
Kenton Cnty., Special Fac. Arpt. Rev. Bonds Baa3 4,000,000 4,145,000
(Delta Airlines), Ser. A, 7 1/2s, 2/1/12
KY Econ. Dev. Fin. Auth. Hlth. System Rev. BBB 400,000 390,500 1,875,000 1,830,469
Bonds (Norton Healthcare, Inc.), Ser. A, 6
5/8s, 10/1/28
------------ -------------
1,416,750 11,274,969
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
Louisiana 0.9%
- ------------------------------------------------------------------------------------------
Beauregard, Parish Rev. Bonds (Boise Cascade Baa3 2,000,000 2,058,900
Corp.), 7 3/4s, 6/1/21
Massachusetts 7.4%
- ------------------------------------------------------------------------------------------
MA State Dev. Fin. Agcy. Rev. Bonds (Ma. A2 1,850,000 1,863,875
Biomedical Research), Ser. C, 6 1/4s, 8/1/20
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds Baa2 2,750,000 2,340,938
(Caritas Christian Oblig. Group), Ser. A, 5
5/8s, 7/1/20
MA State Hlth. & Edl. Fac. Auth. IFB
(Beth Israel-Deaconess Hosp.), AMBAC, 8.676s, Aaa 2,000,000 2,131,400
10/1/31
(Med. Ctr. of Central MA), Ser. B, AMBAC, Aaa 5,500,000 6,359,375
8.97s, 6/23/22
MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53, Aaa
MBIA, 6.15s, 12/1/29
MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 3,000,000 4,713,750
------------
17,409,338
Michigan 0.9%
- ------------------------------------------------------------------------------------------
Detroit, Wtr. Supply Syst. IFB, FGIC, 8.106s, Aaa 2,000,000 2,120,000
7/1/22
Minnesota 0.4%
- ------------------------------------------------------------------------------------------
MN State Hsg. Fin. Agy. Rev. Bonds (Single Aa1 1,000,000 1,005,000
Family Mtg.), 6.05s, 7/1/31
SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville), Aaa
Ser. A-9, FSA, 7.1s, 1/1/30
Mississippi 0.6%
- ------------------------------------------------------------------------------------------
Mississippi Bus. Fin. Corp. Poll. Ctrl. Rev. Ba1 1,500,000 1,380,000
Bonds (Syst. Energy Res., Inc.), 5.9s, 5/1/22
Missouri 0.4%
- ------------------------------------------------------------------------------------------
MO State Hlth. & Edl. Fac. Rev. Bonds (St. A2 1,000,000 987,500
Anthony's Med. Ctr.), 6 1/4s, 12/1/30
Nevada 4.1%
- ------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp.), Ser. B, 7 1/2s, Baa2 3,000,000 3,131,250
9/1/32
(Southwest Gas Corp.), Ser. A, AMBAC, 6.1s, Aaa 3,000,000 3,071,250
12/1/38
(NV Pwr. Co.), Ser. A, 5.9s, 11/1/32 BBB
(NV Pwr. Co.), Ser. C, 5 1/2s, 10/1/30 BBB 2,000,000 1,720,000
Clark Cnty., Dist. Impt. G.O. Bonds (Special BBB-/P 1,760,000 1,812,800
Assmt. Dist. No. 124), 7 1/4s, 2/1/20
------------
9,735,300
-58-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Louisiana 2.4% 1.2%
- --------------------------------------------------------------------------------------------------------------------------
Beauregard, Parish Rev. Bonds (Boise Cascade Baa3 1,420,000 1,461,819 3,420,000 3,520,719
Corp.), 7 3/4s, 6/1/21
Massachusetts 7.0% 7.3%
- --------------------------------------------------------------------------------------------------------------------------
MA State Dev. Fin. Agcy. Rev. Bonds (Ma. A2 1,000,000 1,007,500 2,850,000 2,871,375
Biomedical Research), Ser. C, 6 1/4s, 8/1/20
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds Baa2 2,750,000 2,340,938
(Caritas Christian Oblig. Group), Ser. A, 5
5/8s, 7/1/20
MA State Hlth. & Edl. Fac. Auth. IFB
(Beth Israel-Deaconess Hosp.), AMBAC, 8.676s, Aaa 2,000,000 2,131,400
10/1/31
(Med. Ctr. of Central MA), Ser. B, AMBAC, Aaa 750,000 867,188 6,250,000 7,226,563
8.97s, 6/23/22
MA State Hsg. Fin. Agcy. Rev. Bonds, Ser. 53, Aaa 1,000,000 1,013,750 1,000,000 1,013,750
MBIA, 6.15s, 12/1/29
MA State Port Auth. Rev. Bonds, 13s, 7/1/13 Aaa 830,000 1,304,138 3,830,000 6,017,888
------------ -------------
4,192,576 21,601,914
Michigan 0.0% 0.7%
- --------------------------------------------------------------------------------------------------------------------------
Detroit, Wtr. Supply Syst. IFB, FGIC, 8.106s, Aaa 2,000,000 2,120,000
7/1/22
Minnesota 1.6% 0.3%
- --------------------------------------------------------------------------------------------------------------------------
MN State Hsg. Fin. Agy. Rev. Bonds (Single Aa1 1,000,000 1,005,000
Family Mtg.), 6.05s, 7/1/31
SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville), Aaa 925,000 990,906 925,000 990,906
Ser. A-9, FSA, 7.1s, 1/1/30
-------------
1,995,906
Mississippi 0.8% 0.6%
- --------------------------------------------------------------------------------------------------------------------------
Mississippi Bus. Fin. Corp. Poll. Ctrl. Rev. Ba1 500,000 460,000 2,000,000 1,840,000
Bonds (Syst. Energy Res., Inc.), 5.9s, 5/1/22
Missouri 0.8% 0.5%
- --------------------------------------------------------------------------------------------------------------------------
MO State Hlth. & Edl. Fac. Rev. Bonds (St. A2 500,000 493,750 1,500,000 1,481,250
Anthony's Med. Ctr.), 6 1/4s, 12/1/30
Nevada 3.2% 3.9%
- --------------------------------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds
(Southwest Gas Corp.), Ser. B, 7 1/2s, Baa2 1,000,000 1,043,750 4,000,000 4,175,000
9/1/32
(Southwest Gas Corp.), Ser. A, AMBAC, 6.1s, Aaa 3,000,000 3,071,250
12/1/38
(NV Pwr. Co.), Ser. A, 5.9s, 11/1/32 BBB 1,000,000 895,000 1,000,000 895,000
(NV Pwr. Co.), Ser. C, 5 1/2s, 10/1/30 BBB 2,000,000 1,720,000
Clark Cnty., Dist. Impt. G.O. Bonds (Special BBB-/P 1,760,000 1,812,800
Assmt. Dist. No. 124), 7 1/4s, 2/1/20
------------ -------------
1,938,750 11,674,050
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
New Jersey 0.9%
- ------------------------------------------------------------------------------------------
NJ Hlth. Care Facs. Fin. Auth. Rev. Bonds, Aaa 2,000,000 2,125,000
AMBAC, 6 3/4s, 7/1/19
New York 11.7%
- ------------------------------------------------------------------------------------------
Long Island, Pwr. Auth. NY Elec. Syst. Rev. Baa1 2,000,000 1,860,000
Bonds, Ser. A, 5 1/4s, 12/1/26
NY City, G.O. Bonds
Ser. B, 7 1/2s, 2/1/06 A2 2,000,000 2,100,000
Ser. B, 7 1/2s, 2/1/06, Prerefunded A2 1,100,000 1,156,375
Ser. D, 5 1/4s, 8/1/21 A2 5,000,000 4,725,000
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
Ser. C, 7 3/4s, 6/15/20 Aaa 6,250,000 6,474,625
Ser. B, 5 3/4s, 6/15/26 AA
NY State Dorm. Auth. Rev. Bonds (State U. Edl. A3 5,000,000 5,262,500
Fac.), Ser. A, 5 7/8s, 5/15/17
NY State Energy Res. & Dev. Auth. Elec. Fac. A1 5,000,000 5,049,550
Rev. Bonds (Cons. Edison Co. of NY, Inc.), Ser.
A, 7 1/2s, 1/1/26
Port Auth. NY & NJ 144A FRB, Ser. N18, 8.75s, Aaa 1,000,000 1,112,500
12/1/17
------------
27,740,550
North Carolina 2.1%
- ------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
(No. 1 Catawba Elec.), Ser. B, 6 1/2s, BBB 3,000,000 3,078,750
1/1/20
Ser. A, 5 3/4s, 1/1/26 Baa3 1,500,000 1,383,750
Ser. B, 5.65s, 1/1/16 BBB 500,000 476,250
------------
4,938,750
North Dakota 0.6%
- ------------------------------------------------------------------------------------------
Grand Forks, Hlth. Care Syst. Rev. Bonds (Altru Baa1 1,500,000 1,524,375
Hlth. Syst. Oblig. Group), 7 1/8s, 8/15/24
Ohio 0.6%
- ------------------------------------------------------------------------------------------
OH State Env. Impt. Rev. Bonds (USX Corp.), 5 Baa1 1,600,000 1,440,000
5/8s, 5/1/29
Oklahoma 0.6%
- ------------------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Ba1 2,000,000 1,395,000
Healthcare), Ser. A, 5 5/8s, 8/15/29
-59-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
New Jersey 0.0% 0.7%
- --------------------------------------------------------------------------------------------------------------------------
NJ Hlth. Care Facs. Fin. Auth. Rev. Bonds, Aaa 2,000,000 2,125,000
AMBAC, 6 3/4s, 7/1/19
New York 7.7% 10.9%
- --------------------------------------------------------------------------------------------------------------------------
Long Island, Pwr. Auth. NY Elec. Syst. Rev. Baa1 2,000,000 1,860,000
Bonds, Ser. A, 5 1/4s, 12/1/26
NY City, G.O. Bonds
Ser. B, 7 1/2s, 2/1/06 A2 2,000,000 2,100,000
Ser. B, 7 1/2s, 2/1/06, Prerefunded A2 1,100,000 1,156,375
Ser. D, 5 1/4s, 8/1/21 A2 5,000,000 4,725,000
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
Ser. C, 7 3/4s, 6/15/20 Aaa 2,000,000 2,071,880 8,250,000 8,546,505
Ser. B, 5 3/4s, 6/15/26 AA 1,000,000 1,008,750 1,000,000 1,008,750
NY State Dorm. Auth. Rev. Bonds (State U. Edl. A3 5,000,000 5,262,500
Fac.), Ser. A, 5 7/8s, 5/15/17
NY State Energy Res. & Dev. Auth. Elec. Fac. A1 1,000,000 1,009,910 6,000,000 6,059,460
Rev. Bonds (Cons. Edison Co. of NY, Inc.), Ser.
A, 7 1/2s, 1/1/26
Port Auth. NY & NJ 144A FRB, Ser. N18, 8.75s, Aaa 500,000 556,250 1,500,000 1,668,750
12/1/17
------------ -------------
4,646,790 32,387,340
North Carolina 3.3% 2.3%
- --------------------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
(No. 1 Catawba Elec.), Ser. B, 6 1/2s, BBB 1,000,000 1,026,250 4,000,000 4,105,000
1/1/20
Ser. A, 5 3/4s, 1/1/26 Baa3 500,000 461,250 2,000,000 1,845,000
Ser. B, 5.65s, 1/1/16 BBB 500,000 476,250 1,000,000 952,500
------------ -------------
1,963,750 6,902,500
North Dakota 0.8% 0.7%
- --------------------------------------------------------------------------------------------------------------------------
Grand Forks, Hlth. Care Syst. Rev. Bonds (Altru Baa1 500,000 508,125 2,000,000 2,032,500
Hlth. Syst. Oblig. Group), 7 1/8s, 8/15/24
Ohio 0.6% 0.6%
- --------------------------------------------------------------------------------------------------------------------------
OH State Env. Impt. Rev. Bonds (USX Corp.), 5 Baa1 400,000 360,000 2,000,000 1,800,000
5/8s, 5/1/29
Oklahoma 0.7% 0.6%
- --------------------------------------------------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Ba1 600,000 418,500 2,600,000 1,813,500
Healthcare), Ser. A, 5 5/8s, 8/15/29
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
Pennsylvania 5.9%
- ------------------------------------------------------------------------------------------
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds Aaa 3,000,000 3,101,250
(Magee-Womens Hosp.), FGIC, 6s, 10/1/13
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds BBB- 2,000,000 2,040,000
(Environmental Impt.), Ser. A, 6.7s, 12/1/20
Carbon Cnty., Indl. Dev. Auth. Rev. Bonds BBB- 750,000 768,750
(Panter Creek Partners PJ), 6.65s, 5/1/10
Dauphin Cnty., Auth. Hosp. Rev. Bonds B2 5,000,000 5,243,750
(Hapsco-Western PA Hosp.), Ser. A, MBIA, 6
1/2s, 7/1/12
Delaware Cnty., Indl. Dev. Auth. Rev. Bonds, B2 2,000,000 1,772,500
Ser. A, 6.2s, 7/1/19
PA State Higher Ed. Assistance Agcy. Rev. Bonds D 2,700,000 891,000
(Student Loan IFB), Ser. A, 6 1/4s, 7/1/13
(acquired 5/1/96, cost $2,544,068.) (In
default) (NON) (RES)
------------
13,817,250
Puerto Rico 1.3%
- ------------------------------------------------------------------------------------------
PR Comnwlth. Hwy. & Trans. Auth. Rev. Bonds, Baa1 3,000,000 3,142,500
Ser. B, 6s, 7/1/39
PR Elec. Pwr. Auth. IFB, FSA, 7.378s, 7/1/23 Aaa
South Carolina 2.8%
- ------------------------------------------------------------------------------------------
Connector 2000 Assn. Inc. Toll Road Rev. Bonds BBB- 1,000,000 785,000
(SR-Southern Connector), Ser. A, 5 1/4s, 1/1/23
SC State Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Baa1 400,000 413,500
Bonds (Palmetto Hlth. Alliance), Ser. A, 7
3/8s, 12/15/21
Spartanburg Cnty. Solid Waste Disp. Rev. Bonds A/P 5,000,000 5,400,000
(Bayerische Motoren Werke), 7.55s, 11/1/24
------------
6,598,500
Tennessee 6.3%
- ------------------------------------------------------------------------------------------
Johnson City, Hlth. & Edl. Facs. Rev. Bonds.
(Mtn. States Hlth.), Ser. A, 7 1/2s, 7/1/33 Baa2 3,300,000 3,316,500
Ser. A2, MBIA, 8.2s, 7/1/21 (both acquired Aaa 2,500,000 2,637,500
2/8/00, cost $2,355,021 and $941,900,
respectively) (RES)
Metropolitan Govt. Nashville & Davidson Cnty., Aaa 8,300,000 8,881,000
Tenn. Wtr. & Swr. IFB, AMBAC, 7.557s, 1/1/22
------------
14,835,000
-60-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Pennsylvania 3.6% 5.4%
- --------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds Aaa 3,000,000 3,101,250
(Magee-Womens Hosp.), FGIC, 6s, 10/1/13
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds BBB- 1,000,000 1,020,000 3,000,000 3,060,000
(Environmental Impt.), Ser. A, 6.7s, 12/1/20
Carbon Cnty., Indl. Dev. Auth. Rev. Bonds BBB- 250,000 256,250 1,000,000 1,025,000
(Panter Creek Partners PJ), 6.65s, 5/1/10
Dauphin Cnty., Auth. Hosp. Rev. Bonds B2 5,000,000 5,243,750
(Hapsco-Western PA Hosp.), Ser. A, MBIA, 6
1/2s, 7/1/12
Delaware Cnty., Indl. Dev. Auth. Rev. Bonds, B2 1,000,000 886,250 3,000,000 2,658,750
Ser. A, 6.2s, 7/1/19
PA State Higher Ed. Assistance Agcy. Rev. Bonds D 2,700,000 891,000
(Student Loan IFB), Ser. A, 6 1/4s, 7/1/13
(acquired 5/1/96, cost $2,544,068.) (In
default) (NON) (RES)
------------ -------------
2,162,500 15,979,750
Puerto Rico 0.9% 1.2%
- --------------------------------------------------------------------------------------------------------------------------
PR Comnwlth. Hwy. & Trans. Auth. Rev. Bonds, Baa1 3,000,000 3,142,500
Ser. B, 6s, 7/1/39
PR Elec. Pwr. Auth. IFB, FSA, 7.378s, 7/1/23 Aaa 500,000 539,375 500,000 539,375
-------------
3,681,875
South Carolina 1.1% 2.5%
- --------------------------------------------------------------------------------------------------------------------------
Connector 2000 Assn. Inc. Toll Road Rev. Bonds BBB- 500,000 379,375 1,500,000 1,164,375
(SR-Southern Connector), Ser. A, 5 1/4s, 1/1/23
SC State Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Baa1 300,000 310,125 700,000 723,625
Bonds (Palmetto Hlth. Alliance), Ser. A, 7
3/8s, 12/15/21
Spartanburg Cnty. Solid Waste Disp. Rev. Bonds A/P 5,000,000 5,400,000
(Bayerische Motoren Werke), 7.55s, 11/1/24
------------ -------------
689,500 7,288,000
Tennessee 8.2% 6.7%
- --------------------------------------------------------------------------------------------------------------------------
Johnson City, Hlth. & Edl. Facs. Rev. Bonds.
(Mtn. States Hlth.), Ser. A, 7 1/2s, 7/1/33 Baa2 1,000,000 1,005,000 4,300,000 4,321,500
Ser. A2, MBIA, 8.2s, 7/1/21 (both acquired Aaa 1,000,000 1,055,000 3,500,000 3,692,500
2/8/00, cost $2,355,021 and $941,900,
respectively) (RES)
Metropolitan Govt. Nashville & Davidson Cnty., Aaa 2,700,000 2,889,000 11,000,000 11,770,000
Tenn. Wtr. & Swr. IFB, AMBAC, 7.557s, 1/1/22
------------ -------------
4,949,000 19,784,000
Putnam Investment Grade
Municipal Trust II
Municipal Bonds Principal 98.5%*
and Notes Rating Amount Value
- ---------------------------------------------------------------------------------------------
Texas 5.5%
- ------------------------------------------------------------------------------------------
Alliance, Arpt. Auth. Rev. Bonds (Federal Baa2 1,700,000 1,702,125
Express Corp.), 6 3/8s, 4/1/21
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds AAA/P
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18
Dallas-Fort Worth Intl. Arpt. Fac. Impt. Corp. Rev. Bonds (American
Airlines)
7 1/2s, 11/1/25 Baa1 1,250,000 1,275,000
6 3/8s, 5/1/35 Baa1 2,500,000 2,428,125
Nueces Cnty., Port of Corpus Christi Rev. Bonds Baa3 3,000,000 2,670,000
(Union Pacific), 5.65s, 12/1/22
Titus Cnty., Fresh Wtr. Supply Dist. No. 1 A2 3,000,000 3,140,578
Poll. Rev. Bonds (Southwestern Elec. Pwr. Co.),
Ser. A, 8.2s, 8/1/11
Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl. Hosp.)
