JOINT PROXY STATEMENT/PROSPECTUS
VAN KAMPEN MUNICIPAL INCOME TRUST
AND
VAN KAMPEN TRUST FOR INVESTMENT GRADE MUNICIPALS
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
JOINT SPECIAL MEETING OF SHAREHOLDERS
JUNE 22, 2005
This Joint Proxy Statement/Prospectus is furnished to you as a shareholder of
Van Kampen Municipal Income Trust (the "Target Fund") or Van Kampen Trust for
Investment Grade Municipals (the "Acquiring Fund"). A joint special meeting of
shareholders of the Funds (the "Special Meeting") will be held at the offices of
Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555 on June 22, 2005 at 10:00 a.m. to consider the items listed below and
discussed in greater detail elsewhere in this Joint Proxy Statement/Prospectus.
If you are unable to attend the Special Meeting or any adjournment thereof, the
Board of Trustees of each Fund requests that you vote your shares by completing
and returning the enclosed proxy card or by recording your voting instructions
by telephone or via the internet. The approximate mailing date of this Joint
Proxy Statement/Prospectus and accompanying form of proxy is May 10, 2005.
The purposes of the Special Meeting are:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and the Acquiring Fund, the
termination of the Target Fund's registration under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the dissolution of
the Target Fund under applicable state law;
For common shareholders of the Target Fund:
2. To elect four trustees of the Target Fund to serve for a three year term
or until a successor shall have been duly elected and qualified;
For common shareholders of the Acquiring Fund:
3. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
4. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Reorganization Agreement that you are being asked to consider involves a
transaction that will be referred to in this Joint Proxy Statement/Prospectus as
the "Reorganization." The Reorganization seeks to combine two similar funds to
achieve certain economies of scale and other operational efficiencies. Each Fund
pursues a similar investment objective to provide a high level of current income
exempt from federal income taxes with safety of principal or preservation of
capital. Each Fund invests primarily in investment grade municipal securities.
The Target Fund and the Acquiring Fund are sometimes referred to herein each as
a "Fund" and collectively as the "Funds."
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly issued common shares of
beneficial interest, par value $0.01 per share ("Acquiring Fund Common Shares")
and newly-issued auction preferred shares of the Acquiring Fund with a par value
of $0.01 per share and a liquidation preference of $25,000 per share ("Acquiring
Fund APS"). The Target Fund will distribute Acquiring Fund Common Shares to
holders of common shares of the Target Fund ("Target Fund Common Shares") and
Acquiring Fund APS to holders of Rate Adjusted Tax-Exempt Shares of the Target
Fund ("Target Fund RATES") (the Target Fund RATES and the Acquiring Fund APS are
sometimes referred to herein collectively as "Preferred Shares"), and will then
terminate its registration under the 1940 Act, and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received in the Reorganization will equal the aggregate net asset value of
Target Fund Common Shares held immediately prior to the Reorganization less the
costs of the Reorganization (though common shareholders may receive cash for
their fractional shares), and the aggregate liquidation preference of the
Acquiring Fund APS received in the Reorganization will equal the aggregate
liquidation preference of the Target Fund RATES held immediately prior to the
Reorganization. The Acquiring Fund will continue to operate after the
Reorganization as a registered closed-end investment company with the investment
objective and policies described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganization, common shareholders of the Acquiring
Fund are being asked to approve the issuance of additional Acquiring Fund Common
Shares.
The rules of the New York Stock Exchange (the "NYSE") and the Chicago Stock
Exchange (the "CHX") call for listed companies to have an annual meeting to
elect trustees each fiscal year. Since the Target Fund's fiscal year ends on
2
June 30, 2005, the Board of Trustees of the Target Fund is asking shareholders
of that Fund to elect trustees at this time. The Special Meeting will serve as
the annual meeting of shareholders of the Target Fund.
The Board of Trustees of each Fund has determined that including both
proposals in one Joint Proxy Statement/Prospectus will reduce costs and is in
the best interests of each Funds' shareholders.
In the event that Target Fund shareholders do not approve the Reorganization
or Acquiring Fund common shareholders do not approve the issuance of Acquiring
Fund Common Shares, the Target Fund will continue to exist and the Board of
Trustees of the Target Fund will consider what additional action, if any, to
take.
This Joint Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Funds should know before voting on the proposals and
constitutes an offering of Acquiring Fund Common Shares and Acquiring Fund APS.
Please read it carefully and retain it for future reference. A Statement of
Additional Information, dated May 6, 2005, relating to this Joint Proxy
Statement/Prospectus (the "Reorganization Statement of Additional Information")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. If you wish to request the Reorganization
Statement of Additional Information, please ask for the "Reorganization
Statement of Additional Information." Copies of each Fund's most recent annual
report and semi-annual report can be obtained on a web site maintained by Van
Kampen Investments Inc. at www.vankampen.com. In addition, each Fund will
furnish, without charge, a copy of the Reorganization Statement of Additional
Information, its most recent annual report and any more recent semi-annual
report to any shareholder upon request. Any such request should be directed to
the Van Kampen Client Relations Department by calling (800) 341-2929 (TDD users
may call (800) 421-2833) or by writing to the respective Fund at 1 Parkview
Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. The address of the
principal executive offices of the Funds is 1221 Avenue of the Americas, New
York, New York 10020, and the telephone number is (800) 341-2929.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, file reports,
proxy statements, proxy material and other information with the SEC. Materials
filed with the SEC can be reviewed and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded from the SEC's
web site at www.sec.gov. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. You can
also request copies of these materials, upon payment at the prescribed rates of
a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.
3
The Acquiring Fund Common Shares are listed on the NYSE and the CHX under the
ticker symbol "VGM" and will continue to be so listed subsequent to the
Reorganization. The Target Fund Common Shares are listed on the NYSE and the CHX
under the ticker symbol "VMT." Reports, proxy statements and other information
concerning the Funds may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus serves as a prospectus of the Acquiring
Fund in connection with the issuance of the Acquiring Fund Common Shares and the
Acquiring Fund APS in the Reorganization. No person has been authorized to give
any information or make any representation not contained in this Joint Proxy
Statement/Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This Joint
Proxy Statement/ Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
The Board of Trustees of each Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
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THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is May 6, 2005.
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TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 7
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND............... 14
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 15
Market Risk............................................... 15
Interest Rate Risk........................................ 15
Credit Risk............................................... 15
Income Risk............................................... 16
Nonpayment Risk........................................... 16
Call Risk................................................. 16
Municipal Securities Risk................................. 16
Risks of Using Strategic Transactions..................... 17
Manager Risk.............................................. 17
Market Discount Risk...................................... 17
Leverage Risk............................................. 18
Anti-Takeover Provisions.................................. 19
Special Risks Related to Preferred Shares................. 20
COMPARISON OF THE FUNDS..................................... 21
Investment Objective and Policies......................... 21
Other Investment Practices and Policies................... 25
Investment Restrictions................................... 33
Management of the Funds................................... 36
Other Service Providers................................... 39
Capitalization............................................ 40
Additional Information about Common Shares of the Funds... 41
Additional Information about Preferred Shares of the
Funds................................................... 44
Governing Law............................................. 50
Certain Provisions of the Declaration of Trust............ 51
Conversion to Open-End Funds.............................. 52
Voting Rights............................................. 53
Financial Highlights...................................... 56
INFORMATION ABOUT THE REORGANIZATION........................ 58
General................................................... 58
Terms of the Reorganization Agreement..................... 60
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 62
5
PAGE
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Shareholder Approval...................................... 64
PROPOSAL 2: ELECTION OF TARGET FUND TRUSTEES................ 64
INFORMATION REGARDING TRUSTEES AND NOMINEES FOR ELECTION AS
TRUSTEES.................................................. 65
Remuneration of Trustees.................................. 75
Board Committees and Meetings............................. 77
OTHER INFORMATION........................................... 79
Executive Officers of the Fund............................ 79
Shareholder Information................................... 82
Independent Registered Public Accounting Firm............. 84
Audit and Other Fees...................................... 84
Shareholder Approval...................................... 85
PROPOSAL 3: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON
SHARES.................................................... 86
Shareholder Approval...................................... 86
OTHER INFORMATION........................................... 87
Voting Information and Requirements....................... 87
Shareholder Information................................... 89
Section 16(a) Beneficial Ownership Reporting Compliance... 89
Shareholder Proposals..................................... 89
Solicitation of Proxies................................... 90
Legal Matters............................................. 90
Other Matters to Come Before the Meeting.................. 91
EXHIBIT I: DESCRIPTION OF SECURITIES RATINGS................ I-1
6
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SUMMARY
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The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy
Statement/Prospectus and in the Reorganization Statement of Additional
Information. Shareholders should read the entire Joint Proxy
Statement/Prospectus carefully.
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
THE PROPOSED REORGANIZATION. The Board of Trustees of each Fund, including the
trustees who are not "interested persons," as defined in the 1940 Act, of each
Fund, has unanimously approved the Reorganization Agreement. If the shareholders
of the Target Fund approve the Reorganization Agreement and the shareholders of
the Acquiring Fund approve the issuance of Acquiring Fund Common Shares (see
"Proposal 3: Issuance of Additional Acquiring Fund Common Shares"). Acquiring
Fund Common Shares and Acquiring Fund APS will be issued to holders of Target
Fund Common Shares and Target Fund RATES, respectively, in exchange for
substantially all of the assets of the Target Fund and the assumption of
substantially all of the liabilities of the Target Fund. The Target Fund will
then terminate its registration under the 1940 Act and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received in the Reorganization will equal the aggregate net asset value of
Target Fund Common Shares held immediately prior to the Reorganization, less the
costs of the Reorganization (though common shareholders may receive cash for
fractional shares). The aggregate liquidation preference of Acquiring Fund APS
received in the Reorganization will equal the aggregate liquidation preference
of Target Fund RATES held immediately prior to the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION. The Reorganization
seeks to combine two similar Funds to achieve certain economies of scale and
other operational efficiencies. Each Fund is registered as a diversified,
closed-end management investment company under the 1940 Act. Each Fund invests
primarily in investment grade municipal securities. The investment objective of
the Target Fund is to provide a high level of current income exempt from federal
income taxes with safety of principal. The Target Fund seeks to achieve its
investment objective by investing primarily in a diversified portfolio of
investment grade tax-exempt municipal securities. The investment objective of
the Acquiring Fund is to provide a high level of current income exempt from
federal income tax, consistent with preservation of capital. The Acquiring Fund
seeks to achieve its investment objective by investing in a diversified
portfolio of municipal securities which the Acquiring Fund's investment adviser
believes do not involve undue risk to income or principal. Each Fund may invest
in municipal securities subject to the alternative minimum
7
tax provisions of federal tax law. The Funds are managed by the same investment
advisory personnel.
The proposed Reorganization will combine the assets of these similar funds by
reorganizing the Target Fund into the Acquiring Fund. The Board of Trustees of
the Target Fund (the "Target Fund Board"), based upon its evaluation of all
relevant information, anticipates that the Reorganization will benefit holders
of Target Fund Common Shares. The Board of Trustees of the Acquiring Fund (the
"Acquiring Fund Board"), based upon its evaluation of all relevant information,
anticipates that the Reorganization will benefit holders of Acquiring Fund
Common Shares. The Board of Trustees of each Fund believes, based on data
presented by Van Kampen Asset Management, investment adviser to each of the
Funds (the "Adviser"), that holders of common shares of each Fund will
experience a reduced annual operating expense ratio as a result of the
Reorganization. The combined fund resulting from the Reorganization will have a
larger asset base than either of the Funds has currently; certain fixed
administrative costs, such as costs of printing shareholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses, will
be spread across this larger asset base, thereby lowering the expense ratio for
common shareholders of the combined fund.
The table below illustrates the anticipated reduction in operating expenses
expected as a result of the Reorganization. The table sets forth (i) the fees,
expenses and distributions to preferred shareholders paid by the Target Fund for
the 12-month period ended October 31, 2004, (ii) the fees, expenses and
distributions to preferred shareholders paid by the Acquiring Fund for the
12-month period ended October 31, 2004 and (iii) the pro forma fees, expenses
and distributions to preferred shareholders for the Acquiring Fund for the
12-month period ended October 31, 2004, assuming all of the Reorganization had
been completed at the beginning of such period. As shown below, the
Reorganization is expected to result
8
in decreased total annual expenses for shareholders of each Fund (although such
savings will not be immediately realized (see footnote (c) to the table),.
FEE, EXPENSE AND DISTRIBUTIONS ON PREFERRED SHARES TABLE FOR COMMON SHAREHOLDERS
OF THE FUNDS AS OF OCTOBER 31, 2004
ACTUAL PRO FORMA
----------------------- ----------
VAN KAMPEN VAN KAMPEN
VAN KAMPEN TRUST FOR TRUST FOR
MUNICIPAL INVESTMENT INVESTMENT
INCOME GRADE GRADE
TRUST MUNICIPALS MUNICIPALS
---------- ---------- ----------
Common Shareholder Transaction
Expenses(a):
Maximum Sales Load (as a percentage
of offering price(b)(c)............ None None None
Dividend Reinvestment Plan Fees...... None None None
Annual Expenses (as a percentage of net
assets attributable to common
shares):
Investment Advisory Fees(d).......... 0.85% 0.86% 0.86%
Interest Payments on Borrowed
Funds.............................. 0.00% 0.00% 0.00%
Other Expenses....................... 0.30% 0.27% 0.25%
---- ---- ----
Total Annual Expenses(d)............. 1.15% 1.13% 1.11%
---- ---- ----
Distributions:
Distributions on Preferred
Shares(e).......................... 0.62% 0.65% 0.62%
---- ---- ----
Total Annual Expenses and
Distributions on Preferred
Shares............................. 1.77% 1.78% 1.73%
---- ---- ----
---------------
(a)No expense information is presented with respect to preferred shares because
holders of preferred shares do not bear any transaction or operating expenses
of any of the Funds and will not bear any of the Reorganization expenses or
any transaction or operating expenses of the combined fund.
(b)Common shares purchased in the secondary market may be subject to
brokerage commissions or other charges. No sales load will be charged on the
issuance of common shares in the Reorganization. Common shares are not
available for purchase from the Funds but may be purchased through a
broker-dealer subject to individually negotiated commission rates.
(c)In connection with the Reorganization, there are certain other transaction
expenses which include, but are not limited to: all costs related to the
preparation, printing and distributing of this Joint Proxy
Statement/Prospectus to shareholders; costs related to preparation and
distribution of materials distributed to each Fund's Board; all expenses
incurred in connection with the preparation of the Reorganization Agreement
and registration statement on
9
Form N-14; SEC and state securities commission filing fees; legal and audit
fees; portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. In accordance with applicable SEC rules,
the Board of Trustees of each Fund reviewed the fees and expenses that will
be borne directly or indirectly by the Funds in connection with the
Reorganization. After considering various alternatives for allocating these
costs, the Board of Trustees of each Fund agreed that, in the event the
Reorganization is approved and completed, the expenses of the Reorganization
will be shared by the Target Fund and the Acquiring Fund in proportion to
their projected declines in total annual operating expenses as a result of
the Reorganization. The Board of Trustees of each Fund and management have
agreed to limit the allocation of Reorganization expenses to each Fund based
on a maximum payback period of two years. To the extent that the expenses of
the Reorganization exceed such amount, the additional expenses of the
Reorganization will be borne by the Adviser. The table below summarizes each
Fund's net assets (common shares only) at October 31, 2004, projected annual
savings to each Fund as a result of the Reorganization, allocation of
Reorganization expenses among the Funds and the Adviser in dollars and
percentages, an estimated pay-back period (in years) and the resulting effect
on each Fund's net asset value per common share at October 31, 2004. The
Target Fund will benefit more from projected annual expense savings of the
Reorganization than the Acquiring Fund. The projected annual expense savings
are generally not expected to be immediately realized. If a shareholder sells
his or her common shares prior to the estimated pay-back period, then that
shareholder may not realize any of the projected expense savings resulting
from the reduced expense ratio of the combined fund. The net asset value per
common share of each Fund will be reduced at the closing date of the
respective Reorganization to reflect the allocation of Reorganization
expenses to each Fund. The reduction in net asset value per common share
resulting from the allocation of Reorganization expenses, when compared to
the relative net asset sizes of the Funds involved in the Reorganization,
will be greater in the Target Fund than the Acquiring Fund. In the event the
Reorganization is not completed, the Adviser will bear the costs associated
with
10
the Reorganization. The numbers presented in the table are estimates; actual
results may differ.
REORGANIZATION ESTIMATED REDUCTION TO NET
NET ASSETS PROJECTED EXPENSE PAYBACK ASSET VALUE
(COMMON ANNUAL ALLOCATION IN PERIOD (IN PER COMMON
FUND SHARES ONLY) SAVINGS DOLLARS/PERCENTAGE YEARS) SHARE
---- ------------ --------- ------------------ ---------- ----------------
Target Fund $302,333,336 $120,993 $241,866/49% 2.00 < $ 0.01
Acquiring Fund $468,334,522 $ 93,667 $187,334/38% 2.00 < $ 0.01
The Adviser $ 61,800/13%
Total Expenses $ 491,000
---------------
(d)Expense information has been restated to reflect permanent reductions
made to administrative fees effective as of June 1, 2004 and permanent
reductions made to management fees effective as of November 1, 2004.
(e)In seeking to enhance the income for its common shareholders, each of
the Funds uses preferred shares as financial leverage. Leverage created by
borrowing or other forms of indebtedness would create interest expenses which
would, if used by the Funds, be charged to common shareholders (shown above
as "Interest Payments on Borrowed Funds"). Leverage created by preferred
shares creates dividend payments and/or capital gains distributions to
preferred shareholders which are charged to common shareholders (shown above
as "Distributions on Preferred Shares"). The dividend rates are based on
periodic auctions as described herein and thus will differ based on varying
market conditions at the times of such auctions.
EXAMPLE. The following example is intended to help you compare the costs of
investing in the Acquiring Fund pro forma after the Reorganizations with the
costs of investing in the Target Funds and the Acquiring Fund without the
Reorganizations. An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for each Fund (as a
percentage of net assets attributable to common shares) set forth in the table
above and (2) a 5% annual return throughout the period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Van Kampen Municipal Income Trust...... $12 $37 $63 $140
Van Kampen Trust for Investment Grade
Municipals........................... $12 $36 $62 $137
Pro Forma--Van Kampen Trust for
Investment Grade Municipals.......... $11 $35 $61 $135
The example set forth above assumes Common Shares of each Fund were purchased
in the initial offerings and the reinvestment of all dividends and distributions
and uses a 5% annual rate of return as mandated by SEC regulations.
11
The example should not be considered a representation of past or future expenses
or annual rates of return. Actual expenses or annual rates of return may be more
or less than those assumed for purposes of the example.
FURTHER INFORMATION REGARDING THE REORGANIZATION. The Target Fund Board has
determined that the Reorganization is in the best interests of holders of Target
Fund Common Shares and that the interests of such shareholders will not be
diluted as a result of the Reorganization. Similarly, the Board of Trustees of
the Acquiring Fund has determined that the Reorganization is in the best
interests of holders of Acquiring Fund Common Shares and that the interests of
such shareholders will not be diluted as a result of the Reorganization. It is
not anticipated that the Reorganization will directly benefit the holders of
Preferred Shares of either Fund; however, the Reorganization will not adversely
affect the holders of Preferred Shares of either Fund and the expenses of the
Reorganization will not be borne by the holders of Preferred Shares of either
Fund. As a result of the Reorganization, however, a shareholder of either Fund
will hold a reduced percentage of ownership in the larger combined fund than he
or she did in either of the separate Funds.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code" or "Code"). If the Reorganization so qualifies, in
general, a shareholder of the Target Fund will recognize no gain or loss upon
the receipt of shares of the Acquiring Fund in connection with the
Reorganization. Additionally, the Target Fund will not recognize any gain or
loss as a result of the transfer of all of its assets and liabilities in
exchange for the shares of the Acquiring Fund or as a result of its dissolution.
Neither the Acquiring Fund nor its shareholders will recognize any gain or loss
in connection with the Reorganization.
The Target Fund Board requests that shareholders of the Target Fund approve
the proposed Reorganization at the Special Meeting to be held on June 22, 2005.
Shareholder approval of the Reorganization requires the affirmative vote of
shareholders of the Target Fund representing more than 50% of the outstanding
Target Fund Common Shares and 66 2/3% of the outstanding Target Fund Preferred
Shares, each voting separately as a class. Subject to the requisite approval of
the shareholders of each Fund with regard to the Reorganization, it is expected
that the closing date of the transaction (the "Closing Date") will be after the
close of business on or about June 29, 2005, but it may be at a different time
as described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
12
PROPOSAL 2: ELECTION OF TARGET FUND TRUSTEES
The Joint Special Meeting will serve as the annual meeting of shareholders of
the Target Fund for the current fiscal year at which trustees of the Target Fund
will be elected. Shareholders of the Target Fund are being asked to elect four
Class I trustees at the Special Meeting to serve until the later of the Target
Fund's Annual Meeting of Shareholders in 2008 or until a successor has been duly
elected and qualified. Holders of Common Shares, voting as a separate class,
will vote with respect to four Class I trustees (David C. Arch, Jerry D. Choate,
Howard J Kerr and Suzanne H. Woolsey) designated to be elected by such class of
shares. An affirmative vote of a plurality of the Target Fund Common Shares
present at the Special Meeting in person or by proxy is required to elect the
respective nominees. The "vote of a plurality" means that a nominee must receive
more votes than any other candidate for the same position, but not necessarily a
majority of the votes cast. It is the intention of the persons named in the
enclosed proxy to vote the shares represented by them for the election of the
respective nominees listed unless the proxy is marked otherwise.
The Target Fund Board recommends that you vote "FOR" the election of each of
the nominees.
PROPOSAL 3: ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization described under "Proposal 1:
Reorganization of the Target Fund," the Acquiring Fund will issue additional
Acquiring Fund Common Shares and list such shares on the NYSE and CHX. The
Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of the Target Fund in exchange for the
newly-issued Acquiring Fund Common Shares and newly-issued Acquiring Fund APS.
The Reorganization will result in no reduction of net asset value of the
Acquiring Fund Common Shares, other than the costs of the Reorganization. No
gain or loss will be recognized by the Acquiring Fund or its shareholders in
connection with the Reorganization. The Acquiring Fund Board, based upon its
evaluation of all relevant information, anticipates that the Reorganization will
benefit holders of Acquiring Fund Common Shares. In particular, the Acquiring
Fund Board believes, based on data presented by the Adviser, that the Acquiring
Fund will experience a reduced overall operating expense ratio as a result of
the Reorganization.
The Acquiring Fund Board requests that shareholders of the Acquiring Fund
approve the issuance of additional Acquiring Fund Common Shares at the Special
Meeting to be held on June 22, 2005. Shareholder approval of the issuance of
additional Acquiring Fund Common Shares requires the affirmative vote of a
majority of the votes cast on the proposal, provided that the total votes cast
on the proposal represents more than 50% in interest of all securities entitled
to vote on the proposal. Subject to the requisite approval of the shareholders
of each Fund
13
with regard to the Reorganization, it is expected that the Closing Date will be
after the close of business on or about June 29, 2005, but it may be at a
different time as described herein.
The Acquiring Fund Board recommends that you vote "FOR" the issuance of
additional Acquiring Fund Common Shares in connection with the Reorganization.
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PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
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The Reorganization seeks to combine two similar Funds to achieve certain
economies of scale and other operational efficiencies. Each Fund is registered
as a diversified, closed-end management investment company under the 1940 Act.
Each Fund pursues a similar investment objective to provide a high level of
current income exempt from federal income taxes with safety of principal or
preservation of capital. Each Fund invests primarily in investment grade
municipal securities. The Funds are managed by the same investment advisory
personnel.
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of Acquiring Fund Common Shares and
Acquiring Fund APS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund APS to holders of
Target Fund RATES, and will then terminate its registration under the 1940 Act
and dissolve under applicable state law. The aggregate net asset value of
Acquiring Fund Common Shares received in the Reorganization will equal the
aggregate net asset value on the Target Fund Common Shares held immediately
prior to the Reorganization less the costs of the Reorganization (though common
shareholders may receive cash for fractional shares). The aggregate liquidation
preference of Acquiring Fund APS received in the Reorganization will equal the
aggregate liquidation preference of Target Fund RATES held immediately prior to
the Reorganization. The Acquiring Fund will continue to operate as a registered
closed-end investment company with the investment objective and policies
described in this Joint Proxy Statement/Prospectus.
The Target Fund Board, based upon its evaluation of all relevant information,
anticipates that the common shareholders of the Target Fund will benefit from
the Reorganization. In particular, the Target Fund Board believes, based on data
presented by the Adviser, that common shareholders of the Target Fund will
experience a reduced annual operating expense ratio as a result of the
Reorganization. The combined fund resulting from the Reorganizations will have a
larger asset base than either Fund has currently; certain fixed administrative
costs, such as costs of printing shareholder reports and proxy statements, legal
expenses, audit fees,
14
mailing costs and other expenses, will be spread across this larger asset base,
thereby lowering the expense ratio for common shareholders of the combined fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests substantially all
of its assets in investment grade municipal securities, any risks inherent in
such investments are equally applicable to both Funds and will apply to the
combined fund after the Reorganization. The Reorganization itself is not
expected to adversely affect the rights of holders of Common Shares or Preferred
Shares of either Fund or to create additional risks.
MARKET RISK
Market risk is the possibility that the market values of securities owned by
each Fund will decline. The prices of debt securities tend to fall as interest
rates rise, and such declines tend to be greater among debt securities with
longer maturities. Market risk is often greater among certain types of debt
securities, such as zero coupon bonds which do not make regular interest
payments but are instead bought at a discount to their face values and paid in
full upon maturity. As interest rates change, these securities often fluctuate
more in price than securities that make regular interest payments and therefore
subject the Funds to greater market risk than a fund that does not own these
types of securities. When-issued and delayed delivery transactions are subject
to changes in market conditions from the time of the commitment until
settlement. This may adversely affect the prices or yields of the securities
being purchased. The greater the Funds' outstanding commitments for these
securities, the greater the Funds' exposure to market price fluctuations.
INTEREST RATE RISK
Interest rate risk is the risk that prices of municipal securities generally
increase when interest rates decline and decrease when interest rates increase.
Prices of longer-term securities generally change more in response to interest
rate changes than prices of shorter-term securities.
CREDIT RISK
Credit risk refers to an issuer's ability to make timely payments of interest
and principal. The degree of credit risk depends on both the financial condition
of the issuer and the terms of the obligation. Each Fund invests substantially
all of its total assets in municipal securities rated investment grade at the
time of investment. However, to the extent that a Fund may hold securities rated
below investment grade, it may be subject to a higher level of credit risk than
a fund that holds solely investment grade securities. Securities rated BBB by
Standard & Poor's
15
("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's") are in the lowest
of the four investment grades and are considered by the rating agencies to be
medium-grade obligations which possess speculative characteristics so that
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
in the case of higher-rated securities. The credit quality of non-investment
grade securities is considered speculative by recognized rating agencies with
respect to the issuer's continuing ability to pay interest and principal.
Lower-grade securities may have less liquidity and a higher incidence of default
than higher-grade securities. The Acquiring Fund may incur higher expenditures
to protect its interests in such securities. The credit risks and market prices
of lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher-grade securities.
INCOME RISK
The income shareholders receive from a Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from such Fund may drop as well.
NONPAYMENT RISK
Although substantially all of the municipal securities in which the Funds
invest are rated investment grade at the time of investment, municipal
securities, like other debt obligations, are subject to the risk of nonpayment.
The ability of issuers of municipal securities to make timely payments of
interest and principal may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such nonpayment would result in a
reduction of income to a Fund and could result in a reduction in the value of
them municipal security experiencing nonpayment and a potential decrease in the
net asset value of a Fund.
CALL RISK
If interest rates fall, it is possible that issuers of securities with high
interest rates will prepay or "call" their securities before their maturity
dates. In this event, the proceeds from the called securities would likely be
reinvested by the Funds in securities bearing the new, lower interest rates,
resulting in a possible decline in the Funds' income and distributions to
shareholders.
MUNICIPAL SECURITIES RISK
Under normal market conditions, the Funds invest primarily in municipal
securities. The yields of municipal securities may move differently and
adversely
16
compared to the yields of overall debt securities markets. Although the interest
received from municipal securities generally is exempt from federal income tax,
each Fund may invest in municipal securities subject to the federal alternative
minimum tax. The Acquiring Fund may invest all or a substantial portion of its
total assets in municipal securities subject to the federal alternative minimum
tax. In addition, there could be changes in applicable tax laws or tax
treatments that reduce or eliminate the current federal income tax exemption on
municipal securities or otherwise adversely affect the current federal or state
tax status of municipal securities.
RISKS OF USING STRATEGIC TRANSACTIONS
Each Fund may engage in certain transactions ("Strategic Transactions")
designed to, among other things, reduce its exposure to interest rate movements.
For example, each Fund may purchase and sell exchange-listed and over-the-
counter put and call options on securities, financial futures and other
financial instruments, purchase and sell financial futures contracts and enter
into various interest rate transactions such as swaps, caps, floors or collars.
If a Fund incorrectly forecasts market values, interest rates or other factors,
that Fund's performance could suffer as a result of its Strategic Transactions.
Each Fund also may suffer a loss if the other party to the Strategic Transaction
fails to meet its obligations. The Funds are not required to use Strategic
Transactions and may choose not to do so.
MANAGER RISK
As with any managed fund, the investment adviser to each Fund may not be
successful in selecting the best-performing securities or investment techniques,
and a Fund's performance may lag behind that of similar funds.
MARKET DISCOUNT RISK
Whether investors will realize gains or losses upon the sale of shares of a
Fund will depend upon the market price of the shares at the time of original
purchase and subsequent sale, which may be less or more than such Fund's net
asset value per share. Since the market price of the shares will be affected by
such factors as the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control of
the Funds, the Funds cannot predict whether shares of the Funds will trade at,
below or above net asset value. Shares of closed-end funds often trade at a
discount to their net asset values, and the Funds' shares may trade at such a
discount.
In order to reduce or eliminate a market value discount from net asset value,
the Board of Trustees of a Fund may, subject to the terms of its preferred
shares, authorize such Fund from time to time to repurchase its common shares in
the open market or to tender for its common shares at net asset value. The Board
of Trustees
17
of a Fund, in consultation with the Adviser, reviews on a quarterly basis the
possibility of open-market repurchases and/or tender offers for such Fund's
common shares. Subject to its borrowing restrictions, a Fund may incur debt to
finance such repurchases, which entails risks. The ability of a Fund to enter
into tender offers and the common share repurchases may be limited by the 1940
Act asset coverage requirements and any additional asset coverage requirements
which may be imposed by a rating agency in connection with any rating of the
preferred shares. No assurance can be given that the Board of Trustees of a Fund
will, in fact, authorize such Fund to undertake such repurchases and/or tender
offers or that, if undertaken, such actions would result in such Fund's common
shares trading at a price which is equal or close to net asset value.
LEVERAGE RISK
Use of leverage, through the issuance of Preferred Shares, involves certain
risks to holders of Common Shares of the Funds. For example, each Fund's
issuance of Preferred Shares may result in higher volatility of the net asset
value of its Common Shares and potentially more volatility in the market value
of its Common Shares. In addition, changes in the short-term and medium-term
dividend rates on, and the amount of taxable income allocable to, the Preferred
Shares of a Fund will affect the yield to holders of Common Shares of such Fund.
In certain circumstances, when a Fund is required to allocate taxable income to
holders of its Preferred Shares, such Fund may be required to make an additional
distribution to such holders in an amount approximately equal to the tax
liability resulting from the allocation (an "Additional Dividend"). Leverage
will allow holders of each Fund's Common Shares to realize a higher current rate
of return than if a Fund were not leveraged as long as such Fund, while
accounting for its costs and operating expenses, is able to realize a higher net
return on its investment portfolio than the then-current dividend rate (and any
Additional Dividend) paid on its Preferred Shares. Similarly, since a pro rata
portion of each Fund's net realized capital gains is generally payable to
holders of a Fund's Common Shares, the use of leverage will increase the amount
of such gains distributed to holders of a Fund's Common Shares. However,
short-term, medium-term and long-term interest rates change from time to time as
do their relationships to each other (i.e., the slope of the yield curve)
depending upon such factors as supply and demand forces, monetary and tax
policies and investor expectations. Changes in any or all of such factors could
cause the relationship between short-term, medium-term and long-term rates to
change (i.e., to flatten or to invert the slope of the yield curve) so that
short-term and medium-term rates may substantially increase relative to the
long-term obligations in which each Fund may be invested. To the extent that the
current dividend rate (and any Additional Dividend) on a Fund's Preferred Shares
approaches the net return on such Fund's investment portfolio, the benefit of
leverage to holders of Common Shares of such Fund will be decreased. If the
current dividend rate (and
18
any Additional Dividend) on the Preferred Shares of a Fund were to exceed the
net return on such Fund's portfolio, holders of Common Shares of such Fund would
receive a lower rate of return than if the Fund were not leveraged. Similarly,
since both the costs of issuing Preferred Shares and any decline in the value of
a Fund's investments (including investments purchased with the proceeds from any
Preferred Shares offering) will be borne entirely by holders of such Fund's
Common Shares, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of Common Shares than if a Fund
were not leveraged. If a Fund is liquidated, holders of that Fund's Preferred
Shares will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Shares of such Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its Common Shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required Common Share dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either its
Common Shares or its Preferred Shares, such Fund may have to liquidate certain
of its investments. In addition, each Fund has the authority to redeem its
Preferred Shares for any reason and may be required to redeem all or part of its
Preferred Shares in the following circumstances:
- if the asset coverage for the Preferred Shares declines below 200%, either
as a result of a decline in the value of a Fund's portfolio investments or
as a result of the repurchase of Common Shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the Preferred Shares.
In addition, in the case of Target Fund RATES, if on any dividend date, the
Target Fund fails to generate sufficient available net tax-exempt income to pay
accrued and unpaid dividends on the RATES out of solely tax exempt income at the
applicable dividend rate, the Target Fund will be required to redeem all or part
of its RATES.
Redemption of the Preferred Shares or insufficient investment income to make
dividend payments, may reduce the net asset value of a Fund's Common Shares and
require a Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such
19
provisions could limit the ability of common shareholders to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of either Fund.
SPECIAL RISKS RELATED TO PREFERRED SHARES
AUCTION RISK. The dividend rate for the Preferred Shares of each Fund normally
is set through an auction process. In the auction, holders of Preferred Shares
may indicate the dividend rate at which they would be willing to hold or sell
their shares or purchase additional shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers, in which case holders
of Preferred Shares may not be able to sell their shares. Also, if holders of
Preferred Shares place bids to retain shares at an auction only at a specified
dividend rate and that rate exceeds the rate set at the auction, they will not
retain their shares. Additionally, if holders of Preferred Shares buy shares or
elect to retain shares without specifying a dividend rate below which they would
not wish to buy or continue to hold those shares, they could receive a lower
rate of return on their shares than the market rate. Finally, the dividend
period for the Preferred Shares may be changed by a Fund, subject to certain
conditions, including notice to preferred shareholders, which could also affect
the liquidity of an investment in Preferred Shares.
SECONDARY MARKET RISK. The Target Fund RATES have not been registered pursuant
to the Securities Act of 1933, as amended (the "1933 Act"). Acquiring Fund APS
are registered pursuant to the 1933 Act. Target Fund RATES may only be
transferred outside of auctions through transactions that are not required to be
registered under applicable federal and state securities laws. Broker-dealers
may maintain a secondary trading market in the Acquiring Fund APS outside of
auctions; however, they are not obligated to do so and there can be no assurance
that such a secondary market will develop or, if it does develop, that it will
provide holders of Acquiring Fund APS with a liquid trading market. It may not
be possible to sell Acquiring Fund APS between auctions, or it may only be
possible to sell them for a price less than their liquidation preference plus
any accumulated dividends. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the Acquiring Fund
APS. Acquiring Fund APS may only be transferred outside of auctions to or
through broker-dealers or other persons as the Acquiring Fund permits.
RATINGS AND ASSET COVERAGE RISKS. Although the Preferred Shares of each Fund
have been rated "Aaa" by Moody's and "AAA" by S&P, such ratings do not eliminate
or necessarily mitigate the risks of investing in Preferred Shares. Moody's or
S&P could downgrade its rating of the Preferred Shares or withdraw its rating at
any time, which may make the Preferred Shares less liquid at an auction or in
the secondary market. If a Fund fails to satisfy its asset coverage ratios, it
will be required to redeem a sufficient number of Preferred Shares in order to
return to
20
compliance with the asset coverage ratios. A Fund may voluntarily redeem
preferred shares under certain circumstances in order to meet asset coverage
tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The Funds pursue a similar investment objective and have similar investment
policies. The Target Fund's investment objective is to provide a high level of
current income exempt from federal income taxes with safety of principal. The
Acquiring Fund's investment objective is to provide a high level of current
income exempt from federal income tax, consistent with preservation of capital.
Each Fund invests primarily in municipal securities rated investment grade at
the time of investment. Under normal market conditions, each Fund invests at
least 80% of its assets in municipal securities. The foregoing policy is a
fundamental policy of each Fund and cannot be changed without shareholder
approval. The Target Fund may only invest in municipal securities that are rated
investment grade at the time of investment. The Acquiring Fund invests
substantially all of its total assets in municipal securities rated investment
grade at the time of investment; however, the Acquiring Fund may, consistent
with such policy, also invest a portion of its assets in municipal securities
rated below investment grade. Each Fund considers securities rated BBB or higher
by S&P or Baa or higher by Moody's and equivalent rated short-term obligations
to be investment grade.
The foregoing policies with respect to credit quality of portfolio investments
apply only at the time of purchase of a security, and the Funds are not required
to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) downgrades its assessment
of the credit characteristics of a particular issuer or. In determining whether
a Fund will retain or sell such a security, the Adviser may consider such
factors as the Adviser's assessment of the credit quality of the issuer of such
security, the price at which such security could be sold and the rating, if any,
assigned to such security by other nationally recognized statistical rating
organizations.
Each Fund may invest in municipal securities subject to the alternative
minimum tax provisions of federal tax law. The Acquiring Fund has not
established any limit on the percentage of its portfolio that may be invested in
municipal securities that pay interest subject to the alternative minimum tax
provisions of federal tax law, and a substantial portion of the income produced
by the Acquiring Fund may be taxable under the alternative minimum tax. The
Target Fund may invest up to 20% of its total assets in municipal securities
that pay interest subject to the alternative minimum tax. The Funds may not be
suitable investments for investors who are already subject to the federal
alternative minimum tax or who would become
21
subject to the federal alternative minimum tax as a result of an investment in
the Funds.
Each Fund may engage in certain hedging transactions and may purchase and sell
put and call options on municipal securities and municipal securities indices.
Such transactions are not treated as investments in municipal securities for the
purpose of each Fund's policy of investing 80% of its total assets in municipal
securities.
MUNICIPAL SECURITIES. Municipal securities are obligations issued by or on
behalf of states, certain territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is, in the opinion of bond counsel or
other counsel to the issuer of such securities, at the time of issuance, not
includable in gross income for regular federal income tax purposes. Under normal
market conditions, at least 80% of each Fund's net assets are invested in
municipal securities. The Acquiring Fund not established any limit on the
percentage of their respective portfolios that may be invested in municipal
securities that pay interest subject to the alternative minimum tax provisions
of federal tax law, and a substantial portion of the income produced by the
Acquiring Fund may be taxable under the federal alternative minimum tax. The
Target Fund may invest up to 20% of its total assets in municipal securities
that pay interest subject to the alternative minimum tax.
The two principal classifications of municipal securities are "general
obligation" securities and "revenue" securities. "General obligation" securities
are secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and municipal securities the terms of which
include elements of, or are similar in effect to, certain Strategic Transactions
in which the Funds may engage. Variable rate securities bear rates of interest
that are adjusted periodically according to formulae intended to reflect market
rates of interest and include securities whose rates vary inversely with changes
in market rates of interest. Municipal notes include tax, revenue and bond
anticipation notes of short maturity, generally less than three years, which are
issued to obtain temporary funds for various public purposes. Municipal leases
are obligations issued by state and local governments or authorities to finance
the acquisition of equipment and facilities. Certain municipal lease obligations
may include "nonappropriation" clauses which provide that the
22
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Custodial receipts are underwritten by securities dealers or banks and evidence
ownership of future interest payments, principal payments or both on certain
municipal securities. Participation certificates are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Municipal securities may not
be backed by the faith, credit and taxing power of the issuer. The Funds may
also invest in municipal securities backed by original issue insurance or
secondary market insurance (collectively, "insurance").