6 1/8s, 7/1/23 Baa2 1,100,000 947,375
6s, 7/1/29 Baa2 1,100,000 915,750
------------
13,078,953
Utah 2.2%
- ------------------------------------------------------------------------------------------
UT, State Board Regents Student Loan Rev. Aaa 5,000,000 5,212,500
Bonds, Ser. H, AMBAC, 6.7s, 11/1/15
Virginia 0.6%
- ------------------------------------------------------------------------------------------
Pocahontas Pkwy Assn. Toll Rd. Rev. Bonds, Ser. Baa3 1,800,000 1,485,000
A, 5 1/2s, 8/15/28
VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A, Aa1
7.1s, 1/1/17
Washington 2.6%
- ------------------------------------------------------------------------------------------
King Cnty., G.O. Bonds, Ser. C, 6 1/4s, Aa1 6,000,000 6,247,500
1/1/32
West Virginia 1.3%
- ------------------------------------------------------------------------------------------
Mason Cnty., Poll. Ctrl. Rev. Bonds Baa1 3,000,000 3,101,250
(Appalachian Pwr. Co.), Ser. I, 6.85s, 6/1/22
Total Investments
(cost $236,658,256, $60,357,682 and $297,015,938, $232,666,132
respectively)
-61-
Putnam Investment Grade Proforma
Municipal Trust III Combined
Municipal Bonds Principal 98.3%* Principal 98.7%*
and Notes Rating Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Texas 10.4% 6.5%
- --------------------------------------------------------------------------------------------------------------------------
Alliance, Arpt. Auth. Rev. Bonds (Federal Baa(2) 1,700,000 1,702,125
Express Corp.), 6 3/8s, 4/1/21
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds AAA/P 2,400,000 2,585,999 2,400,000 2,585,999
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/18
Dallas-Fort Worth Intl. Arpt. Fac. Impt. Corp. Rev. Bonds
(American Airlines)
7 1/2s, 11/1/25 Baa(1) 1,250,000 1,275,000
6 3/8s, 5/1/35 Baa(1) 1,000,000 971,250 3,500,000 3,399,375
Nueces Cnty., Port of Corpus Christi Rev. Bonds Baa(3) 3,000,000 2,670,000
(Union Pacific), 5.65s, 12/1/22
Titus Cnty., Fresh Wtr. Supply Dist. No. 1 A(2) 2,000,000 2,093,720 5,000,000 5,234,298
Poll. Rev. Bonds (Southwestern Elec. Pwr. Co.),
Ser. A, 8.2s, 8/1/11
Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl. Hosp.)
6 1/8s, 7/1/23 Baa(2) 400,000 344,500 1,500,000 1,291,875
6s, 7/1/29 Baa(2) 300,000 249,750 1,400,000 1,165,500
------------ -------------
6,245,219 19,324,172
Utah 0.0% 1.8%
- --------------------------------------------------------------------------------------------------------------------------
UT, State Board Regents Student Loan Rev. Aaa 5,000,000 5,212,500
Bonds, Ser. H, AMBAC, 6.7s, 11/1/15
Virginia 2.5% 1.0%
- --------------------------------------------------------------------------------------------------------------------------
Pocahontas Pkwy Assn. Toll Rd. Rev. Bonds, Ser. Baa(3) 600,000 495,000 2,400,000 1,980,000
A, 5 1/2s, 8/15/28
VA State Hsg. Dev. Auth. Rev. Bonds, Ser. A, Aa(1) 1,000,000 1,033,750 1,000,000 1,033,750
7.1s, 1/1/17
------------ -------------
1,528,750 3,013,750
Washington 1.7% 2.5%
- --------------------------------------------------------------------------------------------------------------------------
King Cnty., G.O. Bonds, Ser. C, 6 1/4s, Aa(1) 1,000,000 1,041,250 7,000,000 7,288,750
1/1/32
West Virginia 0.0% 1.0%
- --------------------------------------------------------------------------------------------------------------------------
Mason Cnty., Poll. Ctrl. Rev. Bonds Baa(1) 3,000,000 3,101,250
(Appalachian Pwr. Co.), Ser. I, 6.85s, 6/1/22
Total Investments
(cost $236,658,256, $60,357,682 and $297,015,938, $59,306,609 $291,972,741
respectively)
Percentages indicated are based on net assets as follows:
- ----------------------------------------------------------
Net Assets
- ----------------------------------------------------------
Putnam Investment Grade Municipal Trust II 236,174,340
Putnam Investment Grade Municipal Trust III 60,305,913
Proforma 295,954,253
- ----------------------------------------------------------
(RAT)The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at Report October 31, 2000, for the securities
listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings do not necessarily represent what the
agencies would ascribe to these securities at October 31, 2000. Securities rated
by Putnam are indicated by "/P" and are not publicly rated.
# A portion of this security was pledged and segregated with the custodian to
cover margin requirements for futures contracts at October 31, 2000.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total
market value of restricted securities held at Report October 31, 2000, was
$3,528,500 and $1,055,000 or 1.5% and 1.7% of net assets respectively.
The rates shown on IFB and IF COP, which are securities paying interest rates
that vary inversely to changes in the market interest rates, and FRB are the
current interest rates at October 31, 2000.
-62-
Putnam Investment Grade Municipal Trust II
Notes to Proforma Combining Statements
(Unaudited)
October 31, 2000
The proforma adjustments to these proforma financial statements are comprised of
the following:
(A) Elimination and reduction of duplicative expenses as a result of the
merger.
(B) $213,000 relates to proxy costs, which will be borne by Putnam
Investment Grade Municipal Trust II and Putnam Investment Grade
Municipal Trust III. The remaining $313,000 consists of $250,000 of
legal costs, $48,000 of accounting costs and $15,000 of SEC
registration fees. These are related merger costs which will be
allocated ratably between the two funds upon consummation of the
merger.
(C) Issuance of common shares of Putnam Investment Grade Municipal Trust
II to the holders of common shares of Putnam Investment Grade
Municipal Trust III.
-63-
APPENDIX A
SECURITIES RATINGS
The ratings of securities in which each fund may invest will be measured at the
time of purchase and, to the extent a security is assigned a different rating by
one or more of the various rating agencies, Putnam Management will use the
highest rating assigned by any agency. Putnam Management will not necessarily
sell an investment if its rating is reduced. The following rating services
describe rated securities as follows:
MOODY'S INVESTORS SERVICE, INC.
BONDS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of 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 be small.
-64-
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTES
MIG 1/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
COMMERCIAL PAPER
Issuers rated PRIME-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- -- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's
BONDS
AAA -- An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
-65-
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.
Obligations rated BB, B, CCC, CC and C are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these are 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 obligations. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated CC is currently highly vulnerable to nonpayment.
C -- The C rating may be used to cover a situation where a bankruptcy petition
has been filed, or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. 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.
NOTES
-66-
SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
SP-3 -- Speculative capacity to pay principal and interest.
COMMERCIAL PAPER
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated `A-1'.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
DUFF & PHELPS CORPORATION
LONG-TERM DEBT
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
-67-
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
FITCH INVESTORS SERVICE, INC.
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA.
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than bonds with
higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB -- Bonds considered to be speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.
CCC -- Bonds have certain characteristics which, with passing of time, could
lead to the possibility of default on either principal or interest payments.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C -- Bonds are in actual or imminent default in payment of interest or
principal.
-68-
DDD -- Bonds are in default and in arrears in interest and/or principal
payments. Such bonds are extremely speculative and should be valued only on the
basis of their value in liquidation or reorganization of the obligor.
-69-
APPENDIX B
INFORMATION ABOUT THE FUNDS'
PREFERRED SHARES
Except as noted below, the terms of each fund's outstanding preferred shares,
the Preferred Merger Shares and the Additional Preferred Shares (collectively,
the "Preferred Shares") are essentially identical. Accordingly, the following
brief description of the Preferred Shares of Trust II applies equally to the
Preferred Shares of Trust III. This description does not purport to be complete
and is subject to and qualified in its entirety by reference to each fund's
Bylaws. A copy of Trust II's Bylaws has been filed as an exhibit to the
Registration Statement of which this Prospectus/Proxy Statement is a part and
may be inspected, and copies thereof may be obtained, as described under
"Further Information about Voting and the Meeting." Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Prospectus/Proxy, the Glossary, or in Exhibit B-2 to this Appendix.
Comparison of the outstanding Preferred Shares of Trust III (and the Preferred
Merger Shares) with the outstanding Preferred Shares of Trust II
As noted above, the terms of the outstanding Preferred Shares of Trust III (and
the Preferred Merger Shares) and the terms of the outstanding Preferred Shares
of Trust II are substantially similar. There are, however, certain differences.
First, if a holder of Preferred Shares fails to make an election in connection
with a Remarketing, he will be deemed to have tendered such shares if the
current Dividend Period or the succeeding Dividend Period is a Special Dividend
Period of more than 90 days, in the case of the outstanding Preferred Shares of
Trust III (and the Preferred Merger Shares), and 60 days, in the case of the
outstanding Preferred Shares of Trust II. Second, the Applicable Dividend Rate
for any Dividend
B-1
Period commencing during any Non-Payment Period, and the rate used to calculate
any applicable late charge, will generally be 250% of the Reference Rate (or
300% of such rate if the fund has provided a Tax Notification to the
Remarketing Agent with respect to that Dividend Period), in the case of the
outstanding Preferred Shares of Trust III (and the Preferred Merger Shares),
and will generally be 200% of the Reference Rate (or 275% of such rate if the
fund has provided a Tax Notification to the Remarketing Agent with respect to
that Dividend Period), in the case of the outstanding Preferred Shares of Trust
II. Third, each Dividend Period that commences during a Non-Payment Period
shall be a 28-day dividend period, unless, in the case of the outstanding
Preferred Shares of Trust II, but not in the case of the outstanding Preferred
Shares of Trust III (and the Preferred Merger Shares), the preceding Dividend
Period was a Special Dividend Period of less than 28 days. Fourth, a
Non-Payment Period, in the case of the outstanding Preferred Shares of Trust
II, but not in the case of the outstanding Preferred Shares of Trust III (and
the Preferred Merger Shares), will not end unless the fund shall have given at
least 14 days' written notice to the Paying Agent, the Remarketing Agent, the
Securities Depository and all holders of shares. Fifth, the discretion of the
Remarketing Agent to waive a holder's election to hold Preferred Shares in
connection with a Remarketing is contingent, in the case of the outstanding
Preferred Shares of Trust II, but not in the case of the outstanding Preferred
Shares of Trust III (and the Preferred Merger Shares), on the Remarketing
Agent's being able to remarket all shares tendered to it in such Remarketing.
Sixth, the 20-day minimum notice period prior to any redemption, in the case of
the outstanding Preferred Shares of Trust III (and the Preferred Merger
Shares), but not in the case of the outstanding Preferred Shares of Trust II,
applies only if a shorter period is not provided for under applicable law.
Seventh, the Remarketing Date and the Settlement Date are normally Thursday and
Friday, respectively, in the case of
B-2
the outstanding Preferred Shares of Trust III (and the Preferred Merger
Shares), and are normally Wednesday and Thursday, respectively, in the case of
the outstanding Preferred Shares of Trust II. Finally, in the event that the
fund notifies the Remarketing Agent prior to the Remarketing establishing the
Applicable Dividend Rate for any dividend that income subject to regular
federal income tax will be included in such dividend, the Maximum Dividend Rate
will be the Maximum Dividend Rate that would otherwise be applicable divided by
the quantity 1 minus the Gross-Up Tax Rate, in the case of the outstanding
Preferred Shares of Trust III (and the Preferred Merger Shares), and will be as
follows, in the case of the outstanding Preferred Shares of Trust II:
Applicable Applicable
Percentage Percentage
of Reference of Reference
Rate- Rate-
Moody's S&P No Tax Notification Tax Notification
- ------------------ --------------- --------------------- -----------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
Dividends and Dividend Periods
The Bylaws provide generally that holders of Preferred Shares will be
entitled to receive, when, as and if declared by the fund, out of funds legally
available therefor, cumulative cash dividends, at the Applicable Dividend Rate
for the applicable Dividend Period, 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,"
"Remarketing Procedures" and Exhibit B-1.
The Applicable Dividend Rate on Preferred Merger Shares for the Initial
Dividend Period will be the rate determined by the Remarketing Agent in
connection with the Remarketing occurring on the day before the Date of
Original
B-3
Issue Date. For each Dividend Period thereafter, except as otherwise described
herein, the Applicable Dividend Rate on the Preferred Merger Shares and all
other Preferred Shares will be the dividend rate per annum determined by the
Remarketing Agent in its sole discretion (which discretion will be conclusive
and binding on all holders) in accordance with the remarketing procedures
described below. See "Remarketing" and "Remarketing Procedures." The Initial
Dividend Period for Preferred Shares and each subsequent Dividend Period will
generally consist of 28 days (a "28-day Dividend Period"), unless the fund
elects, prior to any Remarketing, a Special Dividend Period. A "Special
Dividend Period" is a Dividend Period consisting of a specified number of days
(other than 28), evenly divisible by seven and not fewer than seven nor more
than 364 (a "Short Term Dividend Period"), or a Dividend Period consisting of a
specified period of one whole year or more but not greater than five years (a
"Long Term Dividend Period"). Dividends on Preferred Shares will be cumulative
from their Date of Original Issue and will be payable, when, as and if declared
by the Trustees, commencing on the last day of the Initial Dividend Period, and
generally on each Dividend Payment Date thereafter. The holder of a Preferred
Share may elect to tender such share or hold such share for the next Dividend
Period by providing notice to the Remarketing Agent in connection with the
Remarketing for that Dividend Period. See "Remarketing" and "Remarketing
Procedures."
Dividend Periods for the Preferred Shares. A Dividend Period for
Preferred Shares will commence on each (but not the final) Dividend Payment
Date for such share; provided, however, that any Dividend Payment Date, other
than the last Dividend Payment Date during such Dividend Period, occurring
after commencement of and during a Special Dividend Period of more than 35 days
will not give rise to a new Dividend Period. Each subsequent Dividend Period
for Preferred
B-4
Shares will comprise, beginning with and including the date on which it
commences, 28 consecutive days or, in the event the fund has designated such
Dividend Period as a Special Dividend Period, such number of consecutive days
as specified by the fund; provided that such number of days to be specified
shall be a multiple of seven and not more than 364 in the case of a Short Term
Dividend Period and shall consist of at least one full year (but not more than
five years) in the case of a Long Term Dividend Period. Notwithstanding the
foregoing, any adjustment of the remarketing schedule or of the length of a
Dividend Period as provided herein shall cause an adjustment of the relevant
Settlement Date, if necessary, so that such Settlement Date will be the first
day of the next Dividend Period.
Special Dividend Periods for Preferred Shares. With respect to each
Dividend Period, the fund may, at its sole option and to the extent permitted
by law, by telephonic or written notice (a "Request for Special Dividend
Period") to the Remarketing Agent, request that the next succeeding Dividend
Period for Preferred Shares will be a number of days (other than 28), evenly
divisible by seven, and not fewer than seven nor more than 364 in the case of a
Short Term Dividend Period or a period of not less than one whole year and not
greater than five years in the case of a Long Term Dividend Period, specified
in such notice, provided that the fund may not give a Request for a Special
Dividend Period of greater than 28 days (and any such request shall be null and
void) unless the fund has given written notice thereof to Moody's and S&P and
unless, with respect to the Preferred Shares, full cumulative dividends, any
amounts due with respect to redemptions, and any Additional Dividends payable
prior to such date have been paid in full and, for any Remarketing occurring
after the initial Remarketing, all shares tendered were remarketed in the last
occurring Remarketing. Such Request for Special Dividend Period, in the case of
a
B-5
Short Term Dividend Period, shall be given on or prior to the fourth Business
Day but not more than seven Business Days prior to a Remarketing Date for the
Preferred Shares and, in the case of a Long Term Dividend Period, shall be
given on or prior to the 14th day but not more than 28 days prior to a
Remarketing Date for Preferred Shares. Upon receiving such a Request for
Special Dividend Period, the Remarketing Agent shall determine (i) whether
given the factors set forth below it is advisable that the fund issue a Notice
of Special Dividend Period for Preferred Shares as contemplated by such Request
for Special Dividend Period, (ii) the Optional Redemption Price of the
Preferred Shares during such Special Dividend Period and, (iii) the Specific
Redemption Provisions and shall give the fund written notice (a "Response") of
its determination by no later than the third Business Day prior to such
Remarketing Date. In making such determination, the Remarketing Agent will
consider (i) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (ii) existing market supply and demand for
short-term and long-term securities, (iii) existing yield curves for short-term
and long-term securities comparable to the Preferred Shares, (iv) industry and
financial conditions which may affect the Preferred Shares, (v) the investment
objective of the fund, and (vi) the Dividend Periods and dividend rates at
which current and potential beneficial holders of Preferred Shares would remain
or become beneficial holders. If the Remarketing Agent shall not give the fund
a Response by such third Business Day or if the Response states that given the
factors set forth above it is not advisable that the fund give a Notice of
Special Dividend Period for Preferred Shares, the fund may not give a Notice of
Special Dividend Period in respect of such Request for Special Dividend Period.
In the event the Response indicates that it is advisable that the fund give a
Notice of Special Dividend Period for the Preferred Shares, the fund may by no
later than the second Business Day prior to such Remarketing Date give a notice
(a "Notice
B-6
of Special Dividend Period") to the Remarketing Agent, the Paying Agent and to
the Securities Depository, which notice will specify (i) the duration of the
Special Dividend Period, (ii) the Optional Redemption Price as specified in the
related Response, and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The fund shall not give a Notice of Special
Dividend Period, or, if such Notice of Special Dividend Period shall have
already been given, shall give telephonic or written notice of its revocation
(a "Notice of Revocation") to the Remarketing Agent (in the case of clauses (x)
and (y)) and the Securities Depository (in the case of clauses (x), (y) and (z)
) on or prior to the Business Day prior to the relevant Remarketing Date if (x)
either the 1940 Act Preferred Shares Asset Coverage is not satisfied or the
fund shall fail to maintain S&P Eligible Assets and Moody's Eligible Assets
each with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount, in each case on each of the two Valuation Dates
immediately preceding the Business Day prior to the relevant Remarketing Date
on an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period (using as a pro forma dividend rate with respect to
such Special Dividend Period the dividend rate which the Remarketing Agent
shall advise the fund is an approximately equal rate for securities similar to
the Preferred Shares with an equal dividend period), provided that (unless
Moody's advises the fund to the contrary), in calculating the aggregate
Discounted Value of Moody's Eligible Assets for this purpose, the Moody's
Exposure Period shall be deemed to be one week longer than the Moody's Exposure
Period that would otherwise apply as of the date of the Notice, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date for the Preferred Shares have not been irrevocably
deposited with the Paying Agent by the close of business on the third Business
Day preceding the Remarketing Date or (z) the Remarketing Agent advises the
fund that after
B-7
consideration of the factors listed above it has concluded that it is advisable
to give a Notice of Revocation. If the fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause (x),
(y), or (z) of the preceding sentence or if the fund gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for Preferred
Shares, the next succeeding Dividend Period for Preferred Shares will be a
28-day Dividend Period, provided that if the then-current Dividend Period is a
Special Dividend Period of less than 28 days, the next succeeding Dividend
Period for such shares will be the same length as the current Dividend Period.
In the event all Preferred Shares for which the fund has given a Notice
of Special Dividend Period tendered are not remarketed or a Remarketing is not
held for any reason, the fund may not again give a Notice of Special Dividend
Period (and any such attempted notice shall be null and void) until all
Preferred Shares tendered in any subsequent Remarketing with respect to a
28-day Dividend Period have been remarketed.
Dividend Payment Dates. Dividends on each Preferred Share will accumulate
from its Date of Original Issue and will be payable, when, as and if declared
by the Trustees, on the applicable Dividend Payment Dates. The Dividend Payment
Dates will be: (i) with respect to any 28-day Dividend Period and any Short
Term Dividend Period of 35 or fewer days, the day next succeeding the last day
thereof; and (ii) with respect to any Short Term Dividend Period of more than
35 days and with respect to any Long Term Dividend Period the first Business
Day of each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and the day next succeeding the last day of such period (each
such date referred to in clause (i) or (ii) being herein referred to as a
"Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, then
B-8
(i) the Dividend Payment Date shall be the first Business Day next succeeding
such Normal Dividend Payment Date if such Normal Dividend Payment Date is a
Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date shall
be the first Business Day next preceding such Normal Dividend Payment Date if
such Normal Dividend Payment Date is a Friday and in each case the length of
the current Dividend Period will be adjusted accordingly. If, however, in the
case of clause (ii) in the preceding sentence the Securities Depository shall
make available to its participants and members in funds immediately available
in New York City on Dividend Payment Dates the amount due as dividends on such
Dividend Payment Dates (and the Securities Depository shall have so advised the
fund), and if the Normal Dividend Payment Date is not a Business Day, then the
Dividend Payment Date shall be the next succeeding Business Day and the length
of the current Dividend Period will be adjusted accordingly. Although any
particular Dividend Payment Date may not occur on the originally scheduled date
because of the exceptions discussed above, the next succeeding Dividend Payment
Date, subject to such exceptions, will occur on the next following originally
scheduled date. If for any reason a Dividend Payment Date cannot be fixed as
described above, then the Trustees shall fix the Dividend Payment Date and the
length of the current Dividend Period will be adjusted accordingly, if
necessary. The Initial Dividend Period, 28-day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as "Dividend Periods."
Each dividend payment date determined as provided above is hereinafter referred
to as a "Dividend Payment Date."
Dividend Payments. So long as there is a Securities Depository with
respect to the Preferred Shares, each dividend on Preferred Shares will be paid
to the Securities Depository or its nominee as the record holder of all such
shares, and such payment shall for all purposes discharge the
B-9
fund's obligations in respect of such payment. The Securities Depository is
responsible for crediting the accounts of the Agent Members of the beneficial
owners of Preferred Shares in accordance with the Securities Depository's
procedures. Each Agent Member will be responsible for holding or disbursing
such payments to the holders of the Preferred Shares for which it is acting in
accordance with the instructions of such holders. If, and as long as, neither
the Securities Depository nor its nominee is the record holder of a Preferred
Share, dividends thereon will be paid in same-day funds directly to the record
holder thereof in accordance with the instructions of such holder. 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 holders thereof as of a date not exceeding five Business
Days preceding the date of payment thereof as may be fixed by the Trustees. Any
dividend payment made on Preferred Shares 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 Preferred Shares 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 under "Dividends and Dividend
Periods -- Non-Payment Period; Late Charge," holders of Preferred Shares will
not be entitled to any additional amount in respect of any dividend payment on
any Preferred Shares which may be in arrears.
The amount of cash dividends per Preferred Share payable (if declared) on
each Dividend Payment Date for each 28-day Dividend Period and the Dividend
Payment Date or Dates for each Short Term Dividend Period shall be computed by
the fund by multiplying the Applicable Dividend Rate for such Dividend Period
by a fraction, the numerator of which will be the number of days in such
Dividend Period such
B-10
shares were outstanding from and including the Date of Original Issue or the
preceding Dividend Payment Date, as the case may be, to and including the day
preceding such Dividend Payment Date and the denominator of which will be 365,
multiplying the amount so obtained by $50,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of dividends per share payable on any Dividend Payment Date shall be computed
by multiplying the Applicable Dividend Rate by a fraction, the numerator of
which shall be the number of days from either the Date of Original Issue, with
respect to the initial Dividend Payment Date, or otherwise from the last
Dividend Payment Date, and the denominator of which is 360, multiplying the
amount so obtained by $50,000, and rounding the amount so obtained to the
nearest cent.
In the event that the Remarketing Agent, the Paying Agent, the Securities
Depository, any Agent Member, and any beneficial owner fails for any reason to
perform any of its obligations in respect of a remarketing or otherwise, no
holder of record of, or of any beneficial interest in, any Preferred Shares
shall have any right in respect thereof against the fund or any Trustee or
officer of the fund, and the sole obligation of the fund in respect of the
determination of the amount and the payment of any dividend shall be to pay to
the Paying Agent, for the benefit of the holders of record of the Preferred
Shares, dividends when due at the Applicable Dividend Rate notified to it from
time to time.
Non-Payment Period; Late Charge. A Non-Payment Period will commence on
and include the day on which the fund fails to (i) declare, prior to 12:00
noon, New York City time, on any Dividend Payment Date for a Preferred Share,
for payment on or (to the extent permitted below) within three Business Days
after such Dividend Payment Date to the person who held such share as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
B-11
Date, the full amount of any dividend on such Preferred Share 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 (to the
extent permitted below) within three Business Days after any Dividend Payment
Date for a Preferred Share the full amount of any dividend on such share
(whether or not earned or declared) payable on such Dividend Payment Date or
(B) on or (to the extent permitted below) within three Business Days after any
redemption date for a Preferred Share called for redemption, the redemption
price of $50,000 per share plus the full amount of any dividends thereon
(whether or not earned or declared) accumulated but unpaid to such redemption
date plus, in the case of an optional redemption, the premium, if any, payable
as the result of the designation of a Premium Call Period. Such Non-Payment
Period will end on and include 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. The
Applicable Dividend Rate for each Dividend Period for Preferred Shares,
commencing during a Non-Payment Period, will be equal to the Non-Payment Period
Rate and any Preferred Shares for which a Special Dividend Period would
otherwise have commenced on the first day of or during a Non-Payment Period
will have a 28-day Dividend Period. The "Non-Payment Period Rate," initially,
will be 250% of the applicable Reference Rate (or 300% of such rate if the fund
has provided notification to the Remarketing Agent
B-12
prior to the Remarketing Date establishing the Applicable Dividend Rate for any
dividend that net capital gain or other taxable income will be included in such
dividend on Preferred Shares). The initial Non-Payment Period Rate may be
changed from time to time by the fund without shareholder approval, but only in
the event the fund receives written confirmation from Moody's and S&P that any
such change would not impair the ratings then assigned by Moody's and S&P to
Preferred Shares. Any dividend on Preferred Shares 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 may (if such non-payment occurs because the fund
is prevented from doing so by the Bylaws or applicable law) be paid pro rata 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, and 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; such late charge will be
taxable as interest. If the fund fails to pay a dividend on a Dividend Payment
Date or to redeem any Preferred Shares on the date set for such redemption
(otherwise than because it is prevented from doing so by the Bylaws or by
applicable law), the preceding sentence shall not apply and the Applicable
Dividend Rate for the Dividend Period commencing during such Non-Payment Period
resulting from such failure shall be the Non-Payment Period Rate. During a
Non-Call Period, Preferred Shares subject to such Non-Call Period will not be
subject to redemption
B-13
at the option of the fund, but may be subject to mandatory redemption as
provided below. See "Redemption" below.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
fund may not declare dividends or make other distributions on the 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 Preferred Shares would
be less than 200% (or such other percentage as may in the future be required by
law). Based on the composition of the fund's portfolio at December 31, 2000,
asset coverage with respect to Preferred Shares would have been approximately
% after the merger and % assuming issuance of the Additional Preferred
Shares.
In addition, for so long as any Preferred Shares are outstanding, the
fund will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, common shares or
other shares, if any, ranking junior to the Preferred Shares as to dividends
and upon liquidation) in respect of common shares or any other shares of the
fund ranking junior to or on a parity with the Preferred Shares 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 or
parity shares (except by conversion into or exchange for shares of the fund
ranking junior to the Preferred Shares as to dividends and upon liquidation),
unless (1) full cumulative dividends on Preferred Shares through their most
recent Dividend Payment Date shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Paying Agent,
(2) the fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the Bylaws, (3)
immediately after such transaction the aggregate
B-14
Discounted Value of Moody's Eligible Assets and S&P Eligible Assets would be at
least equal to the Preferred Shares Basic Maintenance Amount and (4) the fund
meets the requirements imposed by the 1940 Act. See "Asset Maintenance" and
"Redemption."
Under the Code the fund must, among other things, distribute each year at
least 90% of the sum of its investment company taxable income and net
tax-exempt income in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the fund's
ability to maintain such qualification. See "Taxation of Preferred Shares."
Upon any failure by the fund to pay dividends on the Preferred Shares for
two years or more, the holders of the Preferred Shares will acquire certain
additional voting rights. See "Voting Rights" below. Such rights shall be the
exclusive remedy of the holders of Preferred Shares upon any failure to pay
dividends on shares of the fund.
Additional Dividends. In the event of a redemption of all or a portion of
the outstanding Preferred Shares or the liquidation of the fund, the fund may,
after the close of its taxable year, be required, in order to comply with the
published position of the Internal Revenue Service (the "IRS") described below
under "Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income Dividend" concerning the allocation of various types of income between a
fund's classes and series of shares, to characterize all or a portion of a
dividend paid to holders of Preferred Shares during such taxable year as net
capital gain or other income subject to regular federal income tax, without
having either given advance notice of the inclusion of such income in such
dividend prior to the setting of the Applicable Dividend Rate for such dividend
or included an additional amount in the dividend to offset the tax effect of
the inclusion therein of such
B-15
taxable income. Accordingly, if the fund characterizes retroactively all or a
portion of a dividend already paid on Preferred Shares as consisting of net
capital gain or other income subject to regular federal income tax solely
because (i) the fund has redeemed all or a portion of the outstanding Preferred
Shares or has liquidated and (ii) the fund, in its judgment, believes it is
required, in order to comply with the published position of the IRS described
above, to allocate such taxable income to the Preferred Shares (the amount so
characterized referred to herein as a "Retroactive Taxable Allocation"), the
fund will, within 90 days after the end of such taxable year, provide notice of
the Retroactive Taxable Allocation made with respect to the dividend to the
Paying Agent and to each holder who received such dividend (initially Cede as
nominee of the Securities Depository) at such holder's address as the same
appears or last appeared on the share books of the fund. The fund will, within
30 days after such notice is given to the Paying Agent, pay to the Paying Agent
(who will then distribute to such holders), out of funds legally available
therefor, an amount equal to the aggregate of the Additional Dividends (as
defined below) payable to holders of Preferred Shares in respect of such
dividend. See "Taxation of Preferred Shares."
An "Additional Dividend" in respect of any dividend means payment to a
present or former holder of a Preferred Share of an amount which, giving effect
to the Retroactive Taxable Allocation made with respect to such dividend, would
cause such holder's after-tax return (taking into account both the dividend and
the Additional Dividend and assuming such holder is taxable at the Gross-Up Tax
Rate) to be equal to the after-tax return which the holder would have realized
if such retroactive allocation of taxable income had not been made. Such
Additional Dividend shall be calculated (i) without consideration being given
to the time value of money, (ii) assuming that no holder of Preferred Shares is
subject to the federal alternative minimum tax with respect to dividends
received
B-16
from the fund, and (iii) assuming that the holder of the Preferred Share in
respect of which a Retroactive Taxable Allocation was made is taxable at the
Gross-Up Tax Rate. An Additional Dividend will not include any amount to
compensate for the fact that either the Additional Dividend or the Retroactive
Taxable Allocation may be subject to state and local taxes. (For a description
of the Gross-Up Tax Rate, see "Remarketing--Remarketing Schedule: Advance
Notice of Allocation of Taxable Income: Inclusion of Taxable Income in
Dividend.") Except as provided in this "Description of Preferred
Shares--Dividends--Additional Dividends," the fund will not distribute any
additional amounts with respect to dividends previously paid to holders of
Preferred Shares. See "Taxation of Preferred Shares."
Special Dividends. The fund may declare Special Dividends on Preferred
Shares in order to comply with any distribution requirements or the Code,
provided that the declaration of a Special Dividend shall not cause the fund to
fail to maintain the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage. See "Taxation of Preferred Shares."
Applicable Dividend Rate. Except during a Non-Payment Period, the
Applicable Dividend Rate for any Dividend Period will not exceed the applicable
Maximum Dividend Rate. The Maximum Dividend Rate for Preferred Shares will
depend on the credit rating or ratings assigned to such shares. The Maximum
Dividend Rate for any Dividend Period will be the Applicable Percentage
(specified below) of the Reference Rate on the applicable Remarketing Date.
"Reference Rate" means (i) with respect to a 28-day Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 but fewer than 183 days, the applicable
B-17
"AA" Composite Commercial Paper Rate, (iii) with respect to any Short Term
Dividend Period having 183 or more but fewer than 365 days, the U.S. Treasury
Bill Rate and (iv) with respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate. The "Applicable Percentage" on any
Remarketing Date will be determined based on the lower of the credit rating or
ratings assigned on such date to Preferred Shares by Moody's and S&P (or if
Moody's or S&P 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 that only one such rating shall be available,
such rating) as follows:
Applicable
Percentage
of Reference
Moody's S&P Rate
- ------------------ --------------- -------------
"aa3" or higher AA- or higher 110%
"a3" to "al" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
"ba3" to "ba1" BB- to BB+ 200%
Below "ba3" Below BB- 250%
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 Preferred Shares 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
Gross-Up Tax Rate (as hereinafter defined). If the ratings for the Preferred
Shares are split between two of the foregoing credit rating categories, the
lower rating will determine the prevailing rating.
There is no minimum Applicable Dividend Rate in respect of any Dividend
Period.
The Applicable Dividend Rate for any Dividend Period commencing during
any Non-Payment Period, and the rate
B-18
used to calculate any applicable late charge, will generally be 250% of the
Reference Rate (or 300% of such rate if the fund has provided a Tax
Notification to the Remarketing Agent with respect to that Dividend Period).
Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividend
Dividends paid by the fund, to the extent paid from tax-exempt interest earned
on tax-exempt securities and properly designated as Exempt-Interest Dividends,
will be exempt from federal income tax, subject to the possible application of
the federal alternative minimum tax. The IRS has taken the position in a
published ruling that the fund is required for each taxable year to allocate
net capital gain and other income subject to regular federal income tax, if
any, proportionately between its common shares and the Preferred Shares in
accordance with the percentage of total fund distributions received by each
such class of shares with respect to such year. For example, the fund will
designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends among the holders of common shares and Preferred
Shares in proportion to the total dividends paid to each such class during or
with respect to the taxable year, or otherwise as required by law. Whenever the
fund intends to include any net capital gain or other income subject to regular
federal income tax in a dividend on Preferred Shares solely because the fund,
in its judgment, believes it is required, in order to comply with the published
position of the IRS, to allocate taxable income to such shares, the fund may
notify the Remarketing Agent of the amount to be so included at least five
Business Days prior to the Remarketing Date on which the Applicable Dividend
Rate for such dividend is to be established. Alternatively, if the fund has not
provided the notice referred to in the preceding sentence, and nevertheless
intends to include such income in a dividend on Preferred Shares solely because
the fund, in its judgment, believes it is
B-19
required, in order to comply with the published position of the IRS, to
allocate such income to Preferred Shares, it will (i) increase the dividend by
an amount such that the return to a holder of Preferred Shares with respect to
such dividend (as so increased and after giving effect to federal income tax at
the Gross-Up Tax Rate) equals the Applicable Dividend Rate and (ii) notify the
Paying Agent of the additional amount to be included in the dividend at least
five Business Days prior to the applicable Dividend Payment Date. In the event
the fund has provided notice of an inclusion of taxable income in an upcoming
dividend on Preferred Shares as referred to above, yet, after giving such
notice the fund intends to include additional taxable income in such dividend
solely because, in the judgment of the fund, it is required to do so in order
to comply with the IRS's published ruling, the fund will (i) increase the
dividend by an amount such that the return to a holder of Preferred Shares with
respect to such dividend (as so increased and after giving effect to federal
income tax at the Gross-Up Tax Rate) shall equal the return such holder of
Preferred Shares would have received, after application of federal income tax
(at the greater of the maximum federal individual or corporate income tax rate
applicable to the character of income reflected in such notice), if such
additional amount of taxable income had not been included in such dividend (and
such dividend had not been increased to take account of any additional taxable
income) and (ii) notify the Paying Agent of the additional amount to be
included in the dividend at least five Business Days prior to the applicable
Dividend Payment Date. Neither the underlying dividend nor the additional
amounts referred to in the two preceding sentences will be increased to
compensate for the fact that they may be subject to state and local taxes. The
Gross-Up Tax Rate shall be equal to the sum of (i) the percentage of the
taxable income included in the dividend that is taxable for federal income tax
purposes as ordinary income, multiplied by the greater of (A) the highest
marginal federal
B-20
corporate income tax rate (without regard to the phase-out of graduated rates)
applicable to ordinary income and (B) the highest marginal federal individual
income tax rate applicable to ordinary income (including any surtax but without
regard to any phase-out of personal exemptions or any limitation on itemized
deductions), and (ii) the percentage of the taxable income included in the
dividend that is taxable for federal income tax purposes as long-term capital
gain, multiplied by the greater of (A) the highest marginal federal corporate
income tax rate (without regard to the phase-out of graduated rates) applicable
to long-term capital gain and (B) the highest marginal federal individual income
tax rate applicable to long-term capital gain (including any surtax but without
regard to any phase-out of personal exemptions or any limitation on itemized
deductions). If for any reason it is determined after the payment of any
dividend that a portion of that dividend was subject to federal income tax, the
fund will not be required to pay any additional amount to compensate for any tax
payable on the dividend (other than Additional Dividends payable under the
circumstances described in this Appendix B). The fund will not be required to
provide any notice of the prospective inclusion of. or increase any dividend on
Preferred Shares as a result of the inclusion of, any taxable income in any
dividend (other than in the circumstances described above and in the
circumstances under which the fund is required to pay Additional Dividends). No
provision will be made to compensate holders of Preferred Shares for any
alternative minimum tax liability in respect of distributions on Preferred
Shares. See "Dividends and Dividend Period--Additional Dividends."
Remarketing
The Bylaws provide that the Applicable Dividend Rate for each Preferred
Share for each Dividend Period therefor (except the Initial Dividend Period)
will be (i) unless such Dividend Period commences during a Non-Payment Period
B-21
(described under "Dividends and Dividend Periods--Non-Payment Period; Late
Charge"), equal to the lower of (a) the rate per annum that the Remarketing
Agent determines on the Remarketing Date preceding the first day of such
Dividend Period pursuant to the procedures set forth in the Bylaws and (b) the
applicable Maximum Dividend Rate or (ii) if such Dividend Period commences
during a Non-Payment Period, equal to the Non-Payment Period Rate which is a
multiple (generally 200%) of the Reference Rate described below under
"Remarketing." During a Non-Payment Period, each Dividend Period that commences
will be a 28-day Dividend Period, the Preferred Shares will not be subject to
Tender and Dividend Reset, and the holders of Preferred Shares will not be able
to tender their shares in a Remarketing. See "Dividends and Dividend Period--
Non-Payment Period; Late Charge."
The fund will enter into a Paying Agent Agreement with [IBJ Schroeder
Bank & Trust Company]. The Paying Agent Agreement will provide, among other
things, that the Paying Agent will (i) act as transfer agent, registrar,
dividend and redemption price disbursing agent, settlement agent and agent for
certain, notifications (including notices of redemption) with respect to the
Preferred Shares and (ii) carry out certain other procedures. See "Redemption."