The yields of municipal securities depend on, among other things, general
money market conditions, general conditions of the municipal securities market,
size of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the municipal securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, municipal securities with the same maturity, coupon and rating may
have different yields while municipal securities of the same maturity and coupon
with different ratings may have the same yield.
Municipal securities include long-term obligations, often called municipal
bonds, as well as short-term municipal notes, participation certificates,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer-term municipal securities generally provide a higher yield
than short-term municipal securities of similar credit quality and therefore
each Fund generally emphasizes investments in municipal securities with
long-term maturities. There is no limitation as to the maturity of municipal
securities in which each Fund may invest. The Adviser may adjust the average
maturity of each Fund's portfolio from time to time, depending on its assessment
of the relative yields available an securities of different maturities and its
expectations of future changes in interest rates.
Each Fund may invest more than 25% of its total assets in a particular segment
of the municipal securities market if the Adviser determines that the yields
available from obligations in a particular segment justify the additional risks
of a larger investment in such segment.
Neither Fund has a policy limiting its investments in municipal securities
whose issuers are located in the same state. However, it is not the present
intention of either Fund to invest more than 25% of the value of its total
assets in issuers located in the same state. If a Fund were to invest more than
25% of its total assets in issuers located in the same state, it would be more
susceptible to adverse economic, business or regulatory conditions in that
state.
23
Neither Fund will invest 25% or more of its total assets in any industry, nor
invest more than 5% of its total assets in the securities of any single issuer.
Governmental issuers of municipal securities are not considered part of any
"industry." However, municipal securities backed only by the assets and revenues
of non-governmental users may for this purpose be deemed to be issued by such
non-governmental users, and the 25% limitation would apply to such obligations.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION. Included within the
general category of municipal securities are participations in lease obligations
or installment purchase contract obligations (collectively called "lease
obligations") of municipal authorities or entities. Although lease obligations
do not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation 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. Although
non-appropriation lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult.
The Target Fund may only invest 5% of its total assets in lease obligations
that contain non-appropriation clauses, and only invests in those
non-appropriation lease obligations where (1) the nature of the leased equipment
or property is such that its ownership or use is essential to a governmental
function of the municipality, (2) the lease payments will commence amortization
of principal at an early date resulting in an average life of seven years or
less for the lease obligation, (3) appropriate covenants will be obtained from
the municipal obligor prohibiting the substitution or purchase of similar
equipment if lease payments are not appropriated, (4) the lease obligor has
maintained good market acceptability in the past, (5) the investment is of a
size that will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment was ever
required.
There is no limitation on the percentage of the Acquiring Fund's assets that
may be invested in lease obligations that contain non-appropriation clauses. In
evaluating such lease obligations, the Adviser will consider such factors as it
deems appropriate, which may include (1) whether the lease can be cancelled, (2)
the ability of the lease obligee to direct the sale of the underlying assets,
(3) the general creditworthiness of the lease obligor, (4) the likelihood that
the municipality will discontinue appropriating funding for the leased property
in the event such property is no longer considered essential by the
municipality, (5) the legal recourse of the lease obligee in the event of such a
failure to appropriate funding and (6) any limitations which are imposed on the
lease obligor's ability to utilize substitute
24
property or services than those covered by the lease obligation. The Acquiring
Fund invests in lease obligations which contain non-appropriation clauses only
if such obligations are rated investment grade at the time of investment.
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.
TEMPORARY DEFENSIVE STRATEGIES. At times, the Adviser may judge that
conditions in the markets for municipal securities make pursuing a Fund's basic
investment strategy inconsistent with the best interests of its shareholders. At
such times the Adviser may use alternative strategies, primarily designed to
reduce fluctuations in the value of such Fund's assets. In implementing these
"defensive" strategies, a Fund may invest to a substantial degree in other
investment grade municipal securities, including liquid, high-quality,
short-term municipal securities. If these other municipal securities are not
available or, in the Adviser's judgment, do not afford sufficient protection
against adverse market conditions, each Fund may invest in investment grade
taxable securities. To the extent that a Fund invests in taxable securities for
temporary defensive purposes, that Fund will not be invested in a manner
primarily designed to achieve its investment objective of seeking to provide
common shareholders with a high level of current income exempt from federal
income tax.
To the extent that the use of certain of these strategies produces taxable
income to the Target Fund, this taxable income will be distributed exclusively
to the holders of Target Fund Common Shares. To the extent that the use of
certain of these strategies produces taxable income, to the Acquiring Fund, this
taxable income will be distributed on a pro rata basis among the Acquiring Fund
APS and the Acquiring Fund Common Shares. It is impossible to predict whether,
or for how long, a Fund will use any such defensive strategies. Further, the
yields on such securities may approach or be less than the then current dividend
rate payable to preferred shareholders. In such event, the benefit of leverage
to the common shareholders will diminish and such Fund's leveraged capital
structure may work to the disadvantage of the common shareholders.
OTHER INVESTMENT PRACTICES AND POLICIES
In connection with the investment objective and policies described above, each
Fund may, but is not required to, utilize various other investment strategies as
described below to earn income, to facilitate portfolio management and to
mitigate risk. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many investment companies and other
institutional investors. These investment practices entail risks. Although the
Adviser believes that these
25
investment practices may further the Funds' respective investment objectives, no
assurance can be given that these investment practices will achieve this result.
OPTIONS. Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In general, each Fund may purchase and sell (write)
options on up to 20% of its assets. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index or other instrument at the exercise price. For instance, a
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving that Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. A Fund's purchase of a call option on a security, financial future
contract, index or other instrument might be intended to protect that Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
26
A Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only enter into OTC options that have a buy-back provision permitting
that Fund to require the Counterparty to close the option at a formula price
within seven days. Each Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with a Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, that Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
Each Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the
27
obligation of which have received) a short-term credit rating of "A-1" from S&P
or "P-1" from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that, in general, OTC options on securities (other
than U.S. government securities) purchased by a Fund, and portfolio securities
"covering" the amount of a Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to a Fund's limitation on illiquid securities
described herein.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase that Fund's income. The sale of put options can also provide income.
Each Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities that are traded on securities exchanges
and in the OTC markets and related futures contracts. All calls sold by a Fund
must be "covered" (i.e., a Fund must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Fund will receive the
option premium to help protect it against loss, a call sold by a Fund exposes
that Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Fund to hold a security or instrument which it
might otherwise have sold. In the event of exercise of a call option sold by a
Fund with respect to securities not owned by that Fund, such Fund may be
required to acquire the underlying security at a disadvantageous price to
satisfy its obligation with respect to the call option.
Each Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and corporate debt securities (whether or not it holds the above
securities in its portfolio.) In selling put options, there is a risk that a
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
FUTURES CONTRACTS. Each Fund may enter into financial futures contracts or
purchase or sell put and call options on futures contracts as a hedge against
anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures contracts generally are
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller of the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures contracts and Eurodollar instruments, the net cash amount). The
sale of a futures contract creates a firm
28
obligation by the Fund, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
Each Fund's use of financial futures contracts and options on futures
contracts will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission and will be entered into only for bona fide hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option on a
futures contract requires a Fund to deposit with a financial intermediary as
security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of
options on financial futures contracts involves payment of a premium for the
option without any further obligation on the part of the Fund. If a Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
contracts position just as it would for any position. Futures contracts and
options on futures contracts are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
Each Fund will not enter into a futures contract or an option on a futures
contracts (except for closing transactions) for other than bona fide hedging
purposes if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open futures contracts and options thereon would exceed 5% of a
Fund's total assets (taken at current value); however, in the case of an option
that is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. Each Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index
29
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
COMBINED TRANSACTIONS. Each Fund may enter into multiple transactions,
including multiple options transactions, multiple futures contracts transactions
and multiple interest rate transactions and any combination of futures
contracts, options and interest rate transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of a
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
each Fund may enter are interest rate and index swaps and the purchase or sale
of related caps, floors and collars. Each Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities a Fund anticipates purchasing at
a later date. Each Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream a Fund
may be obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination
30
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Funds segregate cash and/or
liquid securities to the extent a Fund's obligations are not otherwise "covered"
through ownership of the underlying security, financial instrument or currency.
In general, either the full amount of any obligation by a Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered, or, subject to any regulatory
restrictions, a Fund must segregate cash and/or liquid securities in an amount
at least equal to the current amount of the obligation. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate. For example, a call option
written by a Fund will require that Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate cash and/or liquid securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require that Fund to own portfolio securities which
correlate with the index or to segregate cash and/or liquid securities equal to
the excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires that Fund to segregate cash and/or liquid
securities equal to the exercise price.
OTC options entered into by a Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when a Fund sells these
instruments it will only segregate an amount of cash and/or liquid securities
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, that Fund will segregate, until the option
expires or is closed out, cash and/or liquid securities equal in value to such
excess. OCC issued and exchange listed options sold by a Fund other than those
above generally settle with physical delivery, and that Fund will segregate an
amount of cash and/or liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and possible daily variation margin in addition to
segregating cash and/or liquid securities sufficient to meet its obligation to
purchase or provide
31
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract.
With respect to swaps, each Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash and/or liquid securities having
a value equal to the accrued excess. Caps, floors and collars require
segregation of cash and/or liquid securities with a value equal to a Fund's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund also may enter into offsetting
transactions so that its combined position, coupled with any segregated cash
and/or liquid securities, equals its net outstanding obligation in related
options and Strategic Transactions. For example, a Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by that Fund. Moreover, instead of segregating cash
and/or liquid securities if a Fund held a futures contract or forward contract,
it could purchase a put option on the same futures contract or forward contract
with a strike price as high or higher than the price of the contract held. Other
Strategic Transactions also may be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time, cash and/or
liquid securities equal to any remaining obligation could need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. Income earned or gains realized or deemed to
be earned or realized, if any, by a Fund from engaging in Strategic Transactions
generally will be taxable income of the Fund. Such income earned or realized by
the Target Fund is allocated to the Target Fund Common Shares. Such income
earned or realized by the Acquiring Fund is allocated to the Acquiring Fund
Common Shares and the Acquiring Fund APS on a pro rata basis.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. Each Fund may also purchase
and sell municipal securities on a "when-issued" and "delayed delivery" basis.
No income accrues to a Fund on municipal securities in connection with such
transactions prior to the date such Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund engaging in such transactions relies on
the buyer or seller, as the case may be, to consummate the transaction, failure
by the other party to complete the
32
transaction may result in such Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When a Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid portfolio securities having an aggregate value equal
to the amount of such purchase commitments until payment is made. A Fund will
make commitments to purchase municipal securities on such basis only with the
intention of actually acquiring these securities, but a Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent a Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for a Fund's
portfolio consistent with that Fund's investment objective and policies and not
for the purpose of investment leverage. No specific limitation exists as to the
percentage of a Fund's assets which may be used to acquire securities on a
"when-issued" or "delayed delivery" basis.
INVESTMENT RESTRICTIONS
Each Fund's investment objective, its investment policy with respect to
investing at least 80% of its total assets in municipal securities and the
following investment restrictions are fundamental and cannot be changed without
the approval of the holders of a majority of a Fund's outstanding voting
securities (defined in the 1940 Act as the lesser of (i) more than 50% of a
Fund's outstanding Common Shares and of its outstanding Preferred Shares, voting
by class, or (ii) 67% of such outstanding Common Shares and of its outstanding
Preferred Shares, voting by class, present at a meeting at which the holders of
more than 50% of the outstanding shares of each such class are present in person
or by proxy). All other investment policies or practices are considered by the
Funds not to be fundamental and accordingly may be changed without shareholder
approval. If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentage resulting from changing market values will not be considered a
deviation from policy. With respect to the limitations on illiquid securities
and borrowings, the percentage limitations apply at the time of purchase and on
an ongoing basis. The investment restrictions of the Acquiring Fund are set
forth below. Except as noted herein the investment restrictions of the Target
Fund are similar. The Acquiring Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than tax-exempt obligations guaranteed by the United States Government or
by its agencies or instrumentalities), if as a result more than 5% of the
Fund's total assets would then be invested in securities of a single
issuer or if as a result the Fund would hold more than 10% of the
outstanding voting securities of any single issuer, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended
33
from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, as
described in the Fund's prospectus, the Fund may from time to time invest
more than 25% of its assets in a particular segment of the municipal
securities market.
3. Issue senior securities, as defined in the 1940 Act, other than preferred
shares of beneficial interest, except to the extent such issuance might be
involved with borrowings described under subparagraph (4) below or with
respect to hedging and risk management transactions or the writing of
options within limits described in the Fund's Prospectus.
4. Borrow money, except for temporary or emergency purposes from banks or for
repurchase of the Fund's shares, and then only in an amount not exceeding
one-third of the Fund's total assets, including the amount borrowed. The
Fund will not mortgage, pledge or hypothecate any assets except in
connection with a borrowing. The Fund will not purchase portfolio
securities during any period that such borrowings exceed 5% of the total
asset value of the Fund. Notwithstanding this investment restriction, the
Fund may enter into "when issued" and "delayed delivery" transactions as
described in the Fund's prospectus.
5. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of or the Fund's interest with respect to the
securities owned by the Fund.
6. Buy any securities "on margin." Neither the deposit of initial or
variation margin in connection with hedging and risk management
transactions nor short-term credits as may be necessary for the clearance
of transactions is considered the purchase of a security on margin.
7. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except as described in the Fund's prospectus.
8. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
9. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to municipal securities would be deemed to
constitute such control or participation, and except that the Fund may
purchase securities of other investment companies to the extent permitted
by
34
(i) the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the Securities and Exchange Commission under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
10. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
11. Invest in equity interests in oil, gas or other mineral exploration or
development programs except pursuant to the exercise by the Fund of its
rights under agreements relating to municipal securities.
(The Target Fund may not invest in equity interests in oil, gas or other
mineral exploration or development programs.)
12. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interests in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
municipal securities (in which case the Fund may liquidate real estate
acquired as a result of a default on a mortgage), and except to the extent
that financial futures and related options the Fund may invest in are
considered to be commodities or commodities contracts.
In addition, the Target Fund may not:
13. Invest in illiquid investments, including securities which are subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the securities is suspended or,
in the case of unlisted securities, market makers do not exist or will not
entertain bids or offers), if more than 25% of the Fund's assets (taken at
market value) would be invested in such securities, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
As a matter of operating policy, each Fund will not invest 25% or more of its
assets in a single industry; however, each Fund may from time to time invest 25%
or more of its assets in a particular segment of the municipal securities
market.
35
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of each Fund is responsible for the overall supervision
of the operations of its respective Fund and performs the various duties imposed
on trustees of investment companies by the 1940 Act and under applicable state
law.
THE ADVISER. The investment adviser for each Fund is Van Kampen Asset
Management. The Adviser is a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than three million retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $98 billion under management or supervision as of March 31, 2005.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The principal business
address of the Adviser and Van Kampen Investments is 1221 Avenue of the
Americas, New York, New York 10020.
Pursuant to separate investment advisory agreements between each Fund and the
Adviser, each Fund pays the Adviser a monthly fee at the annual rate of 0.55% of
such Fund's average daily net assets, including assets attributable to Preferred
Shares. Effective November 1, 2004, the investment advisory fee paid by each
Fund was reduced from .60% to .55%. Subsequent to the Reorganization, the
Adviser will continue to receive compensation at the rate of 0.55% of the
average daily net assets, including assets attributable to Preferred Shares, of
the combined fund. Because the fees paid to the Adviser are calculated on net
assets, including assets attributable to Preferred Shares, the fees earned by
the Adviser will be higher when preferred shares are outstanding.
Under a separate accounting services and legal services agreement, the Adviser
(or its affiliates) provides accounting and legal services to each Fund. The
Adviser (or its affiliates) allocates the cost of such services to each Fund.
PORTFOLIO MANAGEMENT. Each Fund's portfolio is managed by the Adviser's
Municipal Fixed Income team. The team is made up of established investment
professionals. Current members of the team include Thomas Byron, Vice President;
Robert Wimmel, Vice President; and John Reynoldson, Executive Director.
Thomas Byron has worked for the Adviser since 1981 and began managing the
Acquiring Fund in 1997 and the Target Fund in 2000. Robert Wimmel has worked for
the Adviser since 1996 and began managing the Funds in 2001. John Reynoldson has
worked for the Adviser since 1987 and began managing the Funds in 2001.
36
Prior to 2001, Messrs. Wimmel and Reynoldson worked in an investment management
capacity for the Adviser.
Mr. Byron is the lead portfolio manager of each Fund. Messrs. Wimmel and
Reynoldson are co-portfolio managers of each Fund. All team members are
responsible for the day-to-day management of each Fund and for the execution of
the overall strategy of each Fund.
The Reorganization Statement of Additional Information provides additional
information about the portfolio managers' compensation, other accounts managed
by the portfolio managers and the portfolio managers' ownership of securities in
the Acquiring Fund.
PORTFOLIO TRANSACTIONS WITH AFFILIATES. The Adviser may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Funds and the Adviser if it reasonably believes that the quality of
execution and the commission are comparable to that available from other
qualified firms.
LEGAL PROCEEDINGS INVOLVING THE ADVISER. The Adviser, certain affiliates of
the Adviser, and certain investment companies advised by the Adviser or its
affiliates were named as defendants in a number of similar class action
complaints which were consolidated. The consolidated amended complaint also
names as defendants certain individual trustees and directors of certain
investment companies advised by affiliates of the Adviser; the complaint does
not, however, name the individual trustees of any Van Kampen funds. The
complaint generally alleges that defendants violated their statutory disclosure
obligations and fiduciary duties by failing properly to disclose (i) that the
Adviser and certain affiliates of the Adviser allegedly offered economic
incentives to brokers and others to steer investors to the funds advised by the
Adviser or its affiliates rather than funds managed by other companies, and (ii)
that the funds advised by the Adviser or its affiliates allegedly paid excessive
commissions to brokers in return for their alleged efforts to steer investors to
these funds. The complaint seeks, among other things, unspecified compensatory
damages, rescissionary damages, fees and costs. The defendants' motion to
dismiss this action is pending. After defendants moved to dismiss, the
plaintiffs filed a motion for leave to amend the complaint, which is also
pending. The proposed amendment drops all claims against the named investment
companies, which are listed only as nominal defendants. The proposed amendment
raises similar claims against the Adviser and its affiliates with respect to the
investment companies advised by the Adviser or its affiliates, and, in addition,
alleges that affiliates of the Adviser received undisclosed compensation for
steering investors into thirteen non-affiliated fund families. The defendants
intend to continue to defend this action vigorously. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
37
The Adviser and certain affiliates of the Adviser are also named as defendants
in a derivative suit which additionally names as defendants individual trustees
of certain Van Kampen funds; the named investment companies are listed as
nominal defendants. The complaint alleges that defendants caused the Van Kampen
funds to pay economic incentives to a proprietary sales force to promote the
sale of Van Kampen funds. The complaint also alleges that the Van Kampen funds
paid excessive commissions to Morgan Stanley and its affiliates in connection
with the sales of the funds. The complaint seeks, among other things, the
removal of the current trustees of the funds, rescission of the management
contracts for the funds, disgorgement of profits by Morgan Stanley and its
affiliates and monetary damages. This complaint has been coordinated with the
action described in the preceding paragraph. The defendants have moved to
dismiss this action and otherwise intend to defend it vigorously. This action is
currently stayed until the later of (i) a ruling on the motion to dismiss the
action described in the preceding paragraph or (ii) a ruling on a motion to
dismiss the action described in the next paragraph. While the defendants believe
that they have meritorious defenses, the ultimate outcome of this matter is not
presently determinable at this early stage of litigation.
The plaintiff in the action described in the preceding paragraph recently
filed a separate derivative action against the Adviser, certain affiliates of
the Adviser, the individual trustees of certain Van Kampen funds, and certain
unaffiliated entities. The named investment companies are listed as nominal
defendants. The complaint alleges that certain unaffiliated entities engaged in
or facilitated market timing and late trading in the Van Kampen funds, and that
the Adviser, certain affiliates of the Adviser, and the trustees failed to
prevent and/or detect such market timing and late trading. The complaint seeks,
among other things, the removal of the current trustees of the funds, rescission
of the management contracts and distribution plans for the funds, disgorgement
of fees and profits from the Adviser and its affiliates, and monetary damages.
The defendants' motion to dismiss this action is pending. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and one of the investment companies advised by the Adviser are
named as defendants in a class action complaint generally alleging that the
defendants breached their duties of care to long-term shareholders of the
investment company by valuing portfolio securities at the closing prices of the
foreign exchanges on which they trade without accounting for significant market
information that became available after the close of the foreign exchanges but
before calculation of net asset value. As a result, the complaint alleges,
short-term traders were able to exploit stale pricing information to capture
arbitrage profits that diluted the value of shares held by long-term investors.
The complaint seeks unspecified compensatory damages, punitive damages, fees and
costs. Defendants appealed an order of the federal district court remanding this
case to state court. The federal
38
appeals court recently reversed the federal district court's order remanding
this case to state court and directed entry of judgment in favor of defendants.
The Adviser and the individual trustees of certain Van Kampen funds are named
as defendants in a recently filed class action complaint that alleges the
defendants breached various fiduciary and statutory duties to investors by
failing to ensure that the funds participated in securities class action
settlements involving securities held in the funds' portfolios. The complaint
seeks, among other things, compensatory and punitive damages. None of the funds
are named as defendants, and no claims are asserted against them. The defendants
expect to move to dismiss the complaint and believe that they have meritorious
defenses.
The Adviser, one of the investment companies advised by the Adviser, and
certain officers and directors of the investment company are defendants in a
class action filed in 2001 alleging that the defendants issued a series of
prospectuses and registration statements that were materially false and
misleading. Among other things, the complaint alleges that the prospectuses and
registration statements contained misleading descriptions of the method
defendants used to value senior loan interests in the fund's portfolio, and that
defendants materially overstated the net asset value of the fund. The parties
recently mediated the dispute through a court-supervised settlement conference
and reached an agreement to settle the case. The parties presented a settlement
agreement for preliminary Court approval in April 2005.
OTHER SERVICE PROVIDERS
COMMUNICATION SUPPORT SERVICES PROVIDER. Van Kampen Funds Inc. (the "Support
Service Provider") serves as the communications support service provider to the
Target Fund. The principal business address of the Support Service Provider is
1221 Avenue of the Americas, New York, New York 10020. Communications support
services include telephonic and written correspondence with shareholders and
brokers. The Target Fund does not pay any fee to the Support Service Provider
but bears certain expenses incurred by the Support Service Provider.
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND PAYING AGENT. State
Street Bank and Trust Company is the custodian for each Fund. Its principal
business address is P.O. Box 43071, Providence, Rhode Island, 02940-3071.
EquiServe Trust Company, N.A., 250 Royall Street, Canton, Massachusetts, 02021,
is the transfer agent, dividend disbursing agent and registrar for the Common
Shares of each Fund. The Bank of New York, 100 Church Street, New York, New York
10286, is the auction agent and dividend paying agent for the Target Fund RATES.
Deutsche Bank Trust Company Americas ("Deutsche Bank"), 280 Park Avenue, New
York, New York 10017, is the auction agent and dividend paying agent for the
Acquiring Fund APS.
39
CAPITALIZATION
The Board of Trustees of each Fund may authorize separate classes of shares
together with such designation of preferences, rights, voting powers,
restrictions, limitations, qualifications or terms as may be determined from
time to time by the trustees. The table below sets forth the capitalization of
the Target Fund and the Acquiring Fund as of October 31, 2004, and the pro forma
capitalization of the combined fund as if the Reorganization had occurred on
that date.
CAPITALIZATION AS OF OCTOBER 31, 2004 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
ACTUAL PRO FORMA
----------------------- ----------
VAN KAMPEN VAN KAMPEN
VAN KAMPEN TRUST FOR TRUST FOR
MUNICIPAL INVESTMENT INVESTMENT
INCOME GRADE GRADE
TRUST MUNICIPALS MUNICIPALS
---------- ---------- ----------
NET ASSETS CONSIST OF:
Common Shares ($.01 par value)*.... $ 287 $ 270 $ 444
Paid in surplus.................... 265,829 399,274 664,787
Net unrealized appreciation........ 33,745 66,944 100,689
Accumulated undistributed net
investment income................ 2,046 2,903 4,949
Accumulated net realized gain
(loss)........................... 426 (1,056) (630)
NET ASSETS APPLICABLE TO
COMMON SHARES.................... 302,333 468,335 770,239**
PREFERRED SHARES ($.01 par value,
with liquidation preference of
$25,000 and $500,000 for
Acquiring Fund and Target Fund,
respectively)*................... 165,000 265,000 430,000
NET ASSETS INCLUDING PREFERRED
SHARES........................... 467,333 733,335 1,200,239
---------------
* Based on the number of outstanding shares listed in "Outstanding Securities
of the Funds" table below.
** Reflects a non-recurring cost associated with these Reorganizations of
approximately $491,000, with $241,866 to be borne by Acquiring Fund common
shareholders, $187,334 to be borne by Target Fund common shareholders, and
$61,800 to be borne by the Adviser, assuming the Reorganizations is approved
and completed.
40
OUTSTANDING SECURITIES OF THE FUNDS AS OF OCTOBER 31, 2004
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
AMOUNT BY FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ---------- --------------- -------------------
Van Kampen Municipal Income
Trust
Common Shares............. Unlimited 0 28,684,985
Preferred Shares.......... 1,000,000 0 330
Van Kampen Trust for
Investment Grade
Municipals
Common Shares............. Unlimited 0 27,013,149
Preferred Shares.......... 100,000,000 0 10,600
ADDITIONAL INFORMATION ABOUT COMMON SHARES OF THE FUNDS
GENERAL. Common shareholders of a Fund are entitled to share equally in
dividends declared by the Fund's Board of Trustees payable to holders of the
common shares and in the net assets of the Fund available for distribution to
holders of the common shares after payment of the preferential amounts payable
to preferred shareholders. Common shareholders do not have preemptive or
conversion rights and a Fund's common shares are not redeemable. The outstanding
common shares of each Fund are fully paid and nonassessable (except as described
under "Governing Law" below). So long as any preferred shares of a Fund are
outstanding, holders of the Fund's common shares will not be entitled to receive
any dividends or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding preferred shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to such preferred
shares would be at least 200% after giving effect to such distributions.
PURCHASE AND SALE. Purchase and sale procedures for the Common Shares of each
of the Funds are identical. Investors typically purchase and sell Common Shares
of the Funds through a registered broker-dealer on the NYSE or CHX, thereby
incurring a brokerage commission set by the broker-dealer. Alternatively,
investors may purchase or sell Common Shares of the Funds through privately
negotiated transactions with existing shareholders.
41
COMMON SHARE PRICE DATA The following table sets forth the high and low sales
prices for Common Shares of each Fund on the NYSE for each full quarterly period
within each Fund's two most recent fiscal years and for the first two fiscal
quarters of the current fiscal year of the Target Fund and the first fiscal
quarter of the current fiscal year of the Acquiring Fund, along with the net
asset value and discount or premium to net asset value for each quotation.
TARGET FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
December 31, 2004..... $ 9.56 $10.58 (9.64)% $8.95 $10.28 (12.94)%
September 30, 2004.... $ 9.48 $10.58 (10.40)% $8.85 $10.14 (12.72)%
June 30, 2004......... $ 9.94 $10.59 (6.14)% $8.41 $ 9.85 (14.62)%
March 31, 2004........ $10.09 $10.94 (7.77)% $9.42 $10.49 (10.20)%
December 31, 2003..... $ 9.50 $10.50 (9.52)% $9.08 $10.24 (11.33)%
September 30, 2003.... $ 9.74 $10.74 (9.31)% $8.87 $10.00 (11.30)%
June 30, 2003......... $ 9.91 $11.07 (10.48)% $9.11 $10.42 (12.57)%
March 31, 2003........ $ 9.25 $10.67 (13.31)% $8.82 $10.32 (14.53)%
December 31, 2002..... $ 9.56 $10.64 (10.15)% $8.63 $10.07 (14.30)%
September 30, 2002.... $ 9.57 $10.66 (10.23)% $8.90 $ 9.95 (10.55)%
ACQUIRING FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
January 31, 2005...... $15.40 $17.30 (10.98)% $14.74 $16.93 (12.94)%
October 31, 2004...... $15.52 $17.41 (10.86)% $14.85 $16.77 (11.45)%
July 31, 2004......... $14.85 $16.84 (11.82)% $13.85 $16.36 (15.34)%
April 30, 2004........ $16.55 $18.00 (8.06)% $14.37 $16.66 (13.75)%
January 31, 2004...... $16.18 $17.61 (8.12)% $15.50 $17.35 (10.66)%
October 31, 2003...... $15.58 $17.15 (9.15)% $14.86 $16.53 (10.10)%
July 31, 2003......... $16.74 $18.00 (7.00)% $15.10 $16.54 (8.71)%
April 30, 2003........ $16.16 $17.54 (7.87)% $15.48 $17.16 (9.79)%
January 31, 2003...... $15.98 $17.60 (9.20)% $15.16 $17.10 (11.35)%
As of April 25, 2005, (i) the net asset value per share for Target Fund Common
Shares was $10.37 and the market price per share was $8.91, representing a
discount to net asset value of 14.08%, and (ii) the net asset value per share
for Acquiring Fund Common Shares was $17.09 and the market price per share was
$14.67, representing a discount to net asset value of 14.16%.
Common Shares of the Funds have historically traded at a discount to net asset
value. In order to reduce or eliminate a market value discount from net asset
value, the Board of Trustees of each Fund may, subject to the terms and
conditions of its preferred shares, authorize that Fund from time to time to
repurchase the common shares in the open market or to tender for the common
shares at net asset value. The Board of Trustees of each Fund, in consultation
with the Adviser, will
42
review on a quarterly basis the possibility of open market repurchases and/or
tender offers for the common shares. Subject to its borrowing restrictions, each
Fund may incur debt to finance such repurchases, which entails risks. The
ability of a Fund to enter into tender offers and the common share repurchases
may be limited by the 1940 Act asset coverage requirements and any additional
asset coverage requirements which may be imposed by a rating agency in
connection with any rating of the preferred shares. No assurance can be given
that the Board of Trustees of either Fund will, in fact, authorize the Fund to
undertake such repurchases and/or tender offers or that, if undertaken, such
actions would result in the common shares trading at a price which is equal or
close to net asset value.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective Common Shares are
similar. It is each Fund's present policy, which may be changed by its Board of
Trustees, to make monthly distributions to holders of its Common Shares of
substantially all of such Fund's net investment income remaining after the
payment of dividends on any outstanding Preferred Shares. Net income of each
Fund consists of all interest income accrued on portfolio assets less all
expenses of such Fund. Under current federal tax law, the Target Fund may
allocate net capital gains and other taxable income, if any, received by the
Target Fund to the Target Fund Common Shares, allowing the Target Fund to pay
dividends to the Target Fund RATES which qualify in their entirety as tax exempt
distributions. The Acquiring Fund, however, is required to allocate net capital
gains and other taxable income, if any, received by the Acquiring Fund among the
Acquiring Fund Common Shares and the Acquiring Fund APS on a pro rata basis in
the year for which such capital gains and other income is realized.
Expenses of each Fund are accrued each day. Net realized capital gains, if
any, are expected to be distributed to shareholders at least once a year. While
there are any Preferred Shares of a Fund outstanding, such Fund may declare any
cash dividend or other distribution on its Common Shares, unless at the time of
such declaration, (1) all accrued Preferred Shares dividends have been paid and
(2) the value of the Fund's total assets (determined after deducting the amount
of such dividend or other distribution), less all liabilities and indebtedness
of the Fund, is at least 200% (as required by the 1940 Act) of the liquidation
value of the outstanding Preferred Shares (expected to equal the aggregate
original purchase price of the outstanding Preferred Shares plus any accrued and
unpaid dividends thereon, whether or not earned or declared on a cumulative
basis). In addition to the requirements of the 1940 Act, each Fund may be
required to comply with other asset coverage requirements as a condition of a
Fund obtaining a rating of its Preferred Shares from a nationally recognized
rating service. These requirements may include an asset coverage test more
stringent than under the 1940 Act. This limitation on a Fund's ability to make
distributions on its Common Shares could in certain circumstances impair the
ability of a Fund to maintain its qualification for
43
taxation as a regulated investment company. Each Fund intends, however, to the
extent possible, to purchase or redeem Preferred Shares from time to time to
maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the Preferred Shares in certain circumstances in
connection with any such impairment of the Fund's status as a regulated
investment company.
For information concerning the manner in which dividends and distributions to
holders of a Fund's Common Shares may be reinvested automatically in such Fund's
Common Shares, see "-- Dividend Reinvestment Plan" below.
DIVIDEND REINVESTMENT PLAN. Each Fund offers a Dividend Reinvestment Plan
(each a "Plan," and collectively the "Plans") pursuant to which holders of
Common Shares may elect to have all distributions of dividends and all capital
gains automatically reinvested in Common Shares pursuant to such Plan. The Plans
for the Target Fund and the Acquiring Fund are similar. Unless common
shareholders elect to participate in a Plan, all common shareholders will
receive distributions of dividends and capital gains in cash. EquiServe Trust
Company, N.A., as plan agent (the "Plan Agent"), serves as agent for the holders
of Common Shares of each Fund in administering the Plans.
After the Reorganization, a holder of shares of a Fund who currently receives
dividends in cash will continue to receive dividends in cash; all holders who
elect to participate in the Plan of a Fund will have their dividends
automatically reinvested in shares of the combined fund. All correspondence
concerning the Plan should be directed to the Plan Agent at P.O. Box 43011,
Providence, Rhode Island 02940-3011. Telephone calls concerning the Plan may be
directed to the Plan Agent between the hours of 7:30 a.m. and 5:00 p.m. Central
Standard Time at (800) 341-2929.
ADDITIONAL INFORMATION ABOUT PREFERRED SHARES OF THE FUNDS
GENERAL. The Preferred Shares of each Fund have similar structures. Both
Target Fund RATES and Acquiring Fund APS are preferred shares of beneficial
interest which entitle their holders to receive dividends when, as and if
declared by the Board of Trustees of such Fund, out of funds legally available
therefor, at a rate per annum that may vary for the successive dividend periods.
While the Target Fund RATES and Acquiring Fund APS are similar in many respects,
there are several differences that shareholders should consider.
The Acquiring Fund APS have a liquidation preference of $25,000 per share. The
Target Fund RATES have a liquidation preference of $500,000 per share. The net
asset value per share of each Fund's Preferred Shares equals its liquidation
preference plus accumulated but unpaid dividends per share. Neither Target Fund
RATES nor Acquiring Fund APS are traded on a stock exchange or
44
over-the-counter. Holders of each Fund's preferred shares do not have preemptive
rights to purchase any shares of RATES or APS, respectively, or any other
preferred shares that might be issued.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of preferred shares as long as no single series has priority
over another series as to the distribution of assets of the Fund or the payment
of dividends. The Target Fund currently has three series of RATES outstanding,
Series A RATES, Series B RATES and Series C RATES. Except as described in the
private placement memorandum offering the Target Fund RATES, the terms of each
series of Target Fund RATES are the same. The Acquiring Fund currently has four
series of APS outstanding, Series A APS, Series B APS, Series C APS and Series D
APS. Except as described in the Prospectus offering the Acquiring Fund APS, the
terms of each series of Acquiring Fund APS are the same. If the Reorganization
is approved and completed, the combined fund will have seven series of APS. The
Acquiring Fund will issue Series E APS, Series F APS and Series G APS in
exchange for Target Fund RATES. 20 shares of Acquiring Fund APS (liquidation
preference $25,000 per share) will be issued for each share of Target Fund RATES
(liquidation preference $500,000 per share).
PURCHASE AND SALE. Both Target Fund RATES and Acquiring Fund APS are purchased
and sold at auctions conducted on a regular basis.
Target Fund RATES generally are purchased and sold at auctions conducted on a
regular basis by The Bank of New York (the "RATES Auction Agent"). Each Auction
requires the participation of one or more auction placement agents, selected by
the Fund (each an "Auction Placement Agent"), who have entered into an
agreements with the RATES Auction Agent, through whom existing or prospective
holders may submit orders to the RATES Auction Agent in an auction. On each
auction date, each holder may submit orders through an Auction Placement Agent
to buy, sell or hold RATES. Each prospective purchaser of Target Fund RATES must
sign and deliver to the Fund a Master Purchaser's Letter, in which such
prospective purchaser agrees, among other things, that (a) shares of Target Fund
RATES may be transferred only (i) pursuant to a Bid or Sell Order placed in an
auction or (ii) to or through an Auction Placement Agent to qualifying eligible
persons or to the Fund and (b) ownership of shares of Target Fund RATES will be
registered in the name of the Securities Depository or its nominee and will be
maintained in book entry form only.
Acquiring Fund APS generally are purchased and sold at auctions conducted on a
regular basis by Deutsche Bank (the "APS Auction Agent"). Unless otherwise
permitted by the Funds, existing and potential holders of Acquiring Fund APS
only may participate in auctions through broker-dealers who have entered into
agreements with the APS Auction Agent ("Broker-Dealers"). Broker-Dealers submit
orders to the APS Auction Agent on behalf of their respective customers who are
45
existing and potential holders of Acquiring Fund APS. On or prior to each
auction date for the Acquiring Fund APS, each holder may submit orders to buy,
sell or hold Acquiring Fund APS to its Broker-Dealer. Outside of these auctions,
shares of Acquiring Fund APS may be purchased or sold through Broker-Dealers in
a secondary trading market maintained by the broker-dealers. However, there can
be no assurance that a secondary market will develop or if it does develop, that
it will provide holders with a liquid trading market for the Acquiring Fund APS.
Each prospective purchaser of Acquiring Fund APS or its Broker-Dealer is
required to sign a Master Purchaser's Letter, in which such purchaser agrees,
among other things that (a) shares of Acquiring Fund APS may be transferred only
(i) pursuant to a Bid or Sell Order placed in an auction or (ii) to or through a
Broker-Dealer and (b) ownership of shares of Acquiring Fund APS will be
registered in the name of the Securities Depository or its nominee and will be
maintained in book entry form only.
Auctions are generally held every four weeks for Target Fund RATES, and every
28 days for Acquiring Fund APS. As a result of the Reorganization, the last
dividend period for the Target Fund RATES prior to the Closing Date and the
initial dividend period for the Acquiring Fund APS issued in connection with the
Reorganization after the Closing Date may be shorter than the ordinary dividend
period for such shares.
REGISTRATION. The Target Fund RATES have not been registered pursuant to the
1933 Act, but are offered pursuant to the private placement exemption contained
in Section 4 of the 1933 Act. Therefore, Target Fund RATES may be resold only at
auctions or through an Auction Placement Agent in a transaction that is not
required to be registered under applicable federal and state securities laws.
The Master Purchaser's Letter, which each potential purchaser of Target Fund
RATES must sign, places additional restrictions on the resale of Target Fund
RATES. Acquiring Fund APS are registered pursuant to the 1933 Act.
Broker-Dealers may maintain a secondary trading market in the Acquiring Fund APS
outside of auctions. They have no obligation to do so, however, and there can be
no assurance that a secondary market for the Acquiring Fund APS will develop or,
it does develop, that it will provide holders with liquidity of investment.
DIVIDENDS AND DISTRIBUTIONS. The holders of Acquiring Fund APS are entitled to
receive, when, as and if declared by the Board of Trustees of the Acquiring
Fund, out of funds legally available therefor, cumulative cash dividends on
their shares. The holders of Target Fund RATES are entitled to receive, when and
if declared by the Board of Trustees of the Target Fund, out of funds legally
available therefor, cumulative cash dividends on their shares, not exceeding the
available net tax-exempt income. Target Fund RATES do not have any dividend
accumulation right with respect to any amount by which the Target Fund's
available net tax-exempt income limited the amount of any dividend that would
have otherwise
46
been paid for any dividend period. In the event of such a limitation of dividend
accumulations, the Target Fund RATES would be subject to mandatory redemption.
Dividends on each Fund's Preferred Shares so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and payable
on the Fund's Common Shares, and (ii) in the case of the Target Fund RATES, to
the extent permitted under the Internal Revenue Code and to the extent of
available net tax exempt income, out of net tax-exempt income earned on the
Target Fund investments.
Prior to each dividend payment date, the relevant Fund is required to deposit
with its Auction Agent sufficient funds for the payment of such declared
dividends. Neither Fund intends to establish any reserves for the payment of
dividends, and no interest will be payable in respect of any dividend payment or
payment on a Fund's Preferred Shares which may be in arrears.