Prospective purchasers should carefully review the remarketing procedures
described below and more fully detailed in this Appendix, and should note that
(i) an election to tender Preferred Shares cannot be revoked except as provided
in the Bylaws and as more fully described in this Appendix B, (ii) each
Remarketing will be conducted through telephonic communications, (iii)
settlement for purchases and sales in a Remarketing will be made on the
Settlement Date, and (iv) each prospective purchaser and each holder of
Preferred Shares will be bound by the remarketing procedures,
B-22
including the Remarketing Agent's determination of the Applicable Dividend Rate
pursuant to the remarketing
procedures.
Remarketing Schedule. Each Remarketing for Preferred Shares will take
place over a two-Business Day period consisting of the Remarketing Date
(normally a Thursday) and the Settlement Date (normally a Friday). If, for
example, Thursday or Friday of a particular week is not a Business Day, the
normal remarketing schedule will be adjusted as follows: (i) if Thursday is not
a Business Day, Wednesday shall be the Remarketing Date and Friday shall be the
Settlement Date; and (ii) if Friday is not a Business Day, Thursday shall be
the Remarketing Date and Monday shall be the Settlement Date. If, for any
reason, neither of the foregoing clauses can be given effect, the Remarketing
Agent shall, in its sole discretion, adjust the remarketing schedule as
appropriate to complete such Remarketing. An example of the time sequence of
the events in a normal remarketing schedule is provided in Exhibit B-1 hereto.
The first Remarketing Date for the Preferred Merger Shares will be the last day
of the Initial Dividend Period.
Remarketing Date. By 9:00 a.m., 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 the next succeeding 28-day Dividend Period or
Special Dividend Period, as the case
may be.
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
DETER-
B-23
MINED UNTIL AFTER A HOLDER IS REQUIRED TO ELECT TO HOLD OR TENDER ITS PREFERRED
SHARES AND A NEW PURCHASER IS REQUIRED TO AGREE TO PURCHASE PREFERRED SHARES.
By 12:00 noon, New York City time, on any Remarketing Date with respect
to the Preferred Shares, each holder of Preferred Shares SUBJECT TO Tender And
Dividend Reset must notify the Remarketing Agent of its desire (on a
share-by-share basis) either to tender such share at a price of $50,000 per
share or to continue to hold such share for the next 28-day Dividend Period or,
if applicable, the designated Special Dividend Period. Holders of such
Preferred Shares who do not provide such notice shall be deemed to have elected
(i) to hold all their Preferred Shares if the current Dividend Period and
succeeding Dividend Period is a 28-day Dividend Period or a Special Dividend
Period of 90 days or less, and (ii) to tender all their Preferred Shares if the
current Dividend Period or succeeding Dividend Period is a Special Dividend
Period of more than 90 days. Any holder or prospective purchaser may informally
indicate to the Remarketing Agent its Applicable Dividend Rate preferences.
However, any notice given to the Remarketing Agent to tender or hold shares for
a particular Dividend Period is irrevocable and may not be conditioned upon the
level at which Applicable Dividend Rates are set. Accordingly, the Applicable
Dividend Rate with respect to a Dividend Period may be greater or less than
such rate preferences. Any notice of tender may not be revoked, except that the
Remarketing Agent may, in its sole discretion, (i) at the request of a
tendering holder that has tendered one or more Preferred Shares to the
Remarketing Agent, waive such holder's tender, and thereby enable such holder
to continue to hold such share or shares for a 28-day Dividend Period or a
designated Special Dividend Period, as agreed to by the holder and the
Remarketing Agent at such time, so long as such tendering holder has indicated
to the Remarket-
B-24
ing Agent that it would accept the new Applicable Dividend Rate for such
Dividend Period, such waiver to be contingent upon the Remarketing Agent's
being able to remarket all shares tendered to it in such Remarketing, and (ii)
at the request of a holder that has elected to hold one or more of its
Preferred Shares, waive such holder's election with respect thereto, such
waiver to be contingent upon the Remarketing Agent's being able to remarket all
shares tendered to it in such Remarketing. Subject to the last sentence of this
paragraph, holders of Preferred Shares 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 Dividend Period if each of the
current Dividend Period and the next Dividend Period is a 28-day Dividend
Period or a Special Dividend Period of 90 days or less. If, on a Remarketing
Date for Preferred Shares, the current Dividend Period is a Special Dividend
Period of more than 90 days, or the succeeding Dividend Period has been
designated by the Trustees as a Special Dividend Period of more than 90 days,
then holders of such shares that fail to elect to tender or hold such shares
will be deemed to have elected to tender such shares.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing. If any Preferred
Shares tendered in a Remarketing are not remarketed, a holder thereof may be
required to hold some or all of its shares at least until the end of the next
Dividend Period therefor or to sell its shares outside a Remarketing. In such
case, the remarketing procedures may require an allocation of Preferred Shares
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 Preferred Shares that is less than the number of Preferred
Shares specified in such holder's tender order. See "Remarketing Procedures."
B-25
Settlement Date. On a Settlement Date for Preferred Shares, which will be
the first Business Day following the related Remarketing Date and which will be
the first day of the new Dividend Period, each person purchasing Preferred
Shares as a result of a Remarketing must pay, or cause its Agent Member to pay
on its behalf, the purchase price against delivery of such shares by the holder
thereof or its Agent Member.
Settlement for purchases and sales of Preferred Shares in a Remarketing
will generally be made with respect to each Preferred Share through the
Securities Depository on the related Settlement Date therefor in accordance
with its normal procedures, which provide for payment in same-day funds.
Preferred Shares tendered in a Remarketing will be purchased solely out
of the proceeds received from purchasers of Preferred Shares in such
Remarketing. Neither the fund, nor the Paying Agent or the Remarketing Agent
will be obligated to provide funds to make payment upon any holder's tender in
a Remarketing unless, in the case of the Paying Agent or the Remarketing Agent,
the shares are purchased for its own account. Tendered Preferred Shares will
also be subject to purchase in a Remarketing by the Remarketing Agent for its
own account or as nominee for others, although the Remarketing Agent is not
obligated to purchase any shares.
Remarketing Agent. The Remarketing Agent for the outstanding Preferred
Shares of Trust III and for the Preferred Merger Shares, is [Smith Barney
Shearson Inc.] The Remarketing Agent for the outstanding Preferred Shares of
Trust II is . No Remarketing Agent has yet been designated for the Additional
Preferred Shares.
The fund will enter into a Remarketing Agreement with the Remarketing
Agent which will provide, among other things, that the Remarketing Agent will
follow certain procedures for remarketing Preferred Shares on behalf of holders
B-26
thereof as provided in the Bylaws for the purpose of determining the Applicable
Dividend Rate that will enable the Remarketing Agent to remarket Preferred
Shares tendered to it at a price of $50,000 per share for a 28-day Dividend
Period or a Special Dividend Period, as the case may be. Each periodic
operation of such procedures with respect to Preferred Shares is referred to as
a "Remarketing." Under certain circumstances. Preferred Shares tendered in a
Remarketing may be tendered or purchased by the Remarketing Agent for its own
account. See "Remarketing Procedures."
For its services in determining the Applicable Dividend Rate and
remarketing Preferred Shares for a 28-day Dividend Period, the Remarketing
Agent will receive from the fund a fee for such period calculated at a rate
equal to approximately .25% per annum of the average amount of Preferred Shares
outstanding during the Dividend Period. If the Dividend Period is a Special
Dividend Period, the fund will instead pay to the Remarketing Agent a fee, to
be determined by mutual consent of the fund and the Remarketing Agent, based on
the selling concession that would be applicable to an underwriting of a fixed
or variable rate preferred stock issue with a similar dividend period. The
Remarketing Agent will pay to selected broker-dealers a portion of the fees
described above, reflecting shares sold through such broker-dealers to
purchasers in Remarketings.
The fund and Putnam Management have agreed to indemnify the Remarketing
Agent against certain liabilities arising out of or in connection with its
duties under the Remarketing Agreement.
Any Remarketing Agent may resign and be discharged from its duties with
respect to the Preferred Shares under a Remarketing Agreement by giving at
least 60 days' prior notice in writing to the fund, the Securities Depository,
the Paying Agent and each other Remarketing Agent, if any, and the fund may
remove a Remarketing Agent under a Remar-
B-27
keting Agreement by giving at least 60 days' prior notice in writing to such
Remarketing Agent, the Securities Depository, the Paying Agent and any other
Remarketing Agent of such removal; provided that if (i) the resigning or
removed Remarketing Agent is at the time the sole Remarketing Agent, or (ii)
each other Remarketing Agent elects to resign or is removed within one week of
delivery of such notice, then neither any such resignation nor any such removal
will be effective until a successor remarketing agent which is a nationally
recognized broker-dealer shall have entered into a remarketing agreement with
the fund in which such successor remarketing agent shall have agreed to conduct
Remarketings with respect to the Preferred Shares in accordance with the terms
and conditions of the Bylaws.
A Remarketing Agent may also terminate a Remarketing Agreement or may
resign by giving notice in writing to the fund, the Securities Depository, the
Paying Agent and each other Remarketing Agent, if any, if any of the following
events has occurred and has not been cured prior to the proposed date of such
termination or resignation (in each case for a period of 30 days after notice
thereof has been given to the fund specifying the condition or event): (i) the
rating of the Preferred Shares shall have been downgraded or withdrawn by a
national rating service, the effect of which, in the opinion of the Remarketing
Agent or Remarketing Agent, as the case may be, is to affect materially and
adversely the market price of such Preferred Shares or the ability of the
Remarketing Agent to remarket such shares; (ii) all of the Preferred Shares
shall have been called for redemption; or (iii) without the prior written
consent of the Remarketing Agent, the Agreement and Declaration of Trust, the
Bylaws or the Paying Agent Agreement shall have been amended in any manner
that, in the opinion of the Remarketing Agent, as the case may be, materially
changes the nature of the Preferred Shares or the remarketing procedures with
respect thereto.
B-28
The Remarketing Agent is not obligated to set the Applicable Dividend
Rate or Rates on Preferred Shares or to remarket such shares during a
Non-Payment Period as provided in the Bylaws or at any time that certain
conditions specified in the Remarketing Agreement have not been met or any of
the events set forth in clauses (i), (ii) or (iii) of the immediately preceding
paragraph has occurred. Performance by the Remarketing Agent will be subject to
certain conditions. The Remarketing Agent may not terminate the Remarketing
Agreement except in accordance with the procedures set forth in such agreement.
See "Remarketing Procedures."
Restriction on Transfer
General. The Paying Agent will maintain a record of certain beneficial
owners of Preferred Shares, for purposes of determining such owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of such beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time.
Book Entry Only. DTC initially will act as Securities Depository for the
Agent Members with respect to Preferred Shares. Except as discussed below, as
long as DTC is the Securities Depository, one certificate for the outstanding
Preferred Shares 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 Preferred Shares. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions contained in the Bylaws.
Unless the fund shall have waived this requirement during a Non-Payment Period,
Preferred Shares may be held only in book entry form through the Securities
Depository (which, either directly or through a nominee, will be the registered
owner of Preferred Shares as described above), and the fund will issue
stop-transfer instructions to the Paying Agent for the Preferred Shares to this
effect. If the fund shall have
B-29
waived the foregoing requirement during a Non-Payment Period, a holder of
Preferred Shares may obtain a certificate or certificates for such shares. The
fund is advised that DTC is a New York-chartered limited purpose trust company,
which performs services for its participants (including the Agent Members),
some of which (and/or their representatives) own DTC. The fund is advised
further that DTC maintains lists of its participants and will maintain as
record holder the positions (beneficial ownership interests) held by each Agent
Member in the Preferred Shares, whether such Agent Member is a holder for its
own account or as a nominee for another holder. The fund shall have no
obligation, including without limitation any obligation to provide notice or to
make any payment (in respect of any dividend or otherwise) to any person
(including without limitation any holder of any beneficial interest in
Preferred Shares, whether or not such interest is reflected on the share
transfer books of the Paying Agent) other than the holders of record of the
Preferred Shares shown on the share transfer books of the Paying Agent from
time to time. The share transfer books of the fund as kept by the Paying Agent
shall be conclusive as to who is the holder of record of any Preferred Shares
at any time and as to the number of Preferred Shares held from time to time by
any such holder. No Remarketing Agent, Paying Agent, Securities Depository, or
Agent Member will have any obligation to any person having any interest in any
Preferred Share other than the holder of record and the beneficial owner
thereof as shown from time to time on the share transfer books kept by the
Paying Agent. The Paying Agent shall have no obligation to record any transfer
of record or beneficial ownership in any share unless and until it shall have
received proper notice and evidence of such transfer and the right of the
transferee in accordance with the Paying Agent's procedures in effect from time
to time.
B-30
The fund intends that any certificate for Preferred Shares will bear a
legend to the effect that such certificate is issued subject to certain
provisions restricting transfers of such shares.
Secondary Market
The Remarketing Agent has advised the fund that it currently intends to
make a secondary trading market in the Preferred Shares 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. The Remarketing Agent, however, has no
obligation to make a secondary market in the Preferred Shares outside of
Remarketings, and there can be no assurance that a secondary market for
Preferred Shares will exist at any particular time or, if it does exist, that
it will provide holders with liquidity of investment. The Preferred Shares will
not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotation System. If the Remarketing Agent
purchases Preferred Shares in the secondary market or in a Remarketing, it may
be in a position of holding for its own account or as nominee for others
Preferred Shares at the time it determines the Applicable Dividend Rate in a
Remarketing therefor, and may tender such shares in such Remarketing.
Remarketing Procedures
Tender by Holders. Each share of Preferred Shares is subject to Tender
and Dividend Reset only on the relevant Remarketing Date at the end of each
Dividend Period applicable to such share.
Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date in the Remarketing at the end of each Dividend Period, the
holder of a Preferred Share may elect to tender such share or hold such share
for the next Dividend Period. If the holder of such Preferred Share elects to
hold such share, such holder shall hold
B-31
such Preferred Share at the Applicable Dividend Rate for a 28-day Dividend
Period or a Special Dividend Period if the succeeding Dividend Period with
respect to such share has been designated by the Trustees as a Special Dividend
Period, provided that, except during a Non-Payment Period, if (i) there is no
Remarketing Agent, (ii) the Remarketing Agent is not required to conduct a
Remarketing or (iii) the Remarketing Agent is unable to remarket in the
Remarketing on such Remarketing Date all such Preferred Shares tendered (or
deemed tendered) to it at a price of $50,000 per share, then the next Dividend
Period for all Preferred Shares shall be a 28-day Dividend Period and the
Applicable Dividend Rate therefor shall be the applicable Maximum Dividend
Rate.
Preferred Shares may be tendered only in a Remarketing which commences on
the Remarking Date immediately prior to the end of the current Dividend Period
with respect thereto as described above in "Remarketing -- Remarketing Date."
When Preferred Shares are tendered in a Remarketing therefor, the
Remarketing Agent is required to 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 Preferred Shares tendered. Each
holder's right to tender Preferred Shares in a Remarketing therefor is 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
purchasers for tendered Preferred Shares at an Applicable Dividend Rate for a
28-day Dividend Period or a designated Special Dividend Period, as the case may
be, not in excess of any applicable Maximum Dividend Rate. If the Remarketing
Agent is unable to find a purchaser or purchasers for all Preferred Shares
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
B-32
the tendered shares. Each purchase or sale in a Remarketing will be made for
settlement on the related Settlement Date.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing therefor. If any
Preferred Shares so tendered are not remarketed, a holder thereof may be
required to continue to hold some or all of its shares until at least the end
of the next Dividend Period therefor or to sell such shares outside a
Remarketing.
Tendered Preferred Shares will also be subject to purchase in a
Remarketing therefor by the Remarketing Agent. If the Remarketing Agent holds
Preferred Shares for its own account after a Remarketing, it is required to
establish an Applicable Dividend Rate in such Remarketing that is no higher
than the Applicable Dividend Rate that would have been set if the Remarketing
Agent did not hold or had not purchased such shares. The Remarketing Agent may
purchase Preferred Shares for its own account in a Remarketing only if the
Remarketing Agent purchases for its own account or the account of others all
tendered (or deemed tendered) Preferred Shares subject to Tender and Dividend
Reset but not sold to other purchasers in such Remarketing. The Remarketing
Agent is not obligated to purchase any Preferred Shares that would otherwise
remain unsold in a Remarketing. If the Remarketing Agent holds any Preferred
Shares immediately prior to a Remarketing and if all other Preferred Shares
subject to Tender and Dividend Reset and tendered for sale by other owners have
been sold in such Remarketing, then the Remarketing Agent may sell in such
Remarketing such number of its shares which are subject to Tender and Dividend
Reset as there are outstanding orders to purchase that have not been filled by
shares tendered for sale on behalf of accounts other than that of the
Remarketing Agent. See "Secondary Market" above. Neither the fund, nor the
Paying Agent or the Remarketing Agent will be obligated in any case
B-33
to provide funds to make payment to any holder upon such holder's tender of its
Preferred Shares in any Remarketing. If the Remarketing Agent purchases
Preferred Shares in the secondary market or in a Remarketing, it may be in the
position of holding for its own account or as nominee for others Preferred
Shares subject to Tender and Dividend Reset in a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.
Applicable Dividend Rates. By 3:00 p.m. New York City time, on each
Remarketing Date, the Remarketing Agent will determine the Applicable Dividend
Rate to the nearest one-thousandth (0.001) of one percent per annum for the
next 28-day Dividend Period (or, if designated, a Special Dividend Period,
provided that, if the Remarketing Agent is unable to remarket on such
Remarketing Date all such tendered shares in a Remarketing at a price of
$50,000 per share, then the Remarketing Agent will assign no shares to any
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 Preferred Shares subject to
Tender and Dividend Reset in such Remarketing and tendered to it on such
Remarketing Date at a price of $50,000 per share. The Applicable Dividend Rate
for Preferred Shares 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 Preferred Shares. In determining such Applicable Dividend Rate, the
Remarketing Agent will, after taking into account market conditions as
reflected in 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 stocks determined for the
B-34
purpose of providing non-binding indications of the Applicable Dividend Rates
to holders and potential purchasers of Preferred Shares, (i) consider the
number of Preferred Shares tendered in the applicable Remarketing and the
number of Preferred Shares prospective purchasers are willing to purchase and
(ii) contact by telephone or otherwise current and prospective holders of the
Preferred Shares subject to Tender and Dividend Reset to ascertain the dividend
rates at which they would be willing to hold such shares. If no Applicable
Dividend Rate shall have been established on a Remarketing Date for the next
28-day Dividend Period, or Special Dividend Period, if any, for any reason
(other than because there is no Remarketing Agent, the Remarketing Agent is not
required to conduct a Remarketing pursuant to the terms of the Remarketing
Agreement or the Remarketing Agent is unable to remarket on the Remarketing
Date all Preferred Shares tendered (or deemed tendered) to it at a price of
$50,000 per share), then the Remarketing Agent, in its sole discretion, shall,
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 of fixed and
variable rate preferred stock, determine the Applicable Dividend Rate that
would be the rate per annum that would be the initial dividend rate fixed in an
offering on such Remarketing Date, assuming in each case a comparable dividend
period, issuer and security. If a Remarketing for Preferred Shares does not
take place because 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 all such Preferred Shares tendered (or deemed
tendered) to it at a price of $50,000 per share, then, except during a
Non-Payment Period, the Applicable Dividend Rate for the subsequent Dividend
Period for such shares will be the applicable Maximum Dividend Rate
B-35
for a 28-day Dividend Period and such subsequent Dividend Period shall be a
28-day Dividend Period.
Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period for Preferred Shares will not be more than the Maximum Dividend
Rate applicable to such shares.
The Maximum Dividend Rate for Preferred Shares will be the "Applicable
Percentage" (as described below) of the Reference Rate. The Remarketing Agent
will round each Maximum Dividend Rate to the nearest one-thousandth (0.001) of
one percent per annum, with any such number ending in five ten-thousandths
(0.0005) of one percent being rounded upwards to the nearest one-thousandth
(0.001) of one percent. The Remarketing Agent will not round the applicable
Reference Rate as part of its calculation of any Maximum Dividend Rate.
"Reference Rate" means (i) with respect to a Dividend Period having 28 or
fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but fewer than
183 days, the applicable "AA" Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having 183 or more but fewer than 365
days, the U.S. Treasury Bill Rate, and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
" 'AA' Composite Commercial Paper Rate," on any date of determination,
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 or "aa" by
Moody's or the equivalent of such rating by another nationally recognized
rating agency, as such rate is made available on a discount basis or otherwise
by the Federal Reserve Bank of New York
B-36
for the Business Day immediately preceding such date, or (ii) in the event that
the Federal Reserve Bank of New York does not make available such a rate, then
the arithmetic average of the Interest Equivalent of the rate 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 one
of the Commercial Paper Dealers does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
will be determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days (in each case
determined without regard to any adjustment in the length of a Dividend Period
or the remarketing schedule in respect of non-Business Days) shall be (i) 7 or
more days but 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 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper, (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper, (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper,
B-37
and (viii) 162 or more days but fewer than 183 days, such rate shall be the
Interest Equivalent of the 180-day rate on such commercial paper.
"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
comparable index 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 successor thereto from time to time selected by the fund 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"
(as defined in the Code) (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, 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 (A) the per annum rate expressed
on an Interest Equivalent basis equal to the most recent Kenny Index so made
available divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available
B-38
on a discount basis or otherwise on the Business Day immediately preceding such
date by the Federal Reserve Bank of New York in its Composite 3:30 p.m.
Quotations for U.S. Government Securities report for such Business Day, or (ii)
if such yield as so calculated is not available, the Alternate Treasury Bill
Rate on such date. "Alternate Treasury Bill Rate" on any date means the Interest
Equivalent of the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded Treasury Bill with a maturity
most nearly comparable to the length of the related Dividend Period, as
determined by bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized primary
U.S. Government securities dealers selected by the Remarketing Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Remarketing Agent.
B-39
The Maximum Dividend Rate for Preferred Shares will depend on the credit
rating or ratings assigned to such shares. The Applicable Percentage for the
Preferred Shares on each Remarketing Date will be determined based on the lower
of the credit rating or ratings assigned on such date to the Preferred Shares
by Moody's and S&P (or if Moody's or S&P 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 that only one
such rating shall be available, such rating), as discussed in "Dividends and
Dividend Periods -- Special Dividends."
Allocation of Shares; Failure to Remarket at $50,000 Per Share. If, in a
Remarketing of the Preferred Shares, the Remarketing Agent is unable to
remarket by 3:00 p.m., New York City time, on the Remarketing Date all
Preferred Shares tendered to it in such Remarketing (which are subject to
Tender and Dividend Reset in such Remarketing) at a price of $50,000 per share,
(i) each holder that tendered shares for sale will sell a number of Preferred
Shares 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 Preferred Shares in such Remarketing, and (ii) the next Dividend
Period for Preferred Shares will be a 28-day Dividend Period and the Applicable
Dividend Rate for such Dividend Period will be the Maximum Dividend Rate for a
28-day Dividend Period.
If the allocation procedures described above would result in the sale of
a fraction of a Preferred Share, the Remarketing Agent will, in its sole
discretion, round up or down the number of Preferred Shares sold by each holder
on the applicable Remarketing Date so that each share sold by each holder shall
be a whole Preferred Share, and the total number of shares sold equals the
total number of shares purchased on such Remarketing Date.
B-40
Notification of Results; Settlement. By telephone at approximately 3:30
p.m., New York City time, on each Remarketing Date with respect to Preferred
Shares, the Remarketing Agent will advise each holder of tendered Preferred
Shares and each purchaser thereof (or the Agent Member thereof who in turn will
advise such holder or purchaser) (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.
The transactions described above will be executed on the Settlement Date
through the Securities Depository in accordance with the Securities
Depository's procedures, and the accounts of the respective Agent Members of
the Securities Depository will be debited and credited and shares delivered by
book entry as necessary to effect the purchases and sales of Preferred Shares,
in each case as determined in the related Remarketing. Purchasers of Preferred
Shares will make payment through their Agent Members in same-day funds to the
Securities Depository against delivery by book entry of Preferred Shares
through their Agent members. The Securities Depository will make payment in
accordance with its procedures, which currently provide for payment in same-day
funds. If the certificates for Preferred Shares are not held by the Securities
Depository or its nominee, payment with respect to such shares will be made in
same-day funds to the Paying Agent against delivery of such certificates.
If any holder selling Preferred Shares 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 Preferred Shares in such Remarketing may deliver to
any
B-41
such other person a number of whole Preferred Shares that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of Preferred Shares to be so delivered will be determined by
such Agent Member. Delivery of such lesser number of Preferred Shares will
constitute good delivery.
As long as the Securities Depository or Cede or any other nominee
therefor holds the certificate or certificates representing the Preferred
Shares, no share certificates will need to be delivered by any selling holder
to reflect any transfer of Preferred Shares effected in a Remarketing.
The Remarketing Agent may, in its sole discretion, modify the settlement
procedures set forth above with respect to any Remarketing of Preferred Shares
so long as any such modification does not adversely affect any holders of such
shares.
Redemption
Optional Redemption. The fund may at its option after giving the
requisite Notice of Redemption, redeem Preferred Shares, in whole or in part,
on the next succeeding scheduled Dividend Payment Date applicable to those
Preferred Shares called for redemption, out of funds legally available
therefor, at a redemption price (the "Optional Redemption Price") of $50,000
per share plus an amount equal to dividends thereon accumulated but unpaid to
the date fixed for redemption plus the premium, if any, resulting from the
designation of a Premium Call Period; provided that no Preferred Share may be
redeemed at the option of the fund during (A) the Initial Dividend Period with
respect to such share or (B) a Non-Call Period to which such share is subject;
provided further that optional redemptions pursuant to this paragraph shall not
cause the fund to fail to maintain the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage. In addition, holders of
Preferred Shares may be entitled to receive Additional Dividends in the event
of the
B-42
redemption of such Preferred Shares to the extent provided above under
"Dividends and Dividend Periods--Additional Dividends." For so long as S&P
rates the Preferred Shares, the fund may not give a Notice of Redemption
relating to an optional redemption as described in this paragraph unless, at
the time of giving such Notice of Redemption, the fund has available "Deposit
Securities" with maturity or tender dates not later than the day preceding the
applicable redemption date and having a Discounted Value not less than the
amount due by reason of the redemption of Preferred Shares on such redemption
date.
Mandatory Redemption. The fund will be required to redeem, at a
redemption price (the "Mandatory Redemption Price") equal to $50,000 per share
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared) to the date fixed by the Trustees for redemption, certain of the
Preferred Shares to the extent permitted under the 1940 Act and Massachusetts
law, if the fund fails to maintain the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage and such failure is not
cured on or before the Preferred Shares Basic Maintenance Cure Date or the 1940
Act Cure Date (herein referred to as a "Cure Date"), as the case may be. In
addition, holders of Preferred Shares may be entitled to receive Additional
Dividends in the event of the redemption of such Preferred Shares to the extent
provided above under "Dividends and Dividend Periods -- Additional Dividends."
The number of Preferred Shares to be redeemed will be equal to the lesser of
(a) the minimum number of Preferred Shares the redemption of which, if deemed
to have occurred immediately prior to the opening of business on such Cure
Date, would, together with all other shares of beneficial interest of the fund
having preference rights subject to redemption or retirement, result in the
satisfaction of the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Cov-
B-43
erage, 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 Preferred Shares then outstanding will be redeemed), and (b) the maximum
number of Preferred Shares, together with all other shares of beneficial
interest of the fund having preference rights subject to redemption and
retirement, that can be redeemed out of funds expected to be legally available
therefor.
The fund is required to effect such a Mandatory Redemption not later than
35 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 Preferred
Shares which are subject to Mandatory Redemption or the fund otherwise is
unable to effect such redemption on or prior to 35 days after such Cure Date,
the fund will redeem those Preferred Shares which it was unable to redeem on
the earliest practicable date on which it is able to effect such redemption.
Any Preferred Share will be subject to Mandatory Redemption regardless of
whether such share is subject to a Non-Call Period, provided that Preferred
Shares subject to a Non-Call Period will only be subject to redemption to the
extent that other Preferred Shares (not subject to a Non-Call Period) are not
available to satisfy the number of shares required to be redeemed. In such
event, such shares subject to a Non-Call Period will be selected for redemption
in an ascending order of outstanding Non-Call Period (with shares with the
lowest number of days remaining in the Non-Call Period to be called first) and
by lot in the event of shares having equal outstanding Non-Call Periods.
Allocation. If fewer than all the outstanding Preferred Shares are to be
redeemed, the number of Preferred Shares to be so redeemed will be a whole
number of shares and will be determined by the Trustees (subject to the
provisions described above under "Redemption"), provided that (i) no
B-44
such Preferred Share will be subject to optional redemption on any Dividend
Payment Date during a Non-Call Period to which it is subject and (ii) Preferred
Shares subject to a Non-Call Period will be subject to Mandatory Redemption
only on the basis described above under "Redemption." Unless certificates
representing Preferred Shares are held by persons other than the Securities
Depository or its nominee, the Securities Depository, upon receipt of such
Notice of Redemption, will determine by lot (or otherwise in accordance with
procedures in effect at that time) the number of Preferred Shares to be
redeemed from the account of each Agent Member (which may include an Agent
Member, including the Remarketing Agent, holding shares for its own account)
and 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 Preferred Shares are not held by the
Securities Depository or its nominee, the Preferred Shares to be redeemed will
be selected by the Paying Agent by lot.
Notice of Redemption. Any Notice of Redemption with respect to Preferred
Shares will be given by the fund via telephone to the Paying Agent, the
Securities Depository (and any other registered holder of such shares) and the
Remarketing Agent not later than 1:00 p.m., New York City time (and later
confirmed in writing), on a day not less than 20 nor more than 30 days, or such
shorter period as may be provided for under applicable law, prior to the
earliest date upon which any such redemption may occur and, in the case of a
Mandatory Redemption, not less than 20 nor more than 30 days prior to
B-45
the redemption date established by the Trustees and specified in such notice.
In the case of a partial redemption, the Paying Agent will use its reasonable
efforts to provide telephonic notice to each beneficial holder (as shown on the
records of such ownership maintained by it) of Preferred Shares 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 to each such beneficial holder of
Preferred Shares called for redemption, the Remarketing Agent and the
Securities Depository not later than the close of business on the Business Day
immediately following the day on which the Paying Agent determines the shares
to be redeemed. In the case of a redemption in whole, the Paying Agent will use
its reasonable efforts to provide telephonic notice to each holder of Preferred
Shares called for redemption not later than the close of business on the
Business Day immediately following the day on which the Paying Agent receives a
Notice of Redemption from the fund. Such telephonic notice will be confirmed
promptly in writing to each holder of Preferred Shares called for redemption,
the Remarketing Agent and the Securities Depository not later than the close of
business on the second Business Day following the day on which the Paying Agent
receives notice of redemption.
Every Notice of Redemption and other redemption notice with respect to
the Preferred Shares will state: (a) the redemption date, (b) the number of
Preferred Shares to be redeemed, (c) the redemption price, (d) that dividends
on the Preferred Shares to be redeemed will cease to accumulate as of such
redemption date and (e) the provision of the Agreement and Declaration of Trust
or the Bylaws pursuant to which such
B-46
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.
The Paying Agent will use its reasonable efforts to cause the publication of a
redemption notice in an Authorized Newspaper within two Business Days of the
date of the Notice of Redemption, but failure so to publish such notification
will not affect the validity or effectiveness of any such redemption
proceedings.
Other Redemption Procedures. To the extent that any redemption for which
Notice of Redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem
Preferred Shares 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.
Upon the deposit of funds sufficient to redeem Preferred Shares 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
Mandatory Redemption Price, as the case may be, but without any interest or
other additional amount (except for Additional Dividends described above under
"Dividends and Dividend Periods -- Additional Dividends"), 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 Preferred Shares called for redemption on such date and
(ii) all other amounts to which holders
B-47
of Preferred Shares called for redemption may be entitled. The fund will be
entitled to receive, from time to time after the date fixed for redemption, any
interest on the funds so deposited. Any funds 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 Preferred Shares 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. If any such unclaimed
funds are repaid to the fund, the fund shall invest such unclaimed funds in
Deposit Securities with a maturity of no more than one Business Day.
Except as described above with respect to redemptions, nothing contained
in the Bylaws limits any legal right of the fund or any affiliate of the fund
to purchase or otherwise acquire any Preferred Shares at any price.
The fund has the right in certain circumstances to arrange for others to
purchase from the holders thereof Preferred Shares which are to be redeemed as
described above.
The Remarketing Agent may, in its sole discretion, modify the procedures
concerning notification of redemption described above with respect to Preferred
Shares so long as any such modification does not adversely affect the holders
of the Preferred Shares or materially alter the obligation of the Paying Agent
without obtaining its consent and so long as the fund receives written
confirmation from S&P that any such modifications would not impair the ratings
then assigned by S&P to the Preferred Shares.
Liquidation/Bankruptcy
Upon a liquidation, dissolution or winding up of the affairs of the fund,
whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled, whether from capital or surplus, before any
assets of the fund will be distributed among or paid over to the holders of the
B-48
common shares or any other class or series of shares of the fund ranking junior
to the Preferred Shares as to liquidation payments, to be paid an amount equal
to the liquidation preference with respect to such shares. The liquidation
preference for the Preferred Shares is $50,000 per share plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to but excluding the date of final distribution in same-day funds. After
any such payment, the holders of Preferred Shares will not be entitled to any
further participation in any distribution of assets of the fund, except to the
extent that they may be entitled to Additional Dividends to the extent provided
above in "Dividends and Dividend Periods -- Additional Dividends." If, upon any
such liquidation, dissolution or winding up of the fund, the assets of the fund
shall be insufficient to make such full
payment to the holders of Preferred Shares and to the holders of any shares of
beneficial interest of the fund having preference rights ranking as to
liquidation, dissolution or winding up on a parity with the Preferred Shares,
then such assets will be distributed among the holders of Preferred Shares and
such parity holders ratably in accordance with the respective amounts which
would by payable on such Preferred Shares and any other such preferred shares
if all amounts thereof were paid in full.
Neither the consolidation nor the merger of the fund with or into any
entity or entities nor a reorganization of the fund alone nor the sale, lease
or transfer by the fund of all or substantially all of its assets shall be
deemed to be a dissolution or liquidation of the fund.
The fund has no intention to file a voluntary petition in bankruptcy so
long as the value of its assets is, and is reasonably foreseen as being,
greater than its liabilities.
Voting Rights
Except as indicated in Appendix B or except as expressly required by
applicable law or expressly set forth in
B-49
the Agreement and Declaration of Trust or Bylaws, each holder of Preferred
Shares and, each holder of common shares shall be entitled to one vote for each
share held on each matter submitted to a vote of shareholders of the Trust, and
the holders of outstanding Preferred Shares and of common shares shall vote
together as a single class.
Holders of Preferred Shares, voting as a class, will be entitled to elect
two of the fund's Trustees and the remaining Trustees will be elected by
holders of the common shares and the Preferred Shares voting together as a
single class. If at any time dividends on the fund's Preferred Shares shall be
unpaid in an amount equal to two full years' dividends thereon or if at any
time holders of any preferred shares of the fund other than the Preferred
Shares are entitled to elect a majority of the Trustees of the fund, then the
number of Trustees shall automatically be increased by the smallest number
that, when added to the two Trustees elected exclusively by the holders of
Preferred Shares as described above, would constitute a majority of the
Trustees as so increased and at a special meeting of shareholders which will be
called and held as soon as practicable, and at all subsequent meetings at which
Trustees are to be elected, the holders of Preferred Shares, voting as a
separate class, will be entitled to elect the smallest number of additional
Trustees that, together with the two Trustees which such holders will be in any
event entitled to elect, constitutes a majority of the total number of Trustees
of the fund as so increased. The terms of office of the persons who are
Trustees at the time of that election will continue. If the fund thereafter
shall pay, or declare and set apart for payment, in full all dividends payable
on all outstanding Preferred Shares for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease (subject always to
revesting in the event of the further occurrence of the circumstances described
above), and the terms of office of all the additional Trustees elected by the
holders of
B-50
Preferred Shares (but not of the Trustees with respect to whose election the
holders of common shares were entitled to vote or the two Trustees the holders
of Preferred Shares have the right to elect in any event) will terminate
automatically.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting separately as a class, would be required to amend,
alter or repeal any of the preferences, rights or powers of the Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or increase or decrease the number of Preferred Shares authorized to be
issued. Unless a higher percentage is provided for as described in Appendix B,
the affirmative vote of the holders of a majority of the outstanding Preferred
Shares, voting as a class, will be required to approve any plan of
reorganization adversely affecting such shares or any action requiring a vote
of security holders under Section 18(a) of the 1940 Act including, among other
things, changes in the investment restrictions described under "Investment
Restrictions."
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding Preferred Shares shall have been redeemed or
shall no longer be deemed to be outstanding.
Repurchase of Shares; Conversion to Open-End Status
Shares of closed-end investment companies often trade at a discount to
their net asset values, and the fund's common shares may likewise trade at a
discount to their net asset value. The market price of the fund's common shares
will be determined by such factors as relative demand for and supply of such
common shares in the market, the fund's net asset value, general market and
economic conditions, and other factors beyond the control of the fund. Although
the fund's Common shareholders will not have the right to redeem their Shares,
the fund may take action to repurchase common shares in the open market or make
tender or repurchase
B-51
offers for its common shares at their net asset value. This may have the effect
of reducing any market discount from net asset value. The fund's ability to
repurchase or to tender for its common shares may be limited by asset coverage
requirements and other restrictions in respect of the Preferred Shares
outstanding at the time. The fund may, by vote of its Common shareholders and
holders of Preferred Shares (each voting as a separate class), be converted to
an open-end investment company, which would make the fund's common shares
redeemable upon demand of shareholders at the common shares net asset value.
Conversion to an open-end company would require the redemption of the Preferred
Shares. Certain provisions of the fund's Agreement and Declaration of Trust
discussed above may have the effect of depriving Common shareholders of an
opportunity to sell their Shares at a premium over prevailing market prices and
may have the effect of inhibiting the fund's conversion to open-end status.
The fund has no present intention of taking any such action. There is no
assurance that if action is undertaken to repurchase or tender for common
shares, that such action will result in the common shares' trading at a price
which approximates their net asset value. Although common share repurchases and
tenders could have a favorable effect on the market price of the fund's common
shares, it should be recognized that the acquisition of common shares by the
fund will decrease the total assets of the fund and, therefore, have the effect
of increasing the fund's expense ratio. Any common share repurchases or tender
offers will be made in accordance with requirements of the Securities Exchange
Act of 1934, as amended, and the 1940 Act. If the fund were to make a tender or
repurchase offer for its common shares, Shareholders would receive any notice
thereof required by applicable law, including any required information
describing the offer and the means by which Shareholders might submit their
common shares. If the fund converted to an open-end company, it
B-52
could be required to liquidate its portfolio investments to meet requests for
redemption, and its common shares would no longer be listed on the American
Stock Exchange.