Holders of Target Fund RATES generally receive dividends out of the Fund's
available net tax-exempt income, which qualify in their entirety as
distributions of tax-exempt interest income for federal income tax purposes
(subject to the possible application of the alternative minimum tax). The
Acquiring Fund, however, is required to allocate net capital gains and other
taxable income, if any, proportionately between its Common Shares and APS. The
amount of taxable income allocated to the Acquiring Fund APS depends upon the
amount of such income realized by the Acquiring Fund, but is generally not
expected to be significant.
In normal circumstances, whenever the Acquiring Fund intends to include any
net capital gains or other taxable income in any dividend on APS, the Acquiring
Fund will notify the APS Auction Agent of the amount to be so included prior to
the Auction establishing the Applicable Rate for such dividend. The APS Auction
Agent will in turn notify each Broker-Dealer who will notify existing and
potential holders of Acquiring Fund APS. As a result, auction participants may,
in response to such information, place bids which take account of the inclusion
of net capital gains or other taxable income in the dividend. If the Acquiring
Fund retroactively allocates any net capital gains or other taxable income to
the Acquiring Fund APS without having given notice to the APS Auction Agent, the
Fund will pay an additional dividend to offset substantially the tax effect
thereof (an "Additional Dividend"). In no other instances will the Acquiring
Fund be required to make payments to holders of APS to offset the tax effect of
any reallocation of net capital gains or other taxable income. As a result of
the notice and Additional Dividend provisions, the after-tax return to a holders
of Target Fund RATES and Acquiring Fund APS is not expected to differ
substantially.
47
DIVIDEND RATES. The following table provides information about the dividend
rates for each Fund's Preferred Shares as of a recent auction.
AUCTION DATE PREFERRED SHARES RATE
------------ ---------------- ----
Target Fund RATES--Series
April 15, 2005 A 2.60%
Target Fund RATES--Series
March 24, 2005 B 2.20%
Target Fund RATES--Series
April 1, 2005 C 2.45%
Acquiring Fund APS--Series
April 15, 2005 A 2.50%
Acquiring Fund APS--Series
March 24, 2005 B 2.50%
Acquiring Fund APS--Series
March 30, 2005 C 2.55%
Acquiring Fund APS--Series
April 5, 2005 D 2.25%
The dividend rates in effect at the closing of the Reorganization will be the
rates determined in the auction most recently proceeding such closing.
RATINGS. The Target Fund RATES and the Acquiring Fund APS have each been
assigned a rating of "AAA" from S&P and "Aaa" from Moody's. Each Fund intends
that, so long as its Preferred Shares are outstanding, the composition of its
portfolio will reflect guidelines established by S&P and Moody's in connection
with each Fund's receipt of a rating for such shares of at least "AAA" from S&P
and "Aaa" from Moody's. S&P and Moody's, which are nationally recognized
statistical rating organizations, issue ratings for various securities
reflecting the perceived creditworthiness of such securities. The guidelines for
rating such preferred shares have been developed by S&P and Moody's in
connection with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred stock, generally on a case-by-case basis
through discussions with the issuers of these securities. The guidelines are
designed to ensure that assets underlying outstanding debt or preferred stock
will be varied sufficiently and will be of sufficient quality and amount to
justify investment grade ratings. The guidelines do not have the force of law
but have been adopted by each Fund in order to satisfy current requirements
necessary for S&P and Moody's to issue the above-described ratings for Preferred
Shares, which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for a Fund's Preferred Shares, at any time, may change or
withdraw any such rating. As set forth in the Certificate of Vote of Trustees
Establishing Preferred Shares of each Fund (each a "Certificate of Vote"), the
Board of Trustees of each Fund, without shareholder approval, may modify certain
48
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Trustees has obtained written
confirmation from S&P and Moody's that any such change would not impair the
ratings then assigned by S&P and Moody's to the Preferred Shares. For so long as
any shares of the Target Fund RATES or Acquiring Fund APS are rated by S&P or
Moody's, as the case may be, a Fund's use of options and financial futures
contracts and options thereon will be subject to certain limitations mandated by
the rating agencies.
REDEMPTIONS. The redemption provisions pertaining to each Fund's Preferred
Shares are similar. It is anticipated that shares of each Fund's Preferred
Shares will generally be redeemable at the option of the Fund at a price equal
to their liquidation preference plus accumulated but unpaid dividends (whether
or not earned or declared) to the date of redemption plus, in certain
circumstances, a redemption premium. Each Fund's Preferred Shares are also
subject to mandatory redemption at a price equal to their liquidation preference
plus accumulated but unpaid dividends (whether or not earned or declared) to the
date of redemption upon the occurrence of certain specified events, such as the
failure of a Fund to maintain asset coverage requirements for the Preferred
Shares specified by Moody's and S&P in connection with their issuance of ratings
on the Preferred Shares. Additionally, with respect to the Target Fund RATES,
the Target Fund is required to redeem Target Fund RATES if on any dividend
payment date the Target Fund fails to generate sufficient available net
tax-exempt income to pay accrued and unpaid dividends on the Target Fund RATES
out of solely tax exempt income at the applicable dividend rate. The liquidation
preference of Target Fund RATES is $500,000 and the liquidation preference of
Acquiring Fund APS is $25,000.
LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of either
Fund, whether voluntary or involuntary, the holders of each Fund's Preferred
Shares will be entitled to receive, out of the assets of such Fund available for
distribution to shareholders, before any distribution or payment is made upon
any of the Fund's Common Shares or any other capital shares of the Fund ranking
junior in right of payment upon liquidation to the Preferred Shares, the
liquidation preference of such Preferred Shares, together with the amount of any
dividends accumulated but unpaid (whether or not earned or declared) thereon to
the date of distribution, and after such payment the holders of Preferred Shares
will be entitled to no other payments except for any Additional Dividends. The
liquidation preference per share of the Target Fund RATES is $500,000 and the
liquidation preference per share of the Acquiring Fund APS is $25,000. If the
assets of a Fund are insufficient to make the full liquidation payment on the
Preferred Shares of such Fund and liquidation payments on any other outstanding
class or series of preferred shares of such Fund ranking on a parity with the
Preferred Shares as to payment upon liquidation, then such assets will be
distributed among the holders of Preferred Shares and the holders of shares of
such other class or series ratably in proportion to the respective preferential
amounts to which they are entitled. After payment of the
49
full amount of liquidation distribution to which they are entitled, the holders
of a Fund's Preferred Shares will not be entitled to any further participation
in any distribution of assets by the Fund except for any Additional Dividends. A
consolidation, merger or share exchange of a Fund with or into any other entity
or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of the Fund
shall not be deemed or construed to be a liquidation, dissolution or winding up
of the Fund for this purpose.
ADDITIONAL INFORMATION. For additional information, Target Fund shareholders
should consult the Reorganization Statement of Additional Information, which
contains a more complete summary of the terms of the Acquiring Fund APS, and the
Certificate of Vote governing the Acquiring Fund APS, included as Appendix B to
the Reorganization Statement of Additional Information. Acquiring Fund APS
issued in connection with the Reorganization will be governed by the Certificate
of Vote of the Acquiring Fund, which, upon completion of the Reorganization,
will be amended to reflect the creation of new series and the issuance of
additional Acquiring Fund APS.
GOVERNING LAW
Each Fund is organized as a business trust under the laws of The Commonwealth
of Massachusetts. The Target Fund was organized on July 6, 1987 and commenced
operations on August 19, 1988; the Acquiring Fund was organized on November 13,
1991 and commenced operations on January 24, 1992.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of each Fund contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and provides for
indemnification and reimbursement of expenses out of the Fund's property for any
shareholder held personally liable for the obligations of that Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the nature of each Fund's assets and operations,
the possibility of a Fund being unable to meet its obligations is remote and, in
the opinion of counsel to the Funds, the risk to the Funds' respective
shareholders is remote.
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws. Each Fund is registered as a diversified, closed-end
management investment company under the 1940 Act.
50
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
Each Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving common shareholders of an opportunity to sell their
Common Shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. The Board of Trustees of each
Fund is divided into three classes, with the term of one class expiring at the
annual meeting of shareholders. At each annual meeting, each class whose term is
expiring will be elected to a three-year term. This provision could delay for up
to two years the replacement of a majority of the Board of Trustees. A trustee
may be removed from office only for cause by a written instrument signed by at
least two-thirds of the remaining trustees or by a vote of the holders of at
least two-thirds of the class of shares of the Fund that elected such trustee
and entitled to vote on the matter.
In addition, each Fund's Declaration of Trust requires the favorable vote of
the holders of at least 75% of the outstanding shares of each class of the Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly and whether alone or together
with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class of beneficial interest of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash (except pursuant to the Dividend Reinvestment
Plan); (iii) the sale, lease or exchange of all or any substantial part of the
assets of the Fund to any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the purpose
of such computation all assets sold, leased or exchanged in any series of
similar transactions within a twelve-month period); or (iv) the sale, lease or
exchange to the Fund or any subsidiary thereof, in exchange for securities of
the Fund, of any assets of any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000, aggregating for purposes of
such computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period).
The Board of Trustees of each Fund has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Massachusetts law or the 1940 Act, are in the best interest of
shareholders of
51
each respective Fund generally. Reference should be made to the Declaration of
Trust of each Fund on file with the SEC for the full text of these provisions.
The Declaration of Trust of each Fund further provides that no trustee,
officer, employee or agent of the Fund is liable to the Fund or to any
shareholder, nor is any trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or her own bad faith, willful misfeasance, gross negligence, or
reckless disregard of their duties. It also provides that all third persons
shall look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a trustee or officer is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
CONVERSION TO OPEN-END FUND
Each Fund may be converted to an open-end investment company at any time by an
amendment to its Declaration of Trust. Each Fund's Declaration of Trust provides
that such an amendment would require the approval of (a) a majority of the
Trustees, including the approval by a majority of the disinterested Trustees of
the Fund, and (b) the lesser of (i) more than 50% of the Fund's outstanding
common and preferred shares, each voting as a class or (ii) 67% of the common
and preferred shares, each voting as a class, present at a meeting at which
holders of more than 50% of the outstanding shares of each such class are
present in person or by proxy. If approved in the foregoing manner, conversion
of the Fund could not occur until 90 days after the shareholders' meeting at
which such conversion was approved and would also require at least 30 days prior
notice to all shareholders. Conversion of a Fund to an open-end investment
company would require the redemption of all outstanding preferred shares, which
would eliminate the leveraged capital structure of the Fund. In the event of
conversion, the Common Shares would cease to be listed on the NYSE, AMEX, CHX,
NASDAQ National Market System or other national securities exchange or national
market system. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption. If
a Fund were converted to an open-end fund, it is likely that new Common Shares
would be sold at net asset value plus a sales load. Following any such
conversion, it is also possible that certain of the Fund's investment policies
and strategies would have to be modified to assure sufficient portfolio
liquidity. In particular the Fund would be required to maintain its portfolio
such that not more than 15% of its assets would be invested in illiquid
securities. Such requirement could cause the Fund to dispose of portfolio
securities or other assets at a time when it is not advantageous to do so, and
could adversely affect the ability of the Fund to meet its investment objective.
52
VOTING RIGHTS
Voting rights are identical for the holders of each Fund's Common Shares.
Holders of each Fund's Common Shares are entitled to one vote for each share
held. Except as set forth above under "Certain Provisions of the Declarations of
Trust" or "Conversion to Open-End Fund," or except as expressly required by
applicable law or expressly set forth in the designation of rights and
preferences with respect to a Fund's Preferred Shares, holders of Preferred
Shares have no voting rights. When holders of a Fund's Preferred Shares are
entitled to vote, they are also entitled to cast one vote per share held.
Holders of Preferred Shares of Fund, voting as a class, are entitled to elect
two of each Fund's trustees. Under the 1940 Act, if at any time dividends on a
Fund's Preferred Shares are unpaid in an amount equal to two full years
dividends thereon, the holders of all outstanding Preferred Shares, voting as a
class, are entitled to elect a majority of the Fund's Trustees until all
dividends have been paid or declared and set apart for payment.
In addition to any vote or consent of shareholders required by law, without
the affirmative consent of the holders of at least 66 2/3% of the shares of
Target Fund RATES at the time outstanding, given in person or by proxy, either
by written consent without a meeting or by vote at any meeting called for that
purpose, the Target Fund shall not:
(1) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against
it, or file a petition seeking or consenting to reorganization or relief
under any applicable Federal or state law relating to bankruptcy, or
consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or a substantial
part of its property, or make any assignment for the benefit of creditors,
or, except as may be required by applicable law, admit in writing its
inability to pay its debts generally as they become due, or take any
corporate action in furtherance of any such action;
(2) create, authorize or issue shares of any class or series of beneficial
interest ranking senior to the RATES with respect to the payment of
dividends or the distribution of assets, or any securities convertible
into, or warrants, options or similar rights to purchase, acquire or
receive, such shares of beneficial interest ranking senior to the RATES or
reclassify any authorized shares of beneficial interest of the Company
into any share ranking senior to the RATES;
(3) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness in
excess of $10,000,000 outstanding at any one time provided, however, that
transfers of assets by the Company subject to an obligation to repurchase
53
shall not be deemed to be indebtedness for purposes of this provision to
the extent that after any such transaction the Company meets the Minimum
Asset Coverage and Required Liquid Asset Test as of the immediately
preceding Valuation Date with Eligible Assets not subject to any reverse
repurchase agreement; and provided further that (a) if the RATES is then
rated by Standard & Poor's, the Company may not incur any indebtedness
unless such indebtedness is rated "AAA" by Standard & Poor's or is would
not adversely affect the current rating by Standard & Poor's or unless the
holders of such indebtedness at the time such indebtedness is incurred
agree that they will not file a petition or any claim against the Company
pursuant to the Federal Bankruptcy Code and the Company obtains an opinion
of counsel to the effect that such agreement is enforceable, and (b) if
the RATES is then rated by Moody's, the Company may not incur any
indebtedness in an amount in excess of $10,000,000 without the approval of
Moody's;
(4) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of
a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance
of any kind upon any of the Eligible Assets, except (a) liens the validity
of which are being contested in good faith by appropriate proceedings, (b)
liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (c) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection
with any indebtedness or reverse repurchase agreements permitted under
clause (3) above, (d) liens to secure payment for services rendered by the
Trust Company in connection with the RATES and (a) any hedging
transactions as contemplated by the Prospectus;
(5) amend, alter or repeal any of the rights of the holders of RATES so as to
affect materially and adversely the preferences, rights or powers of the
shares of RATES, or increase the number of shares of RATES authorized to
be issued;
(6) in addition to the voting rights set forth in Section 9.7 of the Amended
and Restated Declaration of Trust, consolidate or merge with or into any
other corporation (except to the extent that applicable law does not
permit such a vote to be required in the Amended and Restated Declaration
of Trust), or sell, lease or convey all or substantially all of the assets
of the Company (other than with respect to sales, leases and conveyances
of assets in the normal course of selling and investing in Eligible
Assets); and
(7) voluntarily dissolve the Company.
54
The Certificate of Vote establishing the Acquiring Fund APS provides that the
Acquiring Fund shall not take certain actions relating to the preferences,
rights or powers of holders of Acquiring Fund APS without the affirmative vote
of the holders of a majority of the outstanding shares of Acquiring Fund APS.
Additionally, an affirmative vote of a majority of the outstanding shares of
each series of Acquiring Fund APS, each voting separately as a class, is
required with respect to any matter that materially affects the series in a
manner different from that of other series of Acquiring Fund APS. For additional
information with respect to the voting rights of holders of Acquiring Fund APS,
Target Fund shareholders should consult the Certificate of Vote governing the
Acquiring Fund APS, included as Appendix B to the Reorganization Statement of
Additional Information.
55
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED JUNE 30
2004 2003 2002(E) 2001 2000 1999 1998
---- ---- ------- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 10.73 $ 9.99 $ 9.62 $ 8.99 $ 9.56 $ 10.26 $ 10.01
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Investment Income............. .65 .66 .70 .75 .81 .84 .89
Net Realized and Unrealized
Gain/Loss....................... (.62) .70 .31 .66 (.55) (.70) .26
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income............. (.06) (.07) (.11) (.23) (.22) (.19) (.21)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from Investment Operations... (.03) 1.29 .90 1.18 .04 (.05) .94
Distributions Paid to Common
Shareholders:
Net Investment Income............. (.60) (.55) (.53) (.55) (.61) (.65) (.69)
Net Realized Gain................. (.05) -0- -0- -0- -0- -0- -0-
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 10.05 $ 10.73 $ 9.99 $ 9.62 $ 8.99 $ 9.56 $ 10.26
========== ========== ========== ========== ========== ========== ==========
Common Share Market Price at End of
the Period........................ $ 8.87 $ 9.66 $ 8.85 $ 8.89 $ 8.6875 $ 9.625 $ 10.875
Total Return(a).................... -1.63% 15.76% 5.64% 8.88% -3.08% -5.68% 6.85%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 288.2 $ 307.9 $ 286.4 $ 276.0 $ 258.0 $ 274.1 $ 292.3
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(b)......................... 1.23% 1.21% 1.25% 1.27% 1.32% 1.24% 1.23%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(b).................. 6.25% 6.35% 6.99% 7.94% 9.06% 8.23% 8.69%
Portfolio Turnover................. 22% 35% 41% 50% 54% 98% 103%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(b)......................... .79% .78% .79% .79% .81% .79% .79%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 5.72% 5.67% 5.92% 5.50% 6.59% 6.35% 6.64%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 330 330 330 330 330 330 330
Asset Coverage Per Preferred
Share(d).......................... $1,373,451 $1,433,101 $1,368,316 $1,336,403 $1,281,820 $1,330,642 $1,385,892
Involuntary Liquidating Preference
Per Preferred Share............... $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000
Average Market Value Per Preferred
Share............................. $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000
YEAR ENDED JUNE 30
1997 1996 1995
---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 9.76 $ 9.76 $ 9.92
---------- ---------- ----------
Net Investment Income............. .92 .94 .96
Net Realized and Unrealized
Gain/Loss....................... .26 .05 (.06)
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income............. (.21) (.22) (.22)
---------- ---------- ----------
Total from Investment Operations... .97 .77 .68
Distributions Paid to Common
Shareholders:
Net Investment Income............. (.72) (.77) (.84)
Net Realized Gain................. -0- -0- -0-
---------- ---------- ----------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 10.01 $ 9.76 $ 9.76
========== ========== ==========
Common Share Market Price at End of
the Period........................ $ 10.875 $ 9.875 $ 11.125
Total Return(a).................... 18.32% -4.27% 8.59%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 283.2 $ 273.7 $ 271.1
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(b)......................... 1.28% 1.31% 1.33%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(b).................. 9.25% 9.47% 9.85%
Portfolio Turnover................. 53% 29% 38%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(b)......................... .80% .82% .83%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 7.18% 7.26% 7.56%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 330 330 330
Asset Coverage Per Preferred
Share(d).......................... $1,358,326 $1,329,390 $1,321,483
Involuntary Liquidating Preference
Per Preferred Share............... $ 500,000 $ 500,000 $ 500,000
Average Market Value Per Preferred
Share............................. $ 500,000 $ 500,000 $ 500,000
(a) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(b) Ratios do not reflect the effect of distributions to preferred shareholders.
(c) Ratios reflect the effect of distributions to preferred shareholders.
(d) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
(e) As required, effective July 1, 2001, the Trust has adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended June 30, 2002 was to increase net investment
income per share by $.01, decrease realized and unrealized gains and losses
per share by $.01, and increase the ratio of net investment income to
average net assets applicable to common shares by .04%. Per shares,
supplemental data for the period prior to June 30, 2002 have not been
restated to reflect this change in presentation.