Holders of Record; Holders of Beneficial Interest
The fund shall have no obligation, including without limitation any
obligation to provide notice or to make any payment (in respect of any dividend
or otherwise), to any person (including without limitation any holder of any
beneficial interest in Preferred Shares, whether or not such interest is
reflected on the share transfer books of the Paying Agent) other than the
holders of record of the Preferred Shares shown on the share records of the
Paying Agent from time to time. The record books of the fund as kept by the
Paying Agent shall be conclusive as to who is the holder of record of any
Preferred Share at any time and as to the number of Preferred Shares held from
time to time by any such holder. No Remarketing Agent, Paying Agent, Securities
Depository, or Agent Member will have any obligation to any person having any
interest in any Preferred Shares other than the holder of record and the
beneficial owner thereof as shown from time to time on the share transfer books
kept by the Paying Agent. The Paying Agent shall have no obligation to record
any transfer of record or beneficial ownership in any share unless and until it
shall have received proper notice and evidence of such transfer and the right
of the transferee in accordance with the Paying Agents procedures in effect
from time to time.
Special Considerations Relating to Preferred Shares
The 1940 Act Preferred Shares Asset Coverage requirement and the rating
agency asset maintenance guidelines require that the fund maintain certain
asset levels with respect to the Preferred Shares. See "Asset Maintenance." In
the event that the fund's assets fall below these levels, the fund may be
required to redeem some or all of the then outstanding Preferred Shares. See
"Redemption."
B-53
The credit rating of the Preferred Shares could be reduced while an
investor holds the Preferred Shares. A decrease in the rating of the Preferred
Shares may reflect a reduction in the fund's ability to pay dividends and/or
the redemption price and liquidation value in respect of the Preferred Shares
in accordance with the terms of the Preferred Shares.
The actual Applicable Dividend Rate for any dividend period after the
Initial Dividend Period for Preferred Shares may be greater than or less than
the rate indicated in the non-binding indications of the Applicable Dividend
Rate furnished to holders of Preferred Shares (but, except during a Non-Payment
Period, not greater than the applicable Maximum Dividend Rate) and will not be
determined until after a holder is required to elect to hold or tender its
Preferred Shares.
There can be no assurance that the Remarketing Agent will be able to
remarket all Preferred Shares tendered in a Remarketing. If any Preferred
Shares tendered in a Remarketing are not remarketed, a holder thereof maybe
required to hold some or all of its shares at least until the end of the next
Dividend Period therefor (or longer if Remarketings continue to fail) or to
sell its shares outside a Remarketing. In such case, the remarketing procedures
may require an allocation of Preferred Shares 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 Preferred
Shares that is less than the number of Preferred Shares specified in such
holder's tender order. Thus, under certain circumstances, Preferred Shares may
be illiquid investments. See "Remarketing."
Neither the Remarketing Agent nor the fund is obligated to purchase
Preferred Shares in a Remarketing or otherwise, nor is the fund required to
redeem Preferred Shares in the event of failed Remarketings.
B-54
The Remarketing Agent has advised the fund that it currently intends to
maintain a secondary trading market in the Preferred Shares outside of
Remarketings: however, it has no obligation to do so and there can be no
assurance that a secondary market for the Preferred Shares will develop or, if
it does develop, that it will provide liquidity of investment. The Preferred
Shares will not be registered on any stock exchange or on the National
Association of Securities Dealers Automated Quotation system.
Ratings
[It is a condition of the merger that the Preferred Shares be issued with
a rating of "aaa" from Moody's and AAA from S&P.]
Rating Agency Guidelines
The composition of the fund's portfolio will reflect guidelines
established by Moody's and S&P in connection with the fund's receipt of a
rating for such shares on their date of original issue of at least "aaa" by
Moody's and AAA by S&P. Moody's and S&P, nationally recognized statistical
rating organizations, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines described under
"Asset Maintenance" and in Exhibit B-2 have been developed by Moody's and S&P
in connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stocks, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are generally designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment-grade ratings. The
guidelines do not have the force of law but have been adopted by the fund in
order to satisfy current requirements necessary for Moody's and S&P to issue
the above-described ratings for Preferred Shares, which ratings are generally
relied upon by institutional investors in purchasing such securities. The
B-55
guidelines include 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.
Asset Maintenance
The fund will be required to satisfy a number of asset maintenance
requirements under the terms of the Bylaws. These requirements are summarized
below.
1940 Act Preferred Shares Asset Coverage. The fund will be required under
the Bylaws to maintain, as of the last Business Day of each month in which any
Preferred Shares are outstanding, asset coverage of at least 200% with respect
to outstanding senior securities which are stock, including the Preferred
Shares (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 Preferred Shares Asset Coverage").
If the fund fails to maintain 1940 Act Preferred Shares Asset Coverage and such
failure is not cured as of the last Business Day of the month following the
date of such failure (the "1940 Act Cure Date"), the fund will be required
under certain circumstances to redeem certain of the Preferred Shares. See
"Redemption."
Based on the composition of the fund's portfolio at December 31, 2000,
1940 Act Preferred Shares Asset Coverage with respect to the Preferred Shares,
following the issuance of all Preferred Merger Shares [and Additional Preferred
Shares] [and after giving effect to the deduction of the merger costs,
estimated at [$450,000] and offering costs for the Additional Preferred Shares
estimated at $ 000,] would be computed as follows:
B-56
Value of fund assets less
liabilities not constituting
senior securities
- --------------------------------
Senior securities
representing indebtedness
plus liquidation value
of the Preferred Shares = $ = %
Preferred Shares Basic Maintenance Amount. In connection with their
respective ratings of the Preferred Shares, Moody's and S&P have each
established asset coverage guidelines which are incorporated into the Bylaws to
ensure the payment of the liquidation preference and the fund's other
obligations in respect of its outstanding Preferred Shares. These guidelines
require the fund among other things to maintain investment-grade assets with a
value (discounted in accordance with each rating agency's guidelines) equal to
the Preferred Shares Basic Maintenance Amount. These guidelines impose
restrictions on the securities in which the fund may invest, limit the fund's
use of futures, options and forward commitments, and prohibit the use of
borrowing for leverage and the fund's entering into short sales, securities
lending and reverse repurchase agreements. These requirements are explained in
greater detail in Exhibit B-2. If the fund fails to meet such requirements and
such failure is not cured, the fund will be required under certain
circumstances to redeem some or all of the Preferred Shares. See
"Redemption."
Minimum Liquidity Level. In connection with its rating of the Preferred
Shares, S&P has established dividend coverage guidelines, which are
incorporated into the Bylaws requiring the fund to maintain a sufficient level
of highly liquid assets to ensure certain dividend payments and certain expense
payments with respect to the Preferred Shares. Like the Preferred Shares Basic
Maintenance Amount requirements, these Minimum Liquidity Level guidelines
impose limitations on the
B-57
fund's investment activities. The Minimum Liquidity Level requirements are
explained in greater detail in Exhibit B-2.
General. The fund may, but is not required to, adopt any modifications to
these guidelines that may hereafter be established by Moody's or S&P. Failure
to adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. As set forth in the Bylaws, the Trustees may, without
shareholder approval, modify certain definitions or restrictions which have
been adopted by the fund pursuant to the rating agency guidelines, provided in
certain cases the Trustees have obtained written confirmation from Moody's and
S&P that any such change would not impair the ratings then assigned by Moody's
and S&P to the Preferred Shares.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell Preferred Shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. Nor do the rating
agency guidelines address the likelihood that a holder of Preferred Shares 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 Putnam Management and
information obtained from other sources. The outstanding Preferred Shares are
rated AAA by S&P and "aaa" by Moody's. 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.
B-58
Taxation of Preferred Shares
The following is a summary of some of the important tax considerations
applicable to investments in Preferred Shares of Trust II. See "Information
about the Funds -- Taxation" in the Prospectus/Proxy for a discussion of other
important tax considerations generally applicable to investments in Trust II.
If for any reason it is determined after the payment of any dividend that
a portion of that dividend was subject to Federal income tax, Trust II will not
be required to pay any additional amount to compensate for any tax payable on
the dividend (other than Additional Dividends payable under the circumstances
described in this Appendix B). The federal income tax consequences of
Additional Dividends under existing law are uncertain. For example, it is
unclear how Additional Dividends will be treated under the rules in Subchapter
M of the Code applicable to dividends paid following the close of a taxable
year in respect of a prior year's income. Trust II intends to treat such
Additional Dividends as paid during such prior taxable year for purposes of the
rules governing Trust II's treatment of such dividends, and to treat a holder
as receiving a dividend distribution in the amount of any Additional Dividend
only as and when such Additional Dividend is paid. Trust II will generally
designate Additional Dividends as Exempt-Interest Dividends to the extent it
determines such designation is consistent with the allocation principles, as
described in "Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividend." However, the IRS may assert that all or part of an
Additional Dividend is a taxable dividend either in the taxable year in which
the dividend or dividends to which the Additional Dividend relates, was paid,
or in the taxable year in which the Additional Dividend is paid. Trust II will
not be required to pay any additional amount if it is determined that its
treatment of Additional Dividends was improper.
B-59
Existing authorities, including the revenue ruling previously discussed
(see "Advance Notice of Allocation of Taxable Income; Inclusion of Taxable
Income in Dividend."), do not specifically address whether dividends (including
possible Additional Dividends) that are paid following the close of a taxable
year, but that are treated for tax purposes as derived from the income of such
prior taxable year, are treated as dividends "paid" during such prior taxable
year for purposes of determining each class's proportionate share of a
particular type of income. Trust II currently intends to treat such dividends
as having been "paid" in the prior taxable year for purposes of determining
each class's proportionate share of a particular type of income with respect to
such prior taxable year. Existing authorities also do not specifically address
the allocation of taxable income among the dividends paid to holders of a class
of shares during or with respect to a taxable year. It is possible that the IRS
could disagree with the fund's position concerning the treatment of dividends
paid after the close of a taxable year or with the fund's method of allocation,
in which case the IRS could attempt to recharacterize a portion of the
dividends paid to the holders of preferred shares and designated by the Fund as
Exempt-Interest Dividends as consisting instead of capital gains or other
taxable income. If the IRS were to prevail with respect to any such attempted
recharacterization, holders of preferred shares could be subject to tax on
amounts so recharacterized and the fund could be subject to Federal income and
excise tax. In such event, no additional amounts (including Additional
Dividends) would be paid by Trust II with respect to dividends so
recharacterized to compensate for any additional tax owed by holders of
preferred shares.
If, in connection with the selection of a Long-Term Dividend Period, (i)
Trust II provides that a Premium Call Period will follow a Non-Call Period,
(ii) based on all the facts and circumstances at the time of the designation of
the Long-Term
B-60
Dividend Period, Trust II is more likely than not to redeem the Preferred
Shares during the Premium Call Period, and (iii) the premium to be paid upon
redemption during the Premium Call Period exceeds a reasonable penalty for
early redemption, it is possible that the holders of preferred shares will be
required to accrue such premium as a dividend (to the extent of Trust II's
earnings and profits) over the term of the Non-Call Period. See "Dividends and
Dividend Periods," and "Glossary--Specific Redemption Provisions."
B-61
Glossary
" 'AA' Composite Commercial Paper Rate" has the meaning specified on page B-36
of this Appendix B.
"Additional Dividend" has the meaning set forth on page B-16 of this Appendix B.
"Agent Member" means a designated member of the Securities Depository that will
maintain records for a beneficial owner of one or more Preferred Shares.
"Agreement and Declaration of Trust" means the Agreement and Declaration of
Trust of Trust II, as amended from time to time.
"Alternate Treasury Note Rate" has the meaning set forth on page B-39 of this
Appendix B.
"Applicable Dividend Rate" means the rate of dividend per annum that (i) except
for a Dividend Period commencing during a Non-Payment Period, will be equal to
the lower of the rate of dividend 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 Bylaws 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" has the meaning described on page B-18 of this
Appendix B.
"Authorized Newspaper" means a newspaper of general circulation in the English
language generally published on Business Days in The City of New York.
B-62
"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.
"Bylaws" means the Bylaws of the Trust, as amended from time to time.
"Cede" means Cede & Co., the nominee of DTC in whose name the Preferred Shares
initially will be registered.
"Closing Transaction" means the termination of a futures contract or option
position by taking a position opposite thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means [Smith Barney Shearson Inc.] and such other
dealers as the fund may from time to time appoint, or in lieu of any thereof,
their respective affiliates or successors.
"Commission" means the Securities and Exchange Commission.
"Cure Date" has the meaning set forth on page B-43 of this Appendix B.
"Date of Original Issue" means, with respect to any Preferred Merger Shares,
the date on which the merger is consummated.
"Deposit Securities" has the meaning set forth on page B-43 of this Appendix B.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount Factor, as
the case may be.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
B-63
"Dividend Coverage Amount," as of any Valuation Date, means (A) (i) the
aggregate amount of cash dividends that will accumulate on all Preferred Shares,
in each case to (but not including) the Business Day following the first
Dividend Payment Date for Preferred Shares that follows such Valuation Date plus
(ii) the aggregate amount of all liabilities existing on such Valuation Date
which are payable on or prior to the Business Day following such first Dividend
Payment Date less (B) the sum of (i) the combined Market Value of Deposit
Securities irrevocably deposited with the Paving Agent for the payment of cash
dividends on all Preferred Shares, (ii) the book value of Receivables for
Municipal Bonds sold as of or prior to such Valuation Date, if such receivables
are due within five Business Days of such Valuation Date and in any event on or
prior to such Dividend Payment Date, and (iii) interest on Municipal Bonds owned
by the fund which is scheduled to be paid on or prior to such Dividend Payment
Date.
"Dividend Coverage Assets," as of any Valuation Date, means Deposit Securities
with maturity or tender payment dates not later than the day preceding the
Business Day following the first Dividend Payment Date for Preferred Shares
that follows such Valuation Date.
"Dividend Payment Date" has the meaning set forth on page B-8 of this Appendix
B.
"Dividend Period" has the meaning set forth on page B-4 and of this Appendix B.
"DTC" means The Depository Trust Company.
"Exempt-Interest Dividend" has the meaning set forth on page B-19 of this
Appendix B.
"Gross-Up Tax Rate" has the meaning set forth on page B-20 of this Appendix B.
B-64
A "holder" of Preferred Shares 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 Preferred Shares.
"Initial Dividend Payment Date" and "Initial Dividend Payment Dates" have the
meanings set forth in the Bylaws of Trust II.
"Initial Dividend Period" means, with respect to Preferred Merger Shares, the
28-day Dividend Period commencing on the Date of Original Issue thereof.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract or an
option 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.
"IRS" means the Internal Revenue Service.
"Kenny Index" has the meaning set forth on page B-38 of this Appendix B.
"Long Term Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"Mandatory Redemption" has the meaning set forth on page B-43 of this Appendix
B.
"Mandatory Redemption Price" has the meaning set forth on page B-43 of this
Appendix B.
"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.
"Maximum Dividend Rate" has the meaning set forth on page B-17 of this Appendix
B.
B-65
"Minimum Liquidity Level" means, as of any Valuation Date, an aggregate Market
Value of Dividend Coverage Assets not less than the Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes a Moody's Eligible Asset, the
percentage determined by reference to (a) the rating by Moody's or S&P on such
Municipal Bond and (b) the Moody's Exposure Period, in accordance with the
table set forth below:
B-66
Rating Category
Moody's
Exposure Aaa(1) Aa(1) A(1) Baa(1) Other(2) VMIG-1(1),(3)
Period VP-1+(4)
7 weeks or
less 151% 159% 168% 202% 229% 136%
8 weeks or less
but greater
than 7 weeks 154 164 173 205 235 137
9 weeks or less
but greater
than 8 weeks 158 169 179 209 242 138
(1) Moody's rating.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Municipal Bonds rated MIG-1, VMIG-1 or P-1 by Moody's, 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. For the purpose of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
(4) Municipal Bonds rated SP-1+ or A-l+ 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. For the purpose of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of
"A" by Moody's.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be applied
to short-term Municipal Bonds, so long as such Municipal Bonds are rated at
least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+
B-67
or AA by S&P and mature or have a demand feature at par exercisable within the
Moody's Exposure Period, and (ii) no Moody's Discount Factor will be applied to
cash or to Receivables for Municipal Bonds Sold. "Receivables for Municipal
Bonds Sold," for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, means the aggregate of the following: (i) the book value of
receivables for Municipal Bonds 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 Discounted Value of
Municipal Bonds sold (applying the relevant Moody's Discount Factor to such
Bonds) as of or prior to such Valuation Date which generated such receivables,
if such receivables are due within five Business Days of such Valuation Date
but do not comply with either of conditions (x) or (y) of the preceding clause
(i).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds Sold, a
short-term Municipal Bond rated VMIG-1, MIG-1 or P-1 by Moody's or SP-1+ or
A-1+ by S&P or a Municipal Bond that (i) pays interest in cash; (ii) is
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated
by S&P, is rated at least BBB- by S&P (provided that, for purposes of
determining the Moody's Discount Factor applicable to any such S&P-rated
Municipal Bond, such Municipal Bond (excluding any short-term Municipal Bond
and any Municipal Bond rated BBB-, BBB or BBB+) 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 by Moody's; and (iv) is part
of an issue of Municipal Bonds of at least $10,000,000. In addition, Municipal
Bonds in the fund's portfolio will be included as
B-68
Moody's Eligible Assets only to the extent they meet the following
diversification requirements:
Maximum State
Minimum Maximum or Territory
Issue Size Underlying Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3)
- ----------- -------------- ---------------- --------------
Aaa 10 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Other (2) 10 4 12
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower
rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) of any territory are limited to 10% of Moody's Eligible Assets.
For purposes of the maximum underlying obligor requirement described
above, any such Bond backed by a guaranty, letter of credit or insurance issued
by a third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Bond.
When the fund sells a Municipal Bond and agrees to repurchase it at a
future date, such Bond will constitute a Moody's Eligible Asset and the amount
the fund is required to pay upon repurchase of such Bond will count as a
liability for purposes of calculating the Preferred Shares Basic Maintenance
Amount. When the fund purchases a Municipal Bond and agrees to sell it at a
future date to another party, cash receivable by the fund in connection
therewith will constitute
B-69
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
such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the fund for the payment of
dividends or redemption.
"Moody's Exposure Period" means the period commencing on and including a
given Valuation Date and ending 48 days thereafter.
"Moody's Volatility Factor" means 302% as long as there has not been
enacted an increase to the Marginal Tax Rate. If an increase is enacted to the
Marginal Tax Rate but not yet implemented, the Moody's Volatility Factor shall
be as follows:
B-70
% Change in Moody's
Marginal Tax Rate Volatility Factor
- ------------------- ------------------
< 5% 323%
>5% but < 10% 347%
>10% but < 15% 373%
>15% but < 20% 402%
>20% but < 25% 436%
>25% but < 30% 474%
>30% but < 35% 518%
>35% but < 40% 570%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the fund
in writing is applicable.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"1940 Act" means the Investment Company Act of 1940 as amended.
"1940 Act Cure Date" has the meaning set forth on page B-56 of this
Appendix B.
"1940 Act Preferred Shares Asset Coverage" has the meaning set forth on
page B-56 of this Appendix B.
"Non-Call Period" has the meaning described under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page B-11 of this
Appendix B.
"Non-Payment Period Rate" has the meaning set forth on page B-12 of this
Appendix B.
"Notice of Redemption" has the meaning set forth on page B-45 of this
Appendix B.
"Notice of Revocation" has the meaning set forth on page B-7 of this
Appendix B.
B-71
"Notice of Special Dividend Period" has the meaning set forth in the
Bylaws of Trust II.
"Optional Redemption Price" has the meaning set forth on page B-42 of this
Appendix B.
"Paying Agent" means [IBJ Schroeder Bank & 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 Preferred Shares in
accordance with such agreement.
"Paying Agent Agreement" has the meaning set forth on page B-22 of this
Appendix B.
"Preferred Shares" has the meaning set forth on page B-1 of this Appendix
B.
"Premium Call Period" has the meaning specified on page B-79 of this
Appendex B.
"Preferred Shares Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal to (i) the sum of (A) the product of the number
of Preferred Shares outstanding on such Valuation Date multiplied by the sum of
(a) $50,000 and (b) any applicable redemption premium per share attributable to
the designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
each Preferred Share outstanding, in each case, to (but not including) the end
of the Dividend Period for Preferred Shares in which such Valuation Date occurs
or to (but not including) the 49th day after such Valuation Date, whichever is
sooner; (C) the aggregate amount of cash dividends that
B-72
would accumulate at the Maximum Dividend Rate applicable to a Dividend Period
of 28 days on any Preferred Shares outstanding from the end of such Dividend
Period through the 49th day after such Valuation Date, multiplied by the larger
of the Moody's Volatility Factor and the S&P Volatility Factor, determined from
time to time by Moody's and S&P, respectively (except that if such Valuation
Date occurs during a Non-Payment Period, the cash dividend for purposes of
calculation would accumulate at the then current Non-Payment Period Rate); (D)
the amount of anticipated expenses of the fund for the 90 days subsequent to
such Valuation Date; (E) the amount of the fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities
as of such Valuation Date to the extent not reflected in any of (i) (A) through
(i) (E) (including, without limitation, any amounts due and payable by the fund
pursuant to repurchase agreements and any payables for Municipal Bonds
purchased as of such Valuation Date) less (ii) either (A) the Discounted Value
of any of the fund's assets, or (B) the face value of any of the fund's assets
if such assets mature prior to or on the date of redemption of Preferred Shares
or payment of a liability and are either securities issued or guaranteed by the
U.S. Government or, with respect to Moody's, have a rating assigned by Moody's
of at least Aaa, P-1, VMIG-1 or MIG-1 and, with respect to S&P, have a rating
assigned by S&P of at least AAA, SP-1+ or A-l+, in both cases irrevocably
deposited by the fund for the payment of the amount needed to redeem Preferred
Shares subject to redemption or any of (i) (B) through (i) (F).
"Preferred Shares Basic Maintenance Cure Date," with respect to the
failure by the fund to satisfy the Preferred Shares Basic Maintenance Amount as
of a given Valuation Date, means the sixth Business Day following such
Valuation Date.
B-73
"Receivables for Municipal Bonds Sold," for purposes of determining
Moody's Eligible Assets and S&P Eligible Assets, has the meaning set forth on
page B-68 of this Appendix B.
A "record holder" of Preferred Shares 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 Preferred
Shares.
"Reference Rate" has the meaning set forth on page B-17 of this Appendix
B.
"Remarketing" means each periodic operation of the process for
remarketing Preferred Shares, as described in this Appendix B.
"Remarketing Agent" means [Smith Barney Shearson Inc.] and [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" has the meaning set forth on page B-26 of this
Appendix B.
"Remarketing Date" means any date on which (i) each holder of Preferred
Shares must provide to the Remarketing Agent irrevocable telephonic notice of
intent to tender shares in a Remarketing, and (ii) the Remarketing Agent (a)
determines the Applicable Dividend Rate for the ensuing Dividend Period, (b)
notifies holders, purchasers and tendering holders of Preferred Shares by
telephone, telex or otherwise of the results of the Remarketing and (c)
announces the Applicable Dividend Rate.
"Request for Special Dividend Period" has the meaning set forth on page
B-5 of this Appendix B.
"Response" has the meaning set forth on page B-6 of this Appendix B.
B-74
"Retroactive Taxable Allocation" has the meaning set forth on page B-16 of
this Appendix B.
"S&P" means Standard & Poor's Ratings Group.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on such
Municipal Bond and (b) the S&P Exposure Period, in accordance with the table
set forth below:
S&P Rating Category
--------------------------------
S&P 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
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such Municipal Bonds 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 Bonds are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's and such short-term Municipal Bonds referred to
in this clause (i) shall qualify as S&P Eligible Assets; provided, however,
such short-term Municipal Bonds rated by Moody's but not rated by S&P having a
demand feature exercisable in 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution having a short-term rating of at least A-1+ from S&P; and further
provided that such short-term Municipal Bonds rated by Moody's but not rated by
S&P may comprise no more than 50% of short-term Municipal Bonds that qualify as
S&P Eligible Assets and (ii) no S&P Discount Factor will be applied to
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cash or to Receivables for Municipal Bonds Sold. "Receivables for Municipal
Bonds Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for Municipal Bonds sold as
of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date. For purposes of the foregoing,
Anticipation Notes rated SP-1+ or, if not rated by S&P, rated VMIG-1 by
Moody's, whether or not they mature or have a demand feature exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term Municipal Bonds and shall qualify as S&P Eligible Assets.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold or
a Municipal Bond that (i) is issued by any of the 50 states, any territory or
possession of the United States, the District of Columbia, and any political
subdivision, instrumentality, county, city, town, village, school district or
agency (such as authorities and special districts created by the states) of any
of the foregoing and certain federally sponsored agencies such as local housing
authorities; (ii) is interest bearing and pays interest at least semi-annually;
(iii) is payable with respect to principal and interest in U.S. Dollars; (iv)
is publicly rated BBB or higher by S&P or, except in the case of Anticipation
Notes that are grant anticipation notes or bond anticipation notes which must
be rated by S&P to be included in S&P Eligible Assets, if not rated by S&P but
rated by Moody's, is rated at least A by Moody's (provided that such
Moody's-rated Municipal Bonds will be included in S&P Eligible Assets only to
the extent the Market Value of such Municipal Bonds does not exceed 50% of the
aggregate Market Value of the 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 Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its
B-76
Moody's rating); (v) is not part of a private placement of Municipal Bonds; and
(vi) is part of an issue of Municipal Bonds with an original issue size of at
least $20 million or, if of an issue with an original issue size below $20
million (but in no event below $10 million), is issued by an issuer with a
total of at least $50 million of securities outstanding. Notwithstanding the
foregoing:
(1) Municipal Bonds of any one issuer will be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal Bonds
does not exceed 10% of the aggregate Market Value of the 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 Bonds exceeds 5% of the aggregate Market Value of the S&P
Eligible Assets; and
(2) Municipal Bonds issued by issuers in any one state or territory will
be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Bonds does not exceed 20% of the aggregate
Market Value of S&P Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the Preferred Shares Basic
Maintenance Cure Date, that the fund has to cure any failure to maintain, as of
such Valuation Date, a Discounted Value of its portfolio at least equal to the
Preferred Shares Basic Maintenance Amount.
"S&P Volatility Factor" means, depending on the applicable Reference
Rate, the following:
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Reference Rate
- -------------------------------------------------------
Taxable Equivalent of the Short-Term Municipal
Bond Rate 277%
30-day "AA" Composite Commercial Paper Rate 228%
60-day "AA" Composite Commercial Paper Rate 228%
90-day "AA" Composite Commercial Paper Rate 222%
120-day "AA" Composite Commercial Paper Rate 222%
180-day "AA" Composite Commercial Paper Rate 217%
1-year U.S. Treasury Bill Rate 198%
2-year U.S. Treasury Note Rate 185%
3-year U.S. Treasury Note Rate 178%
4-year U.S. Treasury Note Rate 171%
5-year U.S. Treasury Note Rate 169%
Notwithstanding the foregoing, the S&P Volatility Factor may mean such
other potential dividend rate increase factor as S&P advises the Trust in
writing is applicable.
"Securities Depository" means DTC or any successor company or other
entity selected by the fund as securities depository for Preferred Shares that
agrees to follow the procedures required to be followed by such securities
depository in connection with the Preferred Shares.
"Settlement Date" means the first Business Day after a Remarketing Date
applicable to a Preferred Share.
"Short Term Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"Special Dividend" has the meaning set forth on page B-17 of this Appendix
B.
"Special Dividend Period" means a Dividend Period established by the fund
for Preferred Shares as described on page B-4 of this Appendix B.
B-78
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period of 365 or more days, either, or any combination of the
designation of (i) a period (a "Non-Call Period") determined by the Trustees,
after consultation with the Remarketing Agent, during which the Preferred
Shares subject to such Dividend Period shall not be 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 Trustees, after consultation
with the Remarketing Agent, during each year of which the Preferred Shares
subject to such Dividend Period shall be redeemable at the Trust's option at a
price per share equal to $50,000 plus accumulated but unpaid dividends plus an
applicable premium, as determined by the Trustees after consultation with the
Remarketing Agent.
"Substitute Commercial Paper Dealers" means such substitute commercial
paper dealers as the fund may from time to time appoint or, in lieu of any
thereof, their respective affiliates or successors.
"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 Preferred Shares.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth in the Bylaws of the Trust.
"Tender and Dividend Reset" means the process pursuant to which Preferred
Shares may be tendered in a Remarketing or held and become subject to the new
Applicable Dividend Rate determined by the Remarketing Agent in such
Remarketing.
B-79
"Treasury Bonds" means U.S. Treasury Bonds with remaining maturities of
ten years or more.
"Trustees" means the Trustees of the fund.
"28-day Dividend Period" has the meaning set forth on page B-4 of this
Appendix B.
"U.S. Treasury Bill Rate" has the meaning set forth on page B-38 of this
Appendix B.
"U.S. Treasury Note Rate" has the meaning set forth on page B-39 of this
Appendix B.
"Valuation Date" means, for purposes of determining whether the fund is
maintaining the Preferred Shares Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original Issue.
B-80
EXHIBIT B-1
NORMAL SCHEDULE FOR REMARKETING PREFERRED SHARES
The normal schedule for remarketing Preferred Shares is described below. As
described in this Appendix B, the events occurring on each day of a normal
remarketing schedule are subject to change in the event that certain days are
not Business Days. All references herein to a particular time of day shall be
to New York City time.
Remarketing Date
9:00 a.m. Deadline for the Remarketing Agent to make
available to holders of Preferred Shares non-binding
indications of Applicable Dividend Rate for the next
succeeding 28-day Dividend Period or, if applicable,
Special Dividend Period.
12:00 noon Deadline for each holder of Preferred Shares to
provide to the Remarketing Agent irrevocable
telephonic notice of intent to tender Preferred
Shares for sale in the current Remarketing.
Remarketing of tendered shares of Preferred Shares
formally commences.
3:00 p.m. Deadline for completion of Remarketing. The
Remarketing Agent determines the Applicable
Dividend Rate for the Dividend Period.
3:30 p.m. The Remarketing Agent notifies holders, purchasers
and tendering holders of Preferred Shares by
telephone, telex or otherwise of the results of the
Remarketing. Applicable Dividend Rate is announced.
Settlement Date Dividend Period begins. In addition, Preferred Shares
which have been tendered and sold in a
Remarketing are delivered against payment through
the Securities Depository.
B-81
EXHIBIT B-2
RATING AGENCY REQUIREMENTS
This Exhibit sets out certain procedures from the Bylaws of the fund containing
conditions determined by S&P and Moody's which the fund must meet in order to
maintain its AAA/"aaa" rating. Generally, these requirements. among other
things, impose limitations on the securities in which the fund may invest (and
the amount of its portfolio which may be invested in various types of securities
and securities of various issuers), limit the fund's use of futures, options and
forward commitments and may require the fund to redeem Preferred Shares. Any
capitalized terms used in this Exhibit but not defined herein are defined
elsewhere in this Appendix B.
B-82
DEFINITIONS
"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Deposit Securities" means cash and Municipal Bonds rated at least AAA, A-1+ or
SP-1+ by S&P.
"Independent Accountant" means 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.
"Initial Margin" means the amount of cash or securities deposited with a broker
as a margin payment at the time of purchase or sale of a futures contract or an
option thereon.
"Market Value" of any asset of the fund means the market value thereof
determined by the Pricing Service. The Market Value of any asset shall include
any interest accrued thereon. The Pricing Service shall value 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 shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the fund from dealers who are members
of the National Association of Securities Dealers, Inc. and make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are
B-83
valued at closing prices for such instruments established by the exchange or
board of trade on which they are traded, or if market quotations are not
readily available, are valued at fair value on a consistent basis using methods
determined in good faith by the Trustees.
"Maximum Potential Additional Dividend Liability," as of any Valuation Date,
means the aggregate amount of Additional Dividends that would be payable with
respect to the Preferred Shares if the fund were to make Retroactive Taxable
Allocation, with respect to any fiscal year, estimated based upon dividends
paid and the amount of undistributed realized net capital gain and other income
subject to regular federal income tax 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.
"Moody's Hedging Transaction" has the meaning described on page B-92 of this
Appendix B.
"Preferred Shares Basic Maintenance Report" means a report signed by the
President, Treasurer or any Executive 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 the
aggregate), and the Preferred Shares Basic Maintenance Amount.
"Pricing Service" means Muller Investdata Corp., or any successor company or
entity, or any other entity designated from time to time by the Trustees.
Notwithstanding the foregoing, the Trustees will not designate a new Pricing
Service unless the fund has received a written confirmation from Moody's and
S&P that such action would not impair the ratings then assigned by Moody's and
S&P to Preferred Shares.
"Quarterly Valuation Date" means the last Business Day of each fiscal quarter
of the fund in each fiscal year of the fund.
B-84
"S&P Hedging Transactions" has the meaning described below.
"Variation Margin" means, in connection with an outstanding futures contract or
option thereon owned or sold by the fund, the amount of cash or securities paid
to or received from a broker (subsequent to the Initial Margin payment) from
time to time as the price of such futures contract or option fluctuates.
Notwithstanding the foregoing, the Trustees may, without the vote or consent of
the holders of Preferred Shares, from time to time amend, alter or repeal
certain of the foregoing definitions (or definitions of other terms contained
in the fund's Bylaws) and any such amendment, alteration or repeal will be
deemed not to affect the preferences, rights or powers of Preferred Shares or
the holders thereof, provided the Trustees receive written confirmation from
both Moody's and S&P, that any such amendment, alteration or repeal would not
impair the ratings then assigned to Preferred Shares by the rating agency
providing such confirmation.
PREFERRED SHARES BASIC MAINTENANCE AMOUNT
Basic Requirement. The fund shall maintain, on each Valuation Date, and
shall verify to its satisfaction that it is maintaining on such Valuation Date,
S&P Eligible Assets having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets
having an aggregate Discounted Value equal to or greater than the Preferred
Shares Basic Maintenance Amount. Upon any failure to maintain the required
Discounted Value, the fund will use its best efforts to alter the composition
of its portfolio to reattain the Preferred Shares Basic Maintenance Amount on
or prior to the Preferred Shares Basic Maintenance Cure Date. If, on any
Valuation Date, the fund shall have Moody's Eligible Assets with a Discounted
Value which exceeds the Preferred Shares Basic
B-85
Maintenance Amount by not more than 5%, the Adviser shall not alter the
composition of the fund's portfolio unless it determines that such action will
not cause the fund to have Moody's Eligible Assets with a Discounted Value less
than the Preferred Shares Basic Maintenance Amount.
Reporting Requirements. The fund will deliver a Preferred Shares Basic
Maintenance Report to the Remarketing Agent, the Paying Agent, Moody's and S&P
as of (i) each Quarterly Valuation Date, (ii) the first day of a Special
Dividend Period, and (iii) any other time when specifically requested by either
Moody's or S&P, in each case at or before 5:00 p.m., New York City time, on the
third Business Day after such day.
At 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 Moody's Eligible
Assets or S&P Eligible Assets, as the case may be, with an aggregate Discounted
Value which exceeds the Preferred Shares Basic Maintenance Amount by 5% or more
or to satisfy the Preferred Shares Basic Maintenance Amount, the fund shall
complete and deliver to the Remarketing Agent, the Paying Agent, Moody's and
S&P a Preferred Shares Basic Maintenance Report as of the date of such failure.
At or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the fund cures any failure to satisfy the
Preferred Shares Basic Maintenance Amount, the fund shall complete and deliver
to the Remarketing Agent, the Paying Agent, Moody's and S&P a Preferred Shares
Basic Maintenance Report as of the date of such cure.
A Preferred Shares Basic Maintenance Report or Accountant's Confirmation
will be deemed to have been delivered to the Remarketing Agent, the Paying
Agent, Moody's and S&P if the Remarketing Agent, the Paying Agent, Moody's and
S&P receive a copy or telecopy, telex or other
B-86
electronic transcription thereof and on the same day the fund mails to the
Remarketing Agent, the Paying Agent, Moody's and S&P for delivery on the next
Business Day the full Preferred Shares Basic Maintenance Report. A failure by
the fund to deliver a Preferred Shares Basic Maintenance Report shall be deemed
to be delivery of a Preferred Shares Basic Maintenance Report indicating that
the Discounted Value for all assets of the fund is less than the Preferred
Shares Basic Maintenance Amount, as of the relevant Valuation Date.
Whenever the fund delivers a Preferred Shares Basic Maintenance Report to
S&P as described above, it shall also deliver a Certificate of Minimum
Liquidity to the Remarketing Agent and the Paying Agent.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to a Quarterly Valuation Date, the Independent
Accountant will confirm in writing to the Remarketing Agent, the Paying Agent,
S&P and Moody's (i) the mathematical accuracy of the calculations reflected in
such Report (and in any other Preferred Shares Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the fund
during the quarter ending on such Quarterly Valuation Date); (ii) that, in such
Report (and in such randomly selected Report), (a) the fund determined in
accordance with the Bylaws whether the fund had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly selected Report),
S&P Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and Moody's Eligible Assets withan
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, and (b) it has obtained confirmation from the Pricing
Service that the Market Value of portfolio securities as determined by the
Pricing Service equals the mean between the quoted bid and asked prices or
B-87
the yield equivalent (when quotations are readily available); (iii) that the
fund has excluded from the Preferred Shares Basic Maintenance Report assets not
qualifying as Eligible Assets; and (iv) with respect to such confirmation to
Moody's, that the fund has satisfied the requirements described below imposed
by Moody's with respect to transactions in options, futures and forward
commitments as of the Quarterly Valuation Date (and at the Valuation Date
addressed in such randomly selected Report) (such confirmation is herein called
the "Accountant's Confirmation"). In preparing the Accountant's Confirmation,
the Independent Accountant shall be entitled to rely, without further
investigation, on such interpretations of law by the fund as may have been
necessary for the fund to perform the computations contained in the Preferred
Shares Basic Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to any Valuation Date on which the fund failed to
satisfy the Preferred Shares Basic Maintenance Amount, the Independent
Accountant will provide to the Remarketing Agent, the Paying Agent, S&P and
Moody's an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of a Preferred Shares Basic
Maintenance Report relating to any Valuation Date on which the fund cured any
failure to satisfy the Preferred Shares Basic Maintenance Amount, the
Independent Accountant will provide to the Remarketing Agent, the Paying Agent,
S&P and Moody's an Accountant's Confirmation as to such Preferred Shares Basic
Maintenance Report.