56
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED OCTOBER 31,
2004 2003 2002(A) 2001 2000 1999 1998
---- ---- ------- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 17.15 $ 17.46 $ 17.51 $ 16.22 $ 15.63 $ 17.64 $ 17.29
------- ------- ------- ------- -------- -------- --------
Net Investment Income............. 1.09 1.10 1.18 1.25 1.32 1.33 1.35
Net Realized and Unrealized
Gain/Loss....................... .31 .09 .18 1.24 .64 (1.94) .42
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.10) (.08) (.10) (.32) (.40) (.32) (.34)
Net Realized Gain............... (.01) (.03) (.07) -0- -0- (.02) (.02)
------- ------- ------- ------- -------- -------- --------
Total from Investment Operations... 1.29 1.08 1.19 2.17 1.56 (.95) 1.41
Distributions Paid to Common
Shareholders:
Net Investment Income........... (1.00) (1.07) (1.03) (.88) (.97) (.99) (1.00)
Net Realized Gain............... (.10) (.32) (.21) -0- -0- (.07) (.06)
------- ------- ------- ------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 17.34 $ 17.15 $ 17.46 $ 17.51 $ 16.22 $ 15.63 $ 17.64
======= ======= ======= ======= ======== ======== ========
Common Share Market Price at End of
the Period........................ $ 15.34 $ 15.58 $ 15.80 $ 14.94 $13.5625 $13.6875 $ 17.00
Total Return(b).................... 5.76% 7.60% 14.56% 16.85% 6.41% -13.97% 12.40%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 468.3 $ 463.3 $ 471.6 $ 473.0 $ 438.1 $ 422.2 $ 476.6
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.27% 1.28% 1.41% 1.55% 1.68% 1.61% 1.58%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 6.43% 6.40% 6.89% 7.37% 8.44% 7.87% 7.73%
Portfolio Turnover................. 18% 23% 33% 29% 31% 33% 29%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... .80% .82% .89% .98% 1.03% 1.02% 1.01%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 5.82% 5.92% 6.30% 5.49% 5.86% 6.00% 5.80%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 10,600 10,600 10,600 10,600 10,600 10,600 5,300
Asset Coverage Per Preferred
Share(e).......................... $69,204 $68,721 $69,511 $69,623 $ 66,332 $ 64,827 $139,932
Involuntary Liquidating Preference
Per Preferred Share............... $25,000 $25,000 $25,000 $25,000 $ 25,000 $ 25,000 $ 50,000
Average Market Value Per Preferred
Share............................. $25,000 $25,000 $25,000 $25,000 $ 25,000 $ 25,000 $ 50,000
YEAR ENDED OCTOBER 31,
1997 1996 1995
---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 16.58 $ 16.58 $ 15.03
-------- -------- --------
Net Investment Income............. 1.37 1.38 1.42
Net Realized and Unrealized
Gain/Loss....................... .74 .11 1.65
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.35) (.35) (.38)
Net Realized Gain............... -0- -0- -0-
-------- -------- --------
Total from Investment Operations... 1.76 1.14 2.69
Distributions Paid to Common
Shareholders:
Net Investment Income........... (1.05) (1.14) (1.14)
Net Realized Gain............... -0- -0- -0-
-------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 17.29 $ 16.58 $ 16.58
======== ======== ========
Common Share Market Price at End of
the Period........................ $ 16.125 $ 15.813 $ 15.75
Total Return(b).................... 8.92% 7.84% 21.15%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 467.0 $ 447.8 $ 447.9
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.60% 1.62% 1.68%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 8.16% 8.37% 8.96%
Portfolio Turnover................. 40% 30% 15%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... 1.01% 1.02% 1.04%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 6.06% 6.24% 6.55%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 5,300 5,300 5,300
Asset Coverage Per Preferred
Share(e).......................... $138,116 $134,491 $134,501
Involuntary Liquidating Preference
Per Preferred Share............... $ 50,000 $ 50,000 $ 50,000
Average Market Value Per Preferred
Share............................. $ 50,000 $ 50,000 $ 50,000
(a) As required effective November 1, 2001, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
accreting market discount on fixed income securities. The effect of this
change for the year ended October 31, 2002 was to increase net investment
income per share by $.01, decrease net realized and unrealized gains and
losses per share by $.01 and increase the ratio of net investment income to
average net assets applicable to common shares by .02%. Per share, ratios
and supplemental data for periods prior to October 31, 2002 have not been
restated to reflect this change in presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(c) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
57
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement (a form of which is attached as Appendix A
to the Reorganization Statement of Additional Information), the Acquiring Fund
will acquire substantially all of the assets, and will assume substantially all
of the liabilities, of the Target Fund, in exchange for Acquiring Fund Common
Shares and Acquiring Fund APS to be issued by the Acquiring Fund. The Acquiring
Fund will issue and cause to be listed on the NYSE and the CHX additional
Acquiring Fund Common Shares. The Acquiring Fund Common Shares issued to the
Target Fund will have an aggregate net asset value equal to the aggregate net
asset value of the Target Fund Common Shares less the costs of the
Reorganization (though cash may be paid in lieu of any fractional shares). The
Acquiring Fund APS issued to the Target Fund will have an aggregate liquidation
preference equal to the aggregate liquidation preference of the Target Fund
RATES. Upon receipt by the Target Fund of such shares, the Target Fund will (i)
distribute the Acquiring Fund Common Shares to the holders of Target Fund Common
Shares and (ii) distribute the Acquiring Fund APS to the holders of Target Fund
RATES. As soon as practicable after the Closing Date for the Reorganization, the
Target Fund will deregister as an investment company under the 1940 Act and
dissolve under applicable state law.
The Target Fund will distribute the Acquiring Fund Common Shares and the
Acquiring Fund APS received by it pro rata to its holders of record of Target
Fund Common Shares and Target Fund RATES, as applicable, in exchange for such
shareholders' shares in the Target Fund. Such distribution will be accomplished
by opening new accounts on the books of the Acquiring Fund in the names of the
common and preferred shareholders of the Target Fund and transferring to those
shareholder accounts the Acquiring Fund Common Shares and the Acquiring Fund APS
previously credited on those books to the accounts of the Target Fund. Each
newly-opened account on the books of the Acquiring Fund for the former common
shareholders of the Target Fund will represent the respective pro rata number of
Acquiring Fund Common Shares (rounded down, in the case of fractional shares
held in an account other than a Dividend Reinvestment Plan account, to the next
largest number of whole shares) due such shareholder. No fractional Acquiring
Fund Common Shares will be issued (except for shares held in a Dividend
Reinvestment Plan account). In the event of fractional shares held in an account
other than a Dividend Reinvestment Plan account, the Acquiring Fund's transfer
agent will aggregate all such fractional Acquiring Fund Common Shares and sell
the resulting whole shares on the NYSE for the account of all holders of such
fractional interests, and each such holder will be entitled to the pro rata
share of the proceeds from such sale upon surrender of the Target Fund Common
Share certificates. Similarly, each newly-opened account on the books of the
Acquiring
58
Fund for the former preferred shareholders of Target Fund RATES would represent
the respective pro rata number of Acquiring Fund APS due such shareholder. See
"Terms of the Reorganization Agreement -- Surrender and Exchange of Share
Certificates" below for a description of the procedures to be followed by Target
Fund shareholders to obtain their Acquiring Fund Common Shares or Acquiring Fund
APS (and cash in lieu of fractional shares, if any).
As a result of the Reorganization, every holder of Target Fund Common Shares
would own Acquiring Fund Common Shares that (except for cash payments received
in lieu of fractional shares) will have an aggregate net asset value immediately
after the Closing Date equal to the aggregate net asset value of that
shareholder's Target Fund Common Shares immediately prior to the Closing Date
less the costs of the Reorganization. Since the Acquiring Fund Common Shares
will be issued at net asset value in exchange for the net assets of the Target
Fund having a value equal to the aggregate net asset value of those Acquiring
Fund Common Shares, the net asset value per share of Acquiring Fund Common
Shares should remain virtually unchanged by the Reorganization except for its
share of the reorganization costs. Similarly, the aggregate liquidation
preference of the Acquiring Fund APS to be issued to the Target Fund will equal
the aggregate liquidation preference of the Target Fund RATES. Each holder of
Target Fund RATES would receive Acquiring Fund APS that would have an aggregate
liquidation preference immediately after the Closing Date equal to the aggregate
liquidation preference of that shareholder's Target Fund RATES immediately prior
to the Closing Date. The liquidation preference per share of the Acquiring Fund
APS will remain unchanged by the Reorganization. Thus, the Reorganization will
result in no dilution of net asset value of the Target Fund Common Shares or
Acquiring Fund Common Shares, other than to reflect the costs of the
Reorganization, and will result in no dilution of the value per share of
Acquiring Fund APS or Target Fund RATES. However, as a result of the
Reorganization, a shareholder of either Fund will hold a reduced percentage of
ownership in the larger combined entity than he or she did in either of the
separate Funds.
No sales charge or fee of any kind will be charged to shareholders of the
Target Fund in connection with their receipt of Acquiring Fund Common Shares or
Acquiring Fund APS in the Reorganization. Holders of Target Fund RATES will find
that the auction dates and dividend payment dates for the Acquiring Fund APS
received in the Reorganization are ordinarily (i.e., except in the case of a
special dividend period) on a 28 day schedule, similar to the schedule of
dividend payment dates for Target Fund RATES. The auction procedures for the
Acquiring Fund APS and the Target Fund RATES are similar. As a result of the
Reorganization, the last dividend period for the Target Fund RATES prior to the
Closing Date and the initial dividend period for the Acquiring Fund APS issued
in connection with the Reorganization after the Closing Date may be shorter than
the ordinary dividend period for such shares.
59
TERMS OF THE REORGANIZATION AGREEMENT
The following is a summary of the significant terms of the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, attached as Appendix A to the Reorganization Statement
of Additional Information.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of each of the
Funds will be valued after the close of business on the NYSE (generally, 4:00
p.m., Eastern time) on the Closing Date. For the purpose of determining the net
asset value of a common share of each Fund, the value of the securities held by
the Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding Preferred Shares of the Fund is divided by
the total number of common shares of the Fund outstanding at such time. Daily
expenses, including the fees payable to the Adviser, will accrue on the Closing
Date.
AMENDMENTS AND CONDITIONS. The Reorganization Agreement may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Reorganization Agreement are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the SEC, approval by the shareholders of the Target Fund,
approval of the issuance of additional Acquiring Fund Common Shares by Common
Shareholders of the Acquiring Fund, receipt of an opinion of counsel as to tax
matters, receipt of an opinion of counsel as to corporate and securities matters
and the continuing accuracy of various representations and warranties of the
Funds being confirmed by the respective parties.
POSTPONEMENT; TERMINATION. Under the Reorganization Agreement, the Board of
Trustees of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should such Board determine that it is in the
best interests of the shareholders of its respective Fund to do so.
The Reorganization Agreement may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of either of the Funds) prior to the Closing Date, or the Closing
Date may be postponed: (i) by mutual consent of the Boards of Trustees of the
Funds and (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations set forth in the Reorganization Agreement has not been
fulfilled or waived by such Board.
SURRENDER AND EXCHANGE OF SHARE CERTIFICATES. After the Closing Date, each
holder of an outstanding certificate or certificates formerly representing
Target Fund Common Shares will be entitled to receive, upon surrender of his or
her certificate or certificates, a certificate or certificates representing the
number of Acquiring Fund Common Shares distributable with respect to such
holder's Target
60
Fund Common Shares, together with cash in lieu of any fractional Acquiring Fund
Common Shares held in an account other than a Dividend Reinvestment Plan
account. Promptly after the Closing Date, the transfer agent for the Acquiring
Fund Common Shares will mail to each holder of certificates formerly
representing Target Fund Common Shares a letter of transmittal for use in
surrendering his or her certificates for certificates representing Acquiring
Fund Common Shares and cash in lieu of any fractional shares held in an account
other than a Dividend Reinvestment Plan account.
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Target Fund Common Shares will be furnished
with instructions for exchanging their share certificates for Acquiring Fund
share certificates and, if applicable, cash in lieu of fractional shares.
From and after the Closing Date, certificates formerly representing Target
Fund Common Shares will be deemed for all purposes to evidence ownership of the
number of full Acquiring Fund Common Shares distributable with respect to the
Target Fund Common Shares held before the Reorganization as described above and
as shown in the table above, provided that, until such share certificates have
been so surrendered, no dividends payable to the holders of record of Target
Fund Common Shares as of any date subsequent to the Closing Date will be
reinvested pursuant to the Acquiring Fund's Dividend Reinvestment Plan, but will
instead be paid in cash. Once such Target Fund share certificates have been
surrendered, participants in the Target Fund's Dividend Reinvestment Plan will
automatically be enrolled in the Dividend Reinvestment Plan of the Acquiring
Fund.
From and after the Closing Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Closing Date, certificates
representing Target Fund Common Shares are presented to the Acquiring Fund, they
will be cancelled and exchanged for certificates representing Acquiring Fund
Common Shares, as applicable, and cash in lieu of fractional shares, if any,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
Preferred Shares are held in "street name" by the Depository Trust Company and
all transfers will be accomplished by book entry.
EXPENSES OF THE REORGANIZATION. In the event the Reorganization is approved
and completed, the expenses of the Reorganization will be shared by the Target
Fund and the Acquiring Fund in proportion to their projected declines in total
operating expenses as a result of the Reorganization. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
the Reorganization.
Expenses incurred in connection with the Reorganization include, but are not
limited to: all costs related to the preparation and distribution of materials
distributed to each Fund's Board; all expenses incurred in connection with the
61
preparation of the Reorganization Agreement and a registration statement on Form
N-14; SEC and state securities commission filing fees and legal and audit fees
in connection with the Reorganization; the costs of printing and distributing
this Joint Proxy Statement/Prospectus; legal fees incurred preparing materials
for the Board of each Fund, attending each Fund's Board meetings and preparing
the minutes; auditing fees associated with each Fund's financial statements;
portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. Neither the Funds nor the Adviser will pay
any expenses of shareholders arising out of or in connection with the
Reorganization.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code, Treasury regulations, court decisions, published
positions of the Internal Revenue Service ("IRS") and other applicable
authorities, all as in effect on the date hereof and all of which are subject to
change or differing interpretations (possibly with retroactive effect). The
discussion is limited to U.S. persons who hold shares of the Target Fund as
capital assets for U.S. federal income tax purposes (generally, assets held for
investment). This summary does not address all of the U.S. federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under U.S. federal income tax laws. No
ruling has been or will be obtained from the IRS regarding any matter relating
to the Reorganization. No assurance can be given that the IRS would not assert,
or that a court would not sustain, a position contrary to any of the tax aspects
described below. Prospective investors must consult their own tax advisers as to
the federal income tax consequences of the Reorganization, as well as the
effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP ("Skadden Arps"), dated as of the Closing Date, regarding the
characterization of the Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. As such a reorganization, the
federal income tax consequences of the Reorganization can be summarized as
follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer to the Acquiring Fund of substantially all of the
assets of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS and the assumption by the Acquiring Fund of
substantially all of the liabilities of the Target Fund and the subsequent
liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
62
Shares for Acquiring Fund Common Shares pursuant to the Reorganization
(except with respect to cash received in lieu of a fractional share of the
Acquiring Fund, as discussed below) or all of his, her or its Target Fund
RATES for Acquiring Fund APS pursuant to the Reorganization.
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Target Fund surrendered in exchange therefor (reduced
by any amount of tax basis allocable to a fractional shall for which cash
is received).
- The holding period of the Acquiring Fund Common Shares or Acquiring Fund
APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will include the holding period of the
shares of the Target Fund surrendered in exchange therefor.
- A shareholder of the Target Fund that receives cash in lieu of a
fractional share of the Acquiring Fund pursuant to the Reorganization will
recognize capital gain or loss with respect to the fractional share in an
amount equal to the difference between the amount of cash received for the
fractional share and the portion of such shareholder's tax basis in its
Target Fund shares that is allocable to the fractional share. The capital
gain or loss will be long-term if the holding period for such Target Fund
Common Shares is more than one year as of the date of the exchange.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will equal the tax basis of
such assets in the hands of the Target Fund immediately prior to the
Reorganization, and the Acquiring Fund's holding period of such assets
will include the period during which the assets were held by the Target
Fund.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Internal
Revenue Code, which are the same rules currently applicable to the Target Fund
and its shareholders.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing Date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Acquiring Fund and the Target
Fund and assume, among other things, that the Reorganization will be consummated
in accordance with the Reorganization Agreement and as described herein. An
opinion of counsel is not binding on the IRS or any court.
Pursuant to the grandfather relief granted in Revenue Ruling 89-81, 1989-1
C.B. 226, the Target Fund is permitted to designate that dividends paid on the
Target
63
Fund RATES consist of more than the Target Fund RATES's pro rata share of tax-
exempt income earned by the Target Fund. The Acquiring Fund, however, is not
eligible to make such disproportionate designations. Accordingly, designations
made by the Acquiring Fund with respect to dividends paid on the Acquiring Fund
APS will be treated as consisting of a pro rata portion of each type of income
so designated.
For five years after the Closing Date, the combined fund will not be allowed
to offset certain pre-Reorganization built-in gains attributable to one Fund
with capital loss carryforwards (and certain built-in losses) attributable to
the other Fund.
SHAREHOLDER APPROVAL
Under the Declaration of Trust of the Target Fund (as amended to date and
including the Certificate of Vote of the Target Fund), relevant Massachusetts
law and the rules of the NYSE and CHX, shareholder approval of the
Reorganization Agreement requires the affirmative vote of shareholders of the
Target Fund representing more than 50% of the outstanding Target Fund Common
Shares and 66 2/3% of the outstanding Target Fund RATES, each voting separately
as a class.
PROPOSAL 2: ELECTION OF TARGET FUND TRUSTEES
NYSE and CHX rules call for listed companies to have a meeting to elect
trustees each fiscal year. Since the Target Fund's current fiscal year ends on
June 30, 2005, the Target Fund Board is asking shareholders of that Fund to
elect trustees at this time. The Special Meeting will serve as the annual
meeting of shareholders of the Target Fund. The Target Fund Board believes that
combining the proposals related to the proposed Reorganization with the proposal
to elect trustees of the Target Fund into one Joint Proxy Statement/Prospectus
is cost effective. The fiscal year end of the Acquiring Fund occurs later in the
year, and thus the Acquiring Fund Board will ask shareholders of the Acquiring
Fund to elect trustees at a separate meeting to take place later in the year.
This Joint Proxy Statement/Prospectus asks shareholders of the Target Fund to
elect four Class I trustees at the Special Meeting, to serve until the later of
such Fund's Annual Meeting of Shareholders in 2008 or until successors have been
duly elected and qualified. Holders of Common Shares, voting as a separate
class, will vote with respect to four Class I trustees (David C. Arch, Jerry D.
Choate, Howard J Kerr and Suzanne H. Woolsey) designated to be elected by such
class of shares.
As in the past, only one class of trustees is being submitted to shareholders
of the Target Fund for election at the Special Meeting. The Declaration of Trust
of the Target Fund provides that the Target Fund Board shall consist of trustees
divided into three classes, the classes to be as nearly equal in number as
possible. The trustees of only one class are elected at each annual meeting so
that the regular
64
term of only one class of trustees will expire annually and any particular
trustee stands for election only once in each three-year period. This type of
classification may prevent replacement of a majority of trustees of the Target
Fund for up to a two-year period. The foregoing is subject to the provisions of
the 1940 Act, applicable state law and the Target Fund's Declaration of Trust
and Bylaws.
The Board of Trustees recommends a vote "FOR ALL" of the nominees.
INFORMATION REGARDING TRUSTEES AND NOMINEES FOR
ELECTION AS TRUSTEE
The tables below list the incumbent trustees and nominees for trustee, their
principal occupations during the last five years, other directorships held by
them and their affiliations, if any, with Van Kampen Investments, the Adviser,
Van Kampen Funds Inc., Van Kampen Advisors Inc., Van Kampen Exchange Corp. and
Van Kampen Investor Services, Inc. The term "Fund Complex" includes each of the
investment companies advised by the Adviser as of the date of this Joint Proxy
Statement/Prospectus. Trustees of the Funds generally serve three-year terms or
until their successors are duly elected and qualified. All nominees have
consented to being named in this Joint Proxy Statement/Prospectus and have
agreed to serve if elected.
65
INDEPENDENT TRUSTEES
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
David C. Arch (59) Trustee Trustee Chairman and Chief Executive 82
Blistex Inc. since 1991 Officer of Blistex Inc., a
1800 Swift Drive consumer health care products
Oak Brook, IL 60523 manufacturer. Director of the
Heartland Alliance, a nonprofit
organization serving human needs
based in Chicago. Director of St.
Vincent de Paul Center, a Chicago
based day care facility serving
the children of low income
families. Board member of the
Illinois Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, Chairman 80
33971 Selva Road since 2003 and Chief Executive Officer of the
Suite 130 Allstate Corporation ("Allstate")
Dana Point, CA 92629 and Allstate Insurance Company.
Prior to January 1995, President
and Chief Executive Officer of
Allstate. Prior to August 1994,
various management positions at
Allstate.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee/Director/Managing
Blistex Inc. General Partner of funds in the
1800 Swift Drive Fund Complex.
Oak Brook, IL 60523
Jerry D. Choate (66) Trustee/Director/Managing
33971 Selva Road General Partner of funds in the
Suite 130 Fund Complex. Director of Amgen
Dana Point, CA 92629 Inc., a biotechnological
company, and Director of Valero
Energy Corporation, an
independent refining company.
66
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Rod Dammeyer+ (64) Trustee Trustee President of CAC, L.L.C., a 82
CAC, L.L.C. since 1991 private company offering capital
4350 LaJolla Village Drive investment and management advisory
Suite 980 services. Prior to February 2001,
San Diego, CA 92122-6223 Vice Chairman and Director of
Anixter International, Inc., a
global distributor of wire, cable
and communications connectivity
products. Prior to July 2000,
Managing Partner of Equity Group
Corporate Investment (EGI), a
company that makes private
investments in other companies.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Rod Dammeyer+ (64) Trustee/Director/Managing
CAC, L.L.C. General Partner of funds in the
4350 LaJolla Village Drive Fund Complex. Director of
Suite 980 Stericycle, Inc., Ventana
San Diego, CA 92122-6223 Medical Systems, Inc., and GATX
Corporation, and Trustee of The
Scripps Research Institute.
Prior to January 2005, Trustee
of the University of Chicago
Hospitals and Health Systems.
Prior to April 2004, Director
of TheraSense, Inc. Prior to
January 2004, Director of
TeleTech Holdings Inc. and
Arris Group, Inc. Prior to May
2002, Director of Peregrine
Systems Inc. Prior to February
2001, Director of IMC Global
Inc. Prior to July 2000,
Director of Allied Riser
Communications Corp., Matria
Healthcare Inc., Transmedia
Networks, Inc., CNA Surety,
Corp. and Grupo Azcarero Mexico
(GAM).
67
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of Heidrick & 80
Heidrick & Struggles since 2003 Struggles, an executive search
233 South Wacker Drive firm. Trustee on the University of
Suite 7000 Chicago Hospitals Board, Vice
Chicago, IL 60606 Chair of the Board of the YMCA of
Metropolitan Chicago and a member
of the Women's Board of the
University of Chicago. Prior to
1997, Partner of Ray & Berndtson,
Inc., an executive recruiting
firm. Prior to 1996, Trustee of
The International House Board, a
fellowship and housing
organization for international
graduate students. Prior to 1995,
Executive Vice President of ABN
AMRO, N.A., a bank holding
company. Prior to 1992, Executive
Vice President of La Salle
National Bank.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (56) Trustee/Director/Managing
Heidrick & Struggles General Partner of funds in the
233 South Wacker Drive Fund Complex.
Suite 7000
Chicago, IL 60606
68
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
R. Craig Kennedy (53) Trustee Trustee Director and President of the 80
1744 R Street, NW since 2003 German Marshall Fund of the United
Washington, DC 20009 States, an independent U.S.
foundation created to deepen
understanding, promote
collaboration and stimulate
exchanges of practical experience
between Americans and Europeans.
Formerly, advisor to the Dennis
Trading Group Inc., a managed
futures and option company that
invests money for individuals and
institutions. Prior to 1992,
President and Chief Executive
Officer, Director and member of
the Investment Committee of the
Joyce Foundation, a private
foundation.
Howard J Kerr (69) Trustee Trustee Prior to 1998, President and Chief 82
736 North Western Avenue since 1992 Executive Officer of Pocklington
P.O. Box 317 Corporation, Inc., an investment
Lake Forest, IL 60045 holding company. Director of the
Marrow Foundation.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (53) Trustee/Director/Managing
1744 R Street, NW General Partner of funds in the
Washington, DC 20009 Fund Complex.
Howard J Kerr (69) Trustee/Director/Managing
736 North Western Avenue General Partner of funds in the
P.O. Box 317 Fund Complex. Director of the
Lake Forest, IL 60045 Lake Forest Bank & Trust.
69
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Jack E. Nelson (69) Trustee Trustee President of Nelson Investment 80
423 Country Club Drive since 2003 Planning Services, Inc., a
Winter Park, FL 32789 financial planning company and
registered investment adviser in
the State of Florida. President of
Nelson Ivest Brokerage Services
Inc., a member of the NASD,
Securities Investors Protection
Corp. and the Municipal Securities
Rulemaking Board. President of
Nelson Sales and Services
Corporation, a marketing and
services company to support
affiliated companies.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (69) Trustee/Director/Managing
423 Country Club Drive General Partner of funds in the
Winter Park, FL 32789 Fund Complex.
70
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Hugo F. Sonnenschein+ (64) Trustee Trustee President Emeritus and Honorary 82
1126 E. 59th Street since 1994 Trustee of the University of
Chicago, IL 60637 Chicago and the Adam Smith
Distinguished Service Professor in
the Department of Economics at the
University of Chicago. Prior to
July 2000, President of the
University of Chicago. Trustee of
the University of Rochester and a
member of its investment
committee. Member of the National
Academy of Sciences, the American
Philosophical Society and a fellow
of the American Academy of Arts
and Sciences.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Hugo F. Sonnenschein+ (64) Trustee/Director/Managing
1126 E. 59th Street General Partner of funds in the
Chicago, IL 60637 Fund Complex. Director of
Winston Laboratories, Inc.
71
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Suzanne H. Woolsey, Ph.D. (63) Trustee Trustee Chief Communications Officer of 80
815 Cumberstone Road since 2003 the National Academy of Sciences/
Harwood, MD 20776 National Research Council, an
independent, federally chartered
policy institution, from 2001 to
November 2003 and Chief Operating
Officer from 1993 to 2001.
Director of the Institute for
Defense Analyses, a federally
funded research and development
center, Director of the German
Marshall Fund of the United
States, Director of the Rocky
Mountain Institute and Trustee of
Colorado College. Prior to 1993,
Executive Director of the
Commission on Behavioral and
Social Sciences and Education at
the National Academy of
Sciences/National Research
Council. From 1980 through 1989,
Partner of Coopers & Lybrand.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Suzanne H. Woolsey, Ph.D. (63) Trustee/Director/Managing
815 Cumberstone Road General Partner of funds in the
Harwood, MD 20776 Fund Complex. Director of Fluor
Corp., an engineering,
procurement and construction
organization, since January
2004 and Director of Neurogen
Corporation, a pharmaceutical
company, since January 1998.
72
INTERESTED TRUSTEES*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief Executive Officer of funds in the Fund 80
1221 Avenue of the Americas President since Complex. Chairman, President, Chief Executive Officer and
New York, NY 10020 and Chief 2003; Director of the Adviser and Van Kampen Advisors Inc. since
Executive President December 2002. Chairman, President and Chief Executive
Officer and Chief Officer of Van Kampen Investments since December 2002.
Executive Director of Van Kampen Investments since December 1999.
Officer Chairman and Director of Van Kampen Funds Inc. since
since 2002 December 2002. President, Director and Chief Operating
Officer of Morgan Stanley Investment Management since
December 1998. President and Director since April 1997 and
Chief Executive Officer since June 1998 of Morgan Stanley
Investment Advisors Inc. and Morgan Stanley Services Company
Inc. Chairman, Chief Executive Officer and Director of
Morgan Stanley Distributors Inc. since June 1998. Chairman
since June 1998, and Director since January 1998 of Morgan
Stanley Trust. Director of various Morgan Stanley
subsidiaries. President of the Morgan Stanley Funds since
May 1999. Previously Chief Executive Officer of Van Kampen
Funds Inc. from December 2002 to July 2003, Chief Strategic
Officer of Morgan Stanley Investment Advisors Inc. and
Morgan Stanley Services Company Inc. and Executive Vice
President of Morgan Stanley Distributors Inc. from April
1997 to June 1998. Chief Executive Officer from September
2002 to April 2003 and Vice President from May 1997 to April
1999 of the Morgan Stanley Funds.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee/Director/
1221 Avenue of the Americas Managing General
New York, NY 10020 Partner of funds in
the Fund Complex.
73
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Richard F. Powers, III* (59) Trustee Trustee Advisory Director of Morgan Stanley. Prior to December 2002, 82
1221 Avenue of the Americas since 1999 Chairman, Director, President, Chief Executive Officer and
New York, NY 10020 Managing Director of Van Kampen Investments and its
investment advisory, distribution and other subsidiaries.
Prior to December 2002, President and Chief Executive
Officer of funds in the Fund Complex. Prior to May 1998,
Executive Vice President and Director of Marketing at Morgan
Stanley and Director of Dean Witter, Discover & Co. and Dean
Witter Realty. Prior to 1996, Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm of Skadden, Arps, Slate, Meagher & 82
333 West Wacker Drive since 1991 Flom LLP, legal counsel to funds in the Fund Complex.
Chicago, IL 60606
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (59) Trustee/Director/
1221 Avenue of the Americas Managing General
New York, NY 10020 Partner of funds in
the Fund Complex.
Wayne W. Whalen* (65) Trustee/Director/
333 West Wacker Drive Managing General
Chicago, IL 60606 Partner of funds in
the Fund Complex.
Director of the
Abraham Lincoln
Presidential Library
Foundation.
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Merin and Powers are interested persons of funds in
the Fund Complex and the Adviser by reason of their current or former
positions with Morgan Stanley or its affiliates. Mr. Whalen is an interested
person of certain funds in the Fund Complex by reason of he and his firm
currently providing legal services as legal counsel to such funds in the Fund
Complex.
+ Designated as Preferred Shares Trustee.
74
REMUNERATION OF TRUSTEES
The compensation of trustees and executive officers that are affiliated
persons (as defined in 1940 Act) of the Adviser or Van Kampen Investments, Inc.
is paid by the respective entity. The funds in the Fund Complex, including the
Target Fund, pay the non-affiliated trustees an annual retainer and meeting
fees.
Each fund in the Fund Complex (except the Van Kampen Exchange Fund) provides a
deferred compensation plan to its non-affiliated trustees that allows such
trustees to defer receipt of compensation and earn a return on such deferred
amounts based upon the return of the common shares of the funds in the Fund
Complex as selected by the respective non-affiliated trustees. Each fund in the
Fund Complex (except the Van Kampen Exchange Fund) also provides a retirement
plan to its non-affiliated trustees that provides non-affiliated trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
Each non-affiliated trustee generally can elect to defer receipt of all or a
portion of the compensation earned by such non-affiliated trustee until
retirement. Amounts deferred are retained by the respective fund and earn a rate
of return determined by reference to the return on the common shares of the
Target Fund or other funds in the Fund Complex as selected by the respective
non-affiliated trustee, with the same economic effect as if such non-affiliated
trustee had invested in one or more funds in the Fund Complex, including the
Target Fund. To the extent permitted by the 1940 Act, the Target Fund may invest
in securities of those funds selected by the non-affiliated trustees in order to
match the deferred compensation obligation. The deferred compensation plan is
not funded and obligations thereunder represent general unsecured claims against
the general assets of the Target Fund.
The Target Fund has adopted a retirement plan. Under the retirement plan, a
non-affiliated trustee who is receiving trustee's compensation from the Target
Fund prior to such non-affiliated trustee's retirement, has at least 10 years of
service (including years of service prior to adoption of the retirement plan)
for the Target Fund and retires at or after attaining the age of 60, is eligible
to receive a retirement benefit each year for ten years following such trustee's
retirement from the Target Fund. Non-affiliated trustees retiring prior to the
age of 60 or with fewer than 10 years but more than 5 years of service may
receive reduced retirement benefits from a fund.
Additional information regarding compensation and benefits for trustees is set
forth below. As indicated in the notes accompanying the table, the amounts
relate to either the Target Fund's most recently completed fiscal year end in
2004 or the Fund Complex's most recently completed calendar year ended December
31, 2004.
75
COMPENSATION TABLE
FUND COMPLEX
-----------------------------------------------------
AGGREGATE
AGGREGATE PENSION ESTIMATED TOTAL
AGGREGATE OR RETIREMENT MAXIMUM COMPENSATION
COMPENSATION BENEFITS ACCRUED ANNUAL BENEFITS BEFORE DEFERRAL
FROM TARGET PART OF AS ACCRUED AS PART FROM FUND
NAME FUND(2) EXPENSES(3) OF EXPENSES(4) COMPLEX(5)
---- ------------ ----------------- --------------- ---------------
INDEPENDENT TRUSTEES
David C. Arch........... $4,328 $ 35,277 $147,500 $192,530
Jerry D. Choate......... 5,551 82,527 126,000 200,002
Rod Dammeyer............ 4,128 63,782 147,500 208,000
Linda Hutton Heagy...... 5,350 24,465 142,500 184,784
R. Craig Kennedy........ 5,551 16,911 142,500 200,002
Howard J Kerr........... 4,328 140,743 146,250 208,000
Jack E. Nelson.......... 5,551 97,294 109,500 200,002
Hugo F. Sonnenschein.... 4,328 64,476 147,500 208,000
Suzanne H. Woolsey...... 5,551 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1)...... 4,328 72,001 147,500 208,000
---------------
(1)Trustees not eligible for compensation and retirement benefits are not
included in the Compensation Table. Mr. Whalen is an "interested person"
(within the meaning of Section 2(a)(19) of the 1940 Act) of the Target Fund
and certain other funds in the Fund Complex. Theodore A. Myers retired from
the Board of Trustees of the Target Fund and other funds in the Fund Complex
as of December 31, 2003. J. Miles Branagan retired as a member of the Board
of Trustees of the Target Fund and other funds in the Fund Complex as of
December 31, 2004.
(2)The amounts shown in this column represent the aggregate compensation
before deferral by the Trustees with respect to the Target Fund's fiscal year
ended June 30, 2004. The following Trustees deferred compensation from the
Target Fund during the fiscal year ended June 30, 2004: Mr. Choate, $5,551;
Mr. Dammeyer, $4,128; Ms. Heagy, $5,350; Mr. Nelson, $5,551; Mr.
Sonnenschein, $4,328; and Mr. Whalen, $4,328. The cumulative deferred
compensation (including interest) accrued with respect to each trustee,
including former trustees, from the Target Fund as of June 30, 2004 is as
follows: Mr. Choate, $5,775; Mr. Dammeyer, $47,669; Ms. Heagy, $5,698; Mr.
Kerr, $28,639; Mr. Nelson, $5,861; Mr. Sonnenschein, $49,070; and Mr. Whalen,
$50,189. The deferred compensation plan is described above the table. Amounts
deferred are retained by the Target Fund and earn a rate of return determined
by reference to either the return on the Common Shares of the Target Fund or
the common shares of other funds in the Fund Complex as selected by the
respective Trustee. To the extent permitted by the 1940 Act, the Target Fund
may invest in securities of these funds selected by the Trustees in order to
match the deferred compensation obligation.
76
(3)The amounts shown in this column represent the sum of the estimated pension
or retirement benefit accruals expected to be accrued by the operating funds
in the Fund Complex for their respective fiscal years ended in 2004.
(4)For each Trustee, the amounts shown in this column represent the sum of the
estimated annual benefits upon retirement payable per year by the current
operating funds in the Fund Complex for each year of the 10-year period
commencing in the year of such person's anticipated retirement. The
retirement plan is described above the compensation table.
(5)The amounts shown in this column are accumulated from the aggregate
compensation of the operating investment companies in the Fund Complex for
the calendar year ended December 31, 2004 before deferral by the Trustees
under the deferred compensation plan. Because the funds in the Fund Complex
have different fiscal year ends, the amounts shown in this column are
presented on a calendar year basis.
BOARD COMMITTEES AND MEETINGS
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised solely of "Independent Trustees", which is defined for purposes herein
as trustees who: (1) are not "interested persons" of the Fund as defined by the
1940 Act and (2) are "independent" of the Fund as defined by the NYSE, American
Stock Exchange and CHX listing standards.
The Board's audit committee consists of Jerry D. Choate, Rod Dammeyer and R.
Craig Kennedy. In addition to being Independent Trustees as defined above, each
of these trustees also meets the additional independence requirements for audit
committee members as defined by the NYSE, American Stock Exchange and CHX
listing standards. The audit committee makes recommendations to the Board of
Trustees concerning the selection of the Fund's independent registered public
accounting firm, reviews with such independent registered public accounting firm
the scope and results of the Target Fund's annual audit and considers any
comments which the independent registered public accounting firm may have
regarding the Target Fund's financial statements, books of account or internal
controls. The Board of Trustees has adopted a formal written charter for the
audit committee which sets forth the audit committee's responsibilities. The
audit committee has reviewed and discussed the financial statements of the
Target Fund with management as well as with the independent registered public
accounting firm of the Target Fund, and discussed with the independent
registered public accounting firm the matters required to be discussed under the
Statement of Auditing Standards No. 61. The audit committee has received the
written disclosures and the letter from the independent registered public
accounting firm required under Independence Standards Board Standard No. 1 and
has discussed with the independent registered public accounting firm its
independence. Based on this
77
review, the audit committee recommended to the Board of Trustees of the Target
Fund that the Target Fund's audited financial statements be included in the
Target Fund's annual report to shareholders for the most recent fiscal year for
filing with the SEC.
In accordance with proxy rules promulgated by the SEC, a fund's audit
committee charter is required to be filed at least once every three years as an
exhibit to a fund's proxy statement. The audit committee charter of the Target
Fund was attached as an exhibit to the Van Kampen Joint Closed-End Fund Proxy
Statement, filed with the SEC on May 19, 2004.
The Board's brokerage and services committee consists of Linda Hutton Heagy,
Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Target Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Howard J Kerr and
Jack E. Nelson. In addition to being Independent Trustees as defined above, each
of these trustees also meets the additional independence requirements for
nominating committee members as defined by the NYSE, American Stock Exchange and
CHX listing standards. The governance committee identifies individuals qualified
to serve as Independent Trustees on the Board and on committees of the Board,
advises the Board with respect to Board composition, procedures and committees,
develops and recommends to the Board a set of corporate governance principles
applicable to the Target Fund, monitors corporate governance matters and makes
recommendations to the Board, and acts as the administrative committee with
respect to Board policies and procedures, committee policies and procedures and
codes of ethics. The Independent Trustees of the Target Fund select and nominate
any other nominee Independent Trustees for the Fund. While the Independent
Trustees of the Target Fund expect to be able to continue to identify from their
own resources an ample number of qualified candidates form the Board of Trustees
as they deem appropriate, they will consider nominations from shareholders to
the Board. Nominations from shareholders should be in writing and sent to the
Independent Trustees of the Target Fund at the Target Fund's offices at 1221
Avenue of the Americas, New York, New York 10020 or directly to the Independent
Trustees at the address specified for each trustee.
In accordance with proxy rules promulgated by the SEC, a fund's nominating
committee charter is required to be filed at least once every three years as an
exhibit to a fund's proxy statement. The governance committee charter of the
Target Fund was attached as an exhibit to the Van Kampen Joint Closed-End Fund
Proxy Statement, filed with the SEC on May 19, 2004.
78
During the Target Fund's last fiscal year, the Board of Trustees held 13
meetings. During the Target Fund's last fiscal year, the audit committee of the
Board held 7 meetings, the brokerage and services committee of the Board held 4
meetings and the governance committee of the Board and held 5 meetings. During
the last fiscal year, each of the trustees of the Target Fund during such period
such trustee served as a trustee attended at least 75% of the meetings of the
Board of Trustees and all committee meetings thereof of which such trustee was a
member.
OTHER INFORMATION
EXECUTIVE OFFICERS OF THE FUNDS
The following information relates to the executive officers of the Target Fund
who are not trustee nominees. Each officer also serves in the same capacity for
all or a number of the other investment companies advised by the Adviser or
affiliates of the Adviser. The officers of the Target Fund are appointed
annually by the trustees and serve for one year or until their respective
successors are chosen and qualified. The Target Funds' officers receive no
compensation from the funds in the Fund Complex but may also be officers of the
Adviser or officers of affiliates of the Adviser and receive compensation in
such capacities.
79
OFFICERS
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
------------------ ----------- ---------- -----------------------
Stefanie V. Chang Yu (38) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President and Secretary of funds in the Fund Complex.