If any Accountant's Confirmation delivered as required above shows that
an error was made in the Preferred Shares Basic Maintenance Report for a
particular Valuation Date for
B-88
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 or Moody's Eligible Assets, 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
Preferred Shares Basic Maintenance Report to the Remarketing Agent, the Paying
Agent, S&P and Moody's promptly following receipt by the fund of such
Accountant's Confirmation.
At or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the Preferred Shares, the fund will
complete and deliver to Moody's and S&P a Preferred Shares Basic Maintenance
Report as of the close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Independent Accountant will
provide to Moody's and S&P an Accountant's Confirmation as to such Preferred
Shares Basic Maintenance Report.
At or before 5:00 p.m., New York City time, on the first Business Day
following any date on which the fund repurchases any outstanding Common Shares,
the fund will complete and deliver to Moody's and S&P a Preferred Shares Basic
Maintenance Report as of the close of business on the date of the repurchase.
FUTURES AND OPTIONS TRANSACTIONS; FORWARD CONTRACTS
S&P Guidelines. For so long as any Preferred Shares are rated by S&P, the
fund will not purchase or sell futures contracts, write, purchase or sell
options on futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the rating then assigned to the
B-89
Preferred Shares by S&P, except that the fund may purchase or sell futures
contracts based on the Municipal Index or Treasury Bonds and write, purchase or
sell put and call options on such contracts (collectively "S&P Hedging
Transactions"), subject to the following limitations:
(A) the fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures
contract or option held by the fund by the fund's taking an opposite
position thereto ("Closing Transactions")), which would cause the fund
at the time of such transaction to own or have sold (1) 1,001 or more
outstanding futures contracts based on the Municipal Index, (2)
outstanding futures contracts based on the Municipal Index and on
Treasury Bonds exceeding in number 25% of the quotient of the 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 thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(B) the fund will 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 (1)
outstanding futures contracts based on Treasury Bonds and on the
Municipal Index exceeding in number 25% of the quotient of the 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
B-90
thirty days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(C) the fund will engage in Closing Transactions to close out any
outstanding futures contract which the fund owns or has sold or any
outstanding option thereon owned by the fund in the event (i) the fund
does not have S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the Preferred Shares Basic Maintenance Amount
on two consecutive Valuation Dates, and (ii) the fund is required to
pay Variation Margin on the second such Valuation Date:
(D) 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 the securities deliverable under such
terms; and
(E) when the fund writes a futures contract or option thereon (including a
futures contract or option thereon which requires delivery of an
underlying security), it will either maintain an amount of cash, cash
equivalents or short-term, fixed-income 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 or on behalf of the fund's broker with respect to such
futures contract or option equals the Market Value of the futures
contract or option, or, in the event the fund writes a futures
contract or option thereon which requires delivery of an underlying
security, it shall hold such underlying security in its portfolio.
For purposes of determining whether the fund has S&P Eligible Assets with
a Discounted Value that equals or
B-91
exceeds the Preferred Shares Basic Maintenance Amount, such Discounted Value
shall, unless the fund receives written confirmation from S&P to the contrary,
be reduced by an amount equal to (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 are owned by the fund.
Moody's Guidelines. For so long as any Preferred Shares are rated by
Moody's, the fund will not buy or sell futures contracts, write, purchase or
sell put or call options on futures contracts or write put or call options
(except covered call or put options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the Preferred Shares by Moody's, except that
the fund may purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively "Moody's
Hedging Transactions"), subject to the following limitations:
(A) the fund will not engage in any Moody's Hedging Transaction based on
the Municipal Index (other than Closing Transactions) which would
cause the fund at the time of such transaction to own or have sold (1)
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 thirty days preceding the time of
effecting such transaction as reported by The Wall Street Journal or
(2) outstanding futures contracts based on the Municipal Index
B-92
having a Market Value exceeding the Market Value of Municipal Bonds
constituting Moody's Eligible Assets owned by the fund;
(B) the fund will not engage in any Moody's 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 in the
aggregate (1) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 10% of the aggregate Market
Value of all Moody's Eligible Assets owned by the fund and rated Aaa
by Moody's, (2) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 50% of the aggregate 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 (3) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 90% of the aggregate 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 (A) and (B), the
fund shall be deemed to own the number of futures contracts that
underlie any outstanding options written by the fund);
(C) the fund will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the
amount of open interest in the Municipal Index as reported by The Wall
Street Journal is less than 5,000;
(D) 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
B-93
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;
(E) the fund will engage in Moody's Hedging Transactions only with respect
to futures contracts or options thereon having the next settlement
date for such type of futures contract or option, or the settlement
date immediately thereafter;
(F) the fund will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the
fund that to do so would not adversely affect Moody's then current
rating of the Preferred Shares; provided, however, that the fund will
not be deemed to have engaged in a futures or options transaction for
leveraging or speculative purposes so long as it has done so otherwise
in accordance with the foregoing; and
(G) 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 Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the fund is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows (unless the fund receives written
confirmation to the contrary from Moody's): (i) assets subject to call options
written by the fund which are either exchange-traded and "readily reversible"
or which expire within 48 days after the
B-94
date as of which such valuation is made shall be valued at the lesser of (a)
Discounted Value and (b) the exercise price of the call option written by the
fund; (ii) assets subject to call options written by the fund not meeting the
requirements of clause (i) of this sentence shall have no value; (iii) assets
subject to put options written by the fund shall be valued at the lesser of (a)
the exercise price and (b) the Discounted Value of such security; and (iv)
futures contracts shall be valued at the lesser of (a) settlement price and (b)
the Discounted Value of the subject security, provided that, if a contract
matures within 48 days after the date as of which such valuation is made, where
the fund is the seller the contract may be valued at the settlement price and
where the fund is the buyer the contract may be valued at the Discounted Value
of the subject securities.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the following amounts shall be added to the Preferred
Shares Basic Maintenance Amount required to be maintained by the fund (unless
the fund receives written confirmation to the contrary from Moody's): (i) 10%
of the exercise price of a written call option; (ii) the exercise price of any
written put option; (iii) where the fund is the seller under a futures
contract, 10% of the settlement price of the futures contract; (iv) where the
fund is the purchaser under a futures contract, the settlement price of assets
to be purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the fund writes call options on futures contracts and does not own the
underlying contract.
For so long as any Preferred Shares are rated by Moody's, the fund will
not enter into any contract to purchase securities for a fixed price at a
future date beyond customary
B-95
settlement time (other than such contracts that constitute Moody's Hedging
Transactions that are permitted above) unless it receives written confirmation
from Moody's that engaging in such transactions would not impair the rating
then assigned to the Preferred Shares by Moody's except that the fund may enter
into such contracts to purchase newly-issued securities on the date such
securities are issued ("Forward Commitments"), subject to the following
limitations:
(A) the fund will maintain in a segregated account with its custodian
cash, cash equivalents or short-term, fixed income securities rated
P-1, MIG-1 or VMIG-l by Moody's and maturing prior to the date of the
Forward Commitment with a face value that equals or exceeds the amount
of the fund's obligations under any Forward Commitments to which it is
from time to time a party or long-term fixed income securities with a
Discounted Value that equals or exceeds the amount of the fund's
obligations under any Forward Commitments to which it is from time to
time a party; and
(B) the fund will not enter into a Forward Commitment 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
Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the fund is a party and of all securities deliverable to the fund
pursuant to such Forward Commitments shall be zero.
B-96
PUTNAM INVESTMENTS
This is your PROXY CARD.
Please vote this proxy, sign it below, and return it promptly in the envelope
provided. Your vote is important.
PLEASE FOLD AT PERFORATION BEFORE DETACHING PROXY CARD
Proxy for a meeting of shareholders, to be held on July 12, 2001 for Putnam
Investment Grade Municipal Trust III.
This proxy is solicited on behalf of the Trustees of the fund.
The undersigned shareholder hereby appoints John A. Hill, Hans H. Estin and
Robert E. Patterson, and each of them separately, Proxies, with power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, at the meeting of shareholders of Putnam Investment Grade Municipal Trust
III on July 12, 2001, at 2:00 p.m., Boston time, and at any adjournments
thereof, all of the shares of the fund that the undersigned shareholder would be
entitled to vote if personally present.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
Please sign your name exactly as it appears on this card. If you are a joint
owner, each owner should sign. When signing as an executor, administrator,
attorney, trustee or guardian, or as custodian for a minor, please give your
full title as such. If you are signing for a corporation, please sign the full
corporate name and indicate the signer's office. If you are a partner, sign in
the partnership name.
- ------------------------ --------------
Shareholder sign here Date
- ------------------------ ---------------
Co-owner sign here Date
HAS YOUR ADDRESS CHANGED?
Please use this form to notify us of any change in address or telephone number
or to provide us with your comments. Detach this form from the proxy ballot and
return it with your signed proxy in the enclosed envelope.
Street __________________________________________________________
City ________________________________ State _______ Zip ____________
Telephone _________________
-1-
DO YOU HAVE ANY COMMENTS? ____________________________________________________
________________________________________________________________________________
________________________________________________________________________________
DEAR SHAREHOLDER:
Your vote is important. Please help us to eliminate the expense of follow-up
mailings by signing and returning this proxy as soon as possible. A postage-paid
envelope is enclosed for your convenience.
THANK YOU!
PLEASE FOLD AT PERFORATION BEFORE DETACHING ADDRESS CARD
If you complete and sign the proxy, we'll vote it exactly as you tell us. If you
simply sign the proxy, it will be voted FOR Proposal 1. In their discretion, the
Proxies will also be authorized to vote upon such other matters that may come
before the meeting.
Please mark your choice [X] in blue or black ink.
THE TRUSTEES RECOMMEND THAT YOU VOTE "FOR" PROPOSAL 1.
1. Approval or disapproval of a proposed merger of Putnam Investment Grade
Municipal Trust III ("Trust III") into Putnam Investment Grade Municipal Trust
II ("Trust II"). In this merger, your common shares of Trust III would, in
effect, be exchanged, on a tax-free basis, for common shares of Trust II with an
equal net asset value and your preferred shares of Trust III would, in effect,
be exchanged for preferred shares of Trust II with an equal aggregate
liquidation preference and identical terms.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Note: If you have questions on the Proposal, please call 1-800-225-1581.
PUTNAM INVESTMENTS
This is your PROXY CARD.
Please vote this proxy, sign it below, and return it promptly in the envelope
provided. Your vote is important.
PLEASE FOLD AT PERFORATION BEFORE DETACHING PROXY CARD
Proxy for a meeting of shareholders, to be held on July 12, 2001 for Putnam
Investment Grade Municipal Trust II.
This proxy is solicited on behalf of the Trustees of the fund.
The undersigned shareholder hereby appoints John A. Hill, Hans H. Estin and
Robert E. Patterson, and each of them separately, Proxies, with power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, at the meeting of shareholders of Putnam Investment Grade Municipal Trust
II on July 12, 2001, at 2:00 p.m., Boston time, and at any adjournments thereof,
all of the shares of the fund that the undersigned shareholder would be entitled
to vote if personally present.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
Please sign your name exactly as it appears on this card. If you are a joint
owner, each owner should sign. When signing as an executor, administrator,
attorney, trustee or guardian, or as custodian for a minor, please give your
full title as such. If you are signing for a corporation, please sign the full
corporate name and indicate the signer's office. If you are a partner, sign in
the partnership name.
- ------------------------ --------------
Shareholder sign here Date
- ------------------------ ---------------
Co-owner sign here Date
HAS YOUR ADDRESS CHANGED?
Please use this form to notify us of any change in address or telephone number
or to provide us with your comments. Detach this form from the proxy ballot and
return it with your signed proxy in the enclosed envelope.
Street __________________________________________________________
City ________________________________ State _______ Zip ____________
Telephone _________________
DO YOU HAVE ANY COMMENTS? ____________________________________________________
________________________________________________________________________________
________________________________________________________________________________
DEAR SHAREHOLDER:
Your vote is important. Please help us to eliminate the expense of follow-up
mailings by signing and returning this proxy as soon as possible. A postage-paid
envelope is enclosed for your convenience.
THANK YOU!
PLEASE FOLD AT PERFORATION BEFORE DETACHING ADDRESS CARD
If you complete and sign the proxy, we'll will vote it exactly as you tell us.
If you simply sign the proxy, it will be voted FOR Proposals 1 and 2. In their
discretion, the Proxies will also be authorized to vote upon such other matters
that may come before the meeting.
Please mark your choice [X] in blue or black ink.
THE TRUSTEES RECOMMEND THAT YOU VOTE "FOR" PROPOSALS 1 AND 2.
1. Approval or disapproval of a proposed merger of Putnam Investment Grade
Municipal Trust III ("Trust III") into Putnam Investment Grade Municipal Trust
II ("Trust II"). In this merger, Trust II will acquire all of the assets of
Trust III in exchange for common and preferred shares of Trust II and the
assumption by Trust II of all of the liabilities of Trust III. The common shares
of Trust II will then be distributed to the common shareholders of Trust III and
the preferred shares of Trust II will then be distributed to the preferred
shareholders of Trust III in complete liquidation of Trust III. (To be voted on
by common and preferred shareholders.)
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Approval or disapproval of the authorization of up to $60 million of
additional preferred shares of Trust II. (To be voted on by preferred
shareholders only.)
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Note: If you have questions on the Proposals, please call 1-800-225-1581.
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
FORM N-14
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust
provides as follows:
SECTION 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding (a) not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or (b)
to be liable to the Trust or its Shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office. Expenses, including counsel fees so
incurred by any such Covered Person (but excluding amounts paid in satisfaction
of judgments, in compromise or as fines or penalties), shall be paid from time
to time by the Trust in advance of the final disposition of any such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
Covered Person to repay amounts so paid to the Trust if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article, provided, however, that either (a) such Covered Person shall have
provided appropriate security for such undertaking, (b) the Trust shall be
insured against losses arising from any such advance payments or (c) either 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
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a full trial type
inquiry), that there is reason to believe that such Covered Person will be found
entitled to indemnification under this Article.
SECTION 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication by a court,
or by any other body before which the proceeding was brought, that such Covered
Person either (a) did not act in good faith in the reasonable belief that his or
her action was in the best interests of the Trust or (b) is liable to
the Trust or its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office, indemnification shall be provided if (a) approved as in the
best interests of the Trust, after notice that it involves such indemnification,
by at least 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) upon a determination, based upon a review of readily available facts
(as opposed to a full trial type inquiry) that such Covered Person acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Trust and is not liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office, or (b) there has been
obtained an opinion in writing of independent legal counsel, based upon a review
of readily available facts (as opposed to a full trial type inquiry), to the
effect that such Covered Person appears to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the Trust
and that such indemnification would not protect such Covered Person against any
liability to the Trust to which he or she would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Any approval pursuant to
this Section shall not prevent the recovery from any Covered Person of any
amount paid to such Covered Person in accordance with this Section as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or to
have been liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
SECTION 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "covered Person" shall include
such person's heirs, executors and administrators, and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act, as amended (or who has been exempted from
being an "interested person" by any rule, regulation or order of the Securities
and Exchange Commission) and 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 has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person.
ITEM 16. EXHIBITS
1. Agreement and Declaration of Trust dated October 2, 1992 -- Exhibit 1.
2a. By-Laws -- Exhibit 2.
2b. Amendment No. 1 to Bylaws -- Exhibit 3.
2c. Amendment No. 2 to Bylaws -- Exhibit 4.
2d. Amendment No. 3 to Bylaws -- Exhibit 5.
2e. Amendment No. 4 to Bylaws -- Exhibit 6.
3. Not applicable.
4. Agreement and Plan of Reorganization -- constitutes Exhibit A to Part
A hereof.
5a. Portions of Agreement and Declaration of Trust Relating to
Shareholders' Rights -- Exhibit 7.
5b. Portions of By-Laws Relating to Shareholders' Rights -- Exhibit 8.
6. Management Contract dated as of November 6, 1992 -- Exhibit 9.
8. Trustee Retirement Plan as adopted October 4, 1996 -- Exhibit 10.
9. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3,
1991, as amended July 13, 1992 -- Exhibit 11.
10. Not applicable.
11. Opinion of Ropes & Gray, including consent --Exhibit 12.
12. Opinion of Ropes & Gray as to Tax Matters -- To be filed by
Post-Effective Amendment.
13. Not applicable.
14a. Consent of PricewaterhouseCoopers LLP Independent Accountants to the
Putnam Investment Grade Municipal Trust III - Exhibit 13.
14b. Consent of PricewaterhouseCoopers LLP Independent Accountants to the
Putnam Investment Grade Municipal Trust II -- Exhibit 14.
15. Not applicable.
16a. Power of Attorney -- Exhibit 15.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a
part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) under the Securities
Act of 1933, as amended, the reoffering prospectus will contain the
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 the other items of the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as a part of an amendment to this
Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration Statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
(c) The Registrant agrees to file an opinion of counsel supporting the tax
consequences of the proposed reorganization as an amendment to this
Registration Statement within a reasonable time after receipt of such
opinion.
- --------------------------------------------------------------------------------
NOTICE
A copy of the Amended and Restated Agreement and Declaration of Trust, as
amended, of Putnam Investment Grade Municipal Trust II is on file with the
Secretary of State of The Commonwealth of Massachusetts, and notice is hereby
given that this Registration Statement has been executed on behalf of the
Registrant by an officer of the Registrant as an officer and not individually,
and the obligations of or arising out of this Registration Statement are not
binding upon any of the Trustees, officers, or shareholders of the Registrant
individually, but are binding only upon the assets and property of the
Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts on March 19, 2001.
PUTNAM INVESTMENT GRADE MUNICIPAL TRUST II
By: Charles E. Porter, Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-14 has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE
John A. Hill Chairman of the Trustees
George Putnam, III President; Principal Executive Officer;
Trustee
Charles E. Porter Principal Financial Officer;
Executive Vice President; Treasurer
Michael T. Healy Principal Accounting Officer;
Assistant Treasurer
Jameson A. Baxter Trustee
Hans H. Estin Trustee
Paul L. Joskow Trustee
Elizabeth T. Kennan Trustee
John H. Mullin, III Trustee
Robert E. Patterson Trustee
A.J.C. Smith Trustee
W. Thomas Stephens Trustee
By: Charles E. Porter, as
Attorney-in-Fact
March 19, 2001
EXHIBIT INDEX
1. Agreement and Declaration of Trust dated October 2, 1992 -- Exhibit 1.
2A. By-Laws -- Exhibit 2.
2B. Amendment No. 1 to By-Laws -- Exhibit 3.
2C. Amendment No. 2 to By-Laws -- Exhibit 4.
2D. Amendment No. 3 to By-Laws -- Exhibit 5.
2E. Amendment No. 4 to By-Laws -- Exhibit 6.
5A. Portions of Agreement and Declaration of Trust Relating to Shareholders'
Rights -- Exhibit 7.
5B. Portions of By-Laws Relating to Shareholders' Rights -- Exhibit 8.
6. Management Contract dated as of November 6, 1992 -- Exhibit 9.
8. Trustee Retirement Plan as adopted October 4, 1996 -- Exhibit 10.
9. Custodian Agreement with Putnam Fiduciary Trust Company dated May 3, 1991,
as amended July 13, 1992 -- Exhibit 11.
11. Opinion of Ropes & Gray, including consent -Exhibit 12.
14A. Consent of PricewaterhouseCoopers LLP Independent Accountants to the Putnam
Investment Grade Municipal Trust III -- Exhibit 13.
14B. Consent of PricewaterhouseCoopers LLP Independent Accountants to the Putnam
Investment Grade Municipal Trust II -- Exhibit 14.
16A. Power of Attorney -- Exhibit 15.