New York, NY 10020
Amy R. Doberman (43) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeltus Investment Management,
Inc from January 1997 to July 2000.
James W. Garrett (36) Chief Financial Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Officer and since 2005 Chief Financial Officer and Treasurer of Morgan Stanley
New York, NY 10020 Treasurer Institutional Funds since 2002 and of funds in the Fund
Complex since 2005.
Joseph J. McAlinden (62) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
80
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
------------------ ----------- ---------- -----------------------
Ronald E. Robison (66) Executive Vice Officer Executive Vice President and Principal Executive Officer of
1221 Avenue of the Americas President and since 2003 Funds in the Fund Complex since May 2003. Chief Executive
New York, NY 10020 Principal Officer and Chairman of Investor Services. Managing Director
Executive of Morgan Stanley. Chief Administrative Officer, Managing
Officer Director and Director of Morgan Stanley Investment Advisors
Inc., Morgan Stanley Services Company Inc. and Managing
Director and Director of Morgan Stanley Distributors Inc.
Chief Executive Officer and Director of Morgan Stanley
Trust. Executive Vice President and Principal Executive
Officer of the Institutional and Retail Morgan Stanley
Funds; Director of Morgan Stanley SICAV; previously Chief
Global Operations Officer and Managing Director of Morgan
Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1996 August 2004. Prior to August 2004, Director and Managing
Oakbrook Terrace, IL 60181 Director of Van Kampen Investments, the Adviser, Van Kampen
Advisors Inc. and certain other subsidiaries of Van Kampen
Investments, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
81
SHAREHOLDER INFORMATION
Excluding deferred compensation balances as described in the Compensation
Table above, as of April 25, 2005, each trustee beneficially owned equity
securities of the Target Fund and other funds in the Fund Complex overseen by
the trustees in the dollar range amounts as specified below.
TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
TRUSTEE
-----------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
---- ------ -------- ----- ------- ---- ------ ------------ -------
Dollar range of
equity securities
owned in the Target
Fund............... $1- none over $1- $1- none none $1- $1-
$10,000 $100,000 $10,000 $10,000 $10,000 $10,000
Aggregate dollar
range of equity
securities owned in
all registered
investment
companies overseen
by trustee in Fund
Complex............ $50,001- $1- over $50,001- over $1- $1- $10,001- $10,001-
$100,000 $10,000 $100,000 $100,000 $100,000 $10,000 $10,000 $50,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
--------------------------------
MERIN POWERS WHALEN
----- ------ ------
Dollar range of equity securities in the Target
Fund......................................... none none $1-
$10,000
Aggregate dollar range of equity securities in
all registered investment companies overseen
by trustee in Fund Complex................... over over over
$100,000 $100,000 $100,000
82
Including deferred compensation balances as described in the Compensation
Table, as of April 25, 2005, each trustee owned the dollar ranges of amounts of
the Target Fund and other funds in the Fund Complex as specified below.
TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
TRUSTEE
--------------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
---- ------ -------- ----- ------- ---- ------ ------------ -------
Dollar range of
equity securities
and deferred
compensation in the
Target Fund........ $1- $1- over $1- $1- none $1- $1- $1-
$10,000 $10,000 $100,000 $10,000 $10,000 $10,000 $10,000 $10,000
Aggregate dollar
range of equity
securities and
deferred
compensation in all
registered
investment
companies overseen
by trustee in Fund
Complex............ $50,001- over over over over over over over $10,000-
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
--------------------------------
MERIN POWERS WHALEN
----- ------ ------
Dollar range of equity securities owned in the
Target Fund.................................. none none $10,001-
$50,000
Aggregate dollar range of equity securities
owned in all registered investment companies
overseen by trustee in Fund Complex.......... over over over
$100,000 $100,000 $100,000
83
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees of the Target Fund, including a majority of the Trustees
who are not "interested persons" of the Target Fund (as defined by the 1940
Act), has selected Deloitte & Touche LLP ("D&T") as the independent auditors to
examine the financial statements for the current fiscal year of the Target Fund.
The selection of D&T for the current fiscal year was recommended and approved by
the Target Fund's audit committee and approved by the Target Fund's Board. The
Target Fund knows of no direct or indirect financial interest of D&T in the
Target Fund.
AUDIT AND OTHER FEES
Each Fund and certain "covered entities" were billed the amounts listed below
by D&T during the Target Fund's most recent two fiscal years.
FISCAL YEAR ENDED JUNE 30, 2004
NON-AUDIT FEES
----------------------------------------------
TOTAL
ENTITY AUDIT FEES AUDIT RELATED TAX ALL OTHER NON-AUDIT TOTAL
------ ---------- ------------- --- --------- --------- -----
Target Fund.......... $29,480 $ 400 $1,550 $0 $ 1,950 $ 31,430
Covered Entities*.... N/A $230,000 $ 0 $0 $230,000 $230,000
FISCAL YEAR ENDED JUNE 30, 2003
NON-AUDIT FEES
----------------------------------------------
TOTAL
ENTITY AUDIT FEES AUDIT RELATED TAX ALL OTHER NON-AUDIT TOTAL
------ ---------- ------------- --- --------- --------- -----
Target Fund.......... $27,876 $ 3,000 $1,500 $0 $ 4,500 $32,176
Covered Entities*.... n/a $95,000 $ 0 $0 $95,000 $95,000
---------------
* Covered Entities include the Adviser and any entity controlling, controlled by
or under common control with the Adviser that provides ongoing services to the
Target Fund.
The audit committee of each Board has considered whether the provision of non-
audit services performed by D&T to the Funds and "covered entities" is
compatible with maintaining D&T's independence in performing audit services.
Beginning with non-audit service contracts entered into on or after May 6, 2003,
the audit committee also is required to pre-approve services to "covered
entities" to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Funds. 100% of such services
were pre-approved by the audit committee pursuant to the audit committee's
pre-approval policies and procedures. The Board's pre-approval policies and
procedures are included as part
84
of the Board's audit committee charter, which was attached to the Van Kampen
Joint Closed-End Fund Proxy Statement, filed with the SEC on May 19, 2004.
SHAREHOLDER APPROVAL
An affirmative vote of a plurality of the Common Shares present at the Special
Meeting in person or by proxy is required to elect the respective nominees. It
is the intention of the persons named in the enclosed proxy to vote the shares
represented by them for the election of the respective nominees listed unless
the proxy is marked otherwise. For more information regarding voting
requirements, see "Other Information -- Voting Information and Requirements"
below.
85
------------------------------------------------------------------------------
PROPOSAL 3: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
------------------------------------------------------------------------------
Pursuant to the Reorganization Agreement, which is described more fully under
"Proposal 1: Reorganization of the Target Fund" herein, the Acquiring Fund will
acquire substantially all of the assets and assume substantially all of the
liabilities of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund APS to holders of
Target Fund RATES, and will then terminate its registration under the 1940 Act
and dissolve under applicable state law. The Acquiring Fund Board, based upon
its evaluation of all relevant information, anticipates that the Reorganization
will benefit holders of Acquiring Fund Common Shares.
The aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value on the Target Fund
Common Shares held immediately prior to the Reorganization, less the costs of
the Reorganization (though you may receive cash for fractional shares). The
aggregate liquidation preference of Acquiring Fund APS received in the
Reorganization will equal the aggregate liquidation preference Target Fund RATES
held immediately prior to the Reorganization. The Reorganization will result in
no dilution of net asset value of the Acquiring Fund Common Shares, other than
to reflect the costs of the Reorganization. No gain or loss will be recognized
by the Acquiring Fund or its shareholders in connection with the Reorganization.
The Acquiring Fund will continue to operate as a registered closed-end
investment company with the investment objective and policies described in this
Joint Proxy Statement/Prospectus.
In connection with the Reorganization and as contemplated by the
Reorganization Agreement, the Acquiring Fund will issue additional Acquiring
Fund Common Shares and list such shares on the NYSE and the CHX. While
applicable state and federal law does not require the shareholders of the
Acquiring Fund to approve the Reorganization, applicable NYSE and CHX rules
require the common shareholders of the Acquiring Fund to approve the issuance of
additional Acquiring Fund Common Shares to be issued in connection with the
Reorganization.
SHAREHOLDER APPROVAL
Shareholder approval of the issuance of additional Acquiring Fund Common
Shares requires the affirmative vote of a majority of the votes cast on the
proposal, provided that the total votes cast on the proposal represents more
than 50% in interest of all securities entitled to vote on the proposal. For
more information regarding voting requirements, see the section entitled "Other
Information--Voting Information and Requirements" below.
86
------------------------------------------------------------------------------
OTHER INFORMATION
------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
GENERAL. A list of shareholders of the Target Fund entitled to be present and
vote at the Special Meeting will be available at the offices of the Target Fund,
1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, for inspection by any
shareholder during regular business hours for ten days prior to the date of the
Special Meeting.
RECORD DATE. The Funds' Boards have fixed the close of business on April 25,
2005 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof. Shareholders on the Record Date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. At the
Record Date, the Target Fund had outstanding 28,684,985 Target Fund Common
Shares and 330 Target Fund RATES and the Acquiring Fund had outstanding
27,013,149 Acquiring Fund Common Shares and 10,600 Acquiring Fund APS.
PROXIES. Shareholders may vote by appearing in person at the Special Meeting,
by returning the enclosed proxy card or by casting their vote via telephone or
the internet using the instructions provided on the enclosed proxy card and more
fully described below. Shareholders of each Fund have the opportunity to submit
their voting instructions via the internet by utilizing a program provided by a
third-party vendor hired by the Funds, or by "touch-tone" telephone voting. The
giving of such a proxy will not affect your right to vote in person should you
decide to attend the Special Meeting. To use the internet, please access the
internet address found on your proxy card. To record your voting instructions by
automated telephone, please call the toll-free number listed on your proxy card.
The internet and automated telephone voting instructions are designed to
authenticate shareholder identities, to allow shareholders to give their voting
instructions, and to confirm that shareholders' instructions have been recorded
properly. Shareholders submitting their voting instructions via the internet
should understand that there may be costs associated with internet access, such
as usage charges from internet access providers and telephone companies, that
must be borne by the shareholders. Any person giving a proxy may revoke it at
any time prior to its exercise by giving written notice of the revocation to the
Secretary of the Fund at the address indicated above, by delivering a duly
executed proxy bearing a later date, by recording later-dated voting
instructions via the internet or automated telephone, or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided
87
therein. Unless instructions to the contrary are marked, proxies will be voted
"FOR" the approval of each proposal. Abstentions and broker non-votes (i.e.,
where a nominee such as a broker, holding shares for beneficial owners,
indicates that instructions have not been received from the beneficial owners,
and the nominee does not exercise discretionary authority) are not treated as
votes "FOR" a proposal.
With respect to Proposal 1, abstentions and broker non-votes have the same
effect as votes "AGAINST" the proposals since their approvals are based on the
affirmative vote of a majority of the total Target Fund Common Shares
outstanding and 66 2/3% of the Target Fund RATES outstanding, each voting as a
separate class. With respect to Proposal 2, abstentions and broker non-votes are
disregarded since only votes "FOR" are considered in a plurality voting
requirement. With respect to Proposal 3, abstentions will not be treated as
votes "FOR" the proposal but will be counted as votes cast on the proposal and
will therefore have the same effect as votes "AGAINST" the proposal. Broker
non-votes will not be treated as votes "FOR" the proposal and will not be
counted as votes cast on the proposal and will therefore have the effect of
reducing the aggregate number of shares voting on the proposal and reducing the
number of votes "FOR" required to approve the proposal.
With respect to each proposal, a majority of the outstanding shares entitled
to vote on the proposal must be present in person or by proxy to have a quorum
to conduct business at the Special Meeting. Abstentions and broker non-votes
will be deemed present for quorum purposes.
CERTAIN VOTING INFORMATION REGARDING TARGET FUND RATES. Pursuant to the rules
of the NYSE, Target Fund RATES held in "street name" may be voted under certain
conditions by broker-dealer firms and counted for purposes of establishing a
quorum of that Fund if no instructions are received one business day before the
Special Meeting or, if adjourned, one business day before the day to which the
Special Meeting is adjourned. These conditions include, among others, that (i)
at least 30% of the Target Fund's preferred shares outstanding have voted on the
Reorganization and (ii) less than 10% of the Target Fund's preferred shares
outstanding have voted against the Reorganization. In such instance, the broker-
dealer firm will vote such uninstructed Target Fund RATES on the Reorganization
in the same proportion as the votes cast by all holders of Target Fund RATES who
voted on the Reorganization. The Fund will include shares held of record by
broker-dealers as to which such authority has been granted in its tabulation of
the total number of shares present for purposes of determining whether the
necessary quorum of shareholders of the Fund exists.
88
SHAREHOLDER INFORMATION
As of April 25, 2005, to the knowledge of the Funds, no shareholder owned
beneficially more than 5% of the outstanding common shares of either Fund.
The table below indicates the number of common shares of the Funds owned
beneficially by each trustee that owns shares of the Funds, as of April 25,
2005, and the percentage of such Trustee's Common Shares to the total Common
Shares outstanding for such Fund.
TARGET FUND ACQUIRING FUND
---------------------------------- ----------------------------------
COMMON SHARES OWNED COMMON SHARES OWNED
AS A PERCENTAGE OF AS A PERCENTAGE OF
COMMON COMMON SHARES COMMON COMMON SHARES
SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
------------ ------------------- ------------ -------------------
Arch.................... 577 < 1% 300 < 1%
Dammeyer................ 11,300 < 1% 0 0%
Heagy................... 100 < 1% 0 0%
Kennedy................. 100 < 1% 0 0%
Sonnenschein............ 300 < 1% 0 0%
Whalen.................. 863 < 1% 903 < 1%
Woolsey................. 565 < 1% 355 < 1%
To the knowledge of the Funds, no executive officers owned, directly or
beneficially, Common Shares of the Funds as of April 25, 2005 and no trustees or
executive officers owned Preferred Shares of the Funds as of that date.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of the Fund's equity securities to file forms with the SEC
and the NYSE, as applicable, reporting their affiliation with the Fund and
reports of ownership and changes in ownership of Fund shares. These persons and
entities are required by SEC regulation to furnish the Fund with copies of all
such forms they file. Based on a review of these forms furnished to each Fund,
each Fund believes that during its last fiscal year, its trustees, officers,
investment adviser and affiliated persons of the investment adviser complied
with the applicable filing requirements except that, due to clerical errors,
Form 4 filings regarding a sales transaction of Target Fund Common Shares and
Acquiring Fund Common Shares by Mr. Whalen were not filed in a timely manner.
SHAREHOLDER PROPOSALS
To be considered for presentation at a shareholder's meeting, rules
promulgated by the SEC generally require that, among other things, a
shareholder's proposal must be received at the offices of the relevant Fund a
reasonable time before solicitation is made. Timely submission of a proposal
does not necessarily mean that
89
such proposal will be included. Any shareholder who wishes to submit a proposal
for consideration at a meeting of such shareholder's Fund should send such
proposal to the relevant Fund at the principal executive offices of the Fund at
1221 Avenue of the Americas, New York, New York 10020.
Shareholder proposals intended to be presented at the year 2006 Annual Meeting
of the Target Fund pursuant to Rule 14a-8 under the Exchange Act of 1934, as
amended (the "Exchange Act"), must be received by the Target Fund at the Target
Fund's principal executive offices by February 22, 2006. In order for proposals
made outside of Rule 14a-8 under the Exchange Act to be considered "timely"
within the meaning of Rule 14a-4(c) under the Exchange Act, such proposals must
be received by the Target Fund at the Target Fund's principal executive offices
not later than March 26, 2006. If the Reorganization is approved and completed,
the Target Fund will cease to exist and will not hold its 2006 Annual Meeting.
Information regarding the deadline for timely submission of proposals intended
to be presented at the year 2006 Annual Meeting of the Acquiring Fund will be
provided in the proxy statement relating to the 2005 Annual Meeting of the
Acquiring Fund, which is expected to take place later this year.
SOLICITATION OF PROXIES
Solicitation of proxies on behalf of the Funds is being made primarily by the
mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures
on or about May 10, 2005. Shareholders whose shares are held by nominees such as
brokers can vote their proxies by contacting their respective nominee. In
addition to the solicitation of proxies by mail, employees of the Adviser and
its affiliates as well as dealers or their representatives may, without
additional compensation, solicit proxies in person or by mail, telephone,
telegraph, facsimile or oral communication. The Funds have retained
Computershare Fund Services ("CFS") to make telephone calls to shareholders of
the Funds to remind them to vote. CFS will be paid a project management fee as
well as fees charged on a per call basis and certain other expenses. Management
estimates that the solicitation by CFS will cost approximately $39,800 for the
Target Fund and $41,700 for the Acquiring Fund. Proxy solicitation expenses are
an expense of the Reorganization which will be borne by the Target Fund and the
Acquiring Fund in proportion to their projected declines in total operating
expenses as a result of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and the issuance of Acquiring Fund Common Shares and Acquiring
Fund APS will be passed upon by Skadden Arps, which serves as counsel to the
Target Funds and the Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps,
is a trustee of both the Target Funds and the Acquiring Fund.
90
OTHER MATTERS TO COME BEFORE THE MEETING
The Board of Trustees of each Fund knows of no business other than that
described in this Joint Proxy Statement/Prospectus which will be presented for
consideration at the Special Meeting. If any other matters are properly
presented, it is the intention of the persons named on the enclosed proxy card
to vote proxies in accordance with their best judgment.
Representatives of D&T will attend the Special Meeting, will have the
opportunity to make a statement if they desire to do so and will be available to
answer appropriate questions.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve any of the proposals are not received, proxies (including
abstentions and broker non-votes) will be voted in favor of one or more
adjournments of the Special Meeting to permit further solicitation of proxies on
the such proposals, provided that the Board of Trustees of each Fund determines
that such an adjournment and additional solicitation is reasonable and in the
interest of shareholders based on a consideration of all relevant factors,
including the percentage of votes then cast, the percentage of negative votes
cast, the nature of the proposed solicitation activities and the nature of the
reasons for such further solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
If you cannot be present in person at the Special Meeting, please fill in,
sign and return the enclosed proxy card promptly or please record your voting
instructions by telephone or via the internet. No postage is necessary if the
enclosed proxy card is mailed in the United States.
Lou Anne McInnis
Assistant Secretary
Van Kampen Municipal Income Trust
Van Kampen Trust for Investment
Grade Municipals
May 6, 2005
91
EXHIBIT I
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. Issue credit ratings can be either long-term or
short-term. Short-term ratings are generally assigned to those obligations
considered short term in the relevant market. In the U.S., for example, that
means obligations with an original maturity of no more than 365 days including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term ratings
address the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
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(Such differentiation applies when an entity has both senior and subordinated
obligations, secured and unsecured obligations, or operating company and holding
company obligations.) Accordingly, in the case of junior debt, the rating may
not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse
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business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A S&P short-term rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: A short-term obligation rated "A-1" is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations
I-3
in higher rating categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
A short-term rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor. Issue credit ratings are based on current
information furnished by the obligors or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any credit
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, "AAA/A-1+"). With short-term demand debt, S&P note
rating symbols are used with the commercial paper rating symbols (for example,
"SP-1+/A-1+").
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MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM OBLIGATION RATINGS
Moody's long-term obligation ratings are opinions of the relative credit risk
of fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
MOODY'S LONG-TERM RATING DEFINITIONS:
Aaa: Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A: Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba: Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high
credit risk.
Caa: Obligations rated Caa are judged to be of poor standing and are subject
to very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C: Obligations rated C are the lowest rated class of bonds and are typically
in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
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MEDIUM-TERM NOTE RATINGS
Moody's assigns long-term ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below:
1. Notes containing features that link interest or principal to the
credit performance of any third party or parties
2. Notes allowing for negative coupons, or negative principal
3. Notes containing any provision that could obligate the investor to
make any additional payments
4. Notes containing provisions that subordinate the claim.
For notes with any of these characteristics, the rating of the individual note
may differ from the indicated rating of the program.
Market participants must determine whether any particular note is rated, and
if so, at what rating level. Moody's encourages market participants to contact
Moody's Ratings Desks or visit www.moodys.com directly if they have questions
regarding ratings for specific notes issued under a medium-term note program.
Unrated notes issued under an MTN program may be assigned an NR symbol.
SHORT-TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted. Moody's employs the following designations to indicate the
relative repayment ability of rated issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
I-6
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
NOTE: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
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