-- MAY 2007 --
--------------------------------------------------------------------------------
IMPORTANT NOTICE
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TO SHAREHOLDERS OF VAN KAMPEN TRUST
FOR INVESTMENT GRADE FLORIDA MUNICIPALS
AND
VAN KAMPEN TRUST
FOR INVESTMENT GRADE MUNICIPALS
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QUESTIONS & ANSWERS
---------------------------------------
Although we recommend that you read the complete Joint Proxy Statement/
Prospectus, we have provided for your convenience a brief overview of the issues
to be voted on.
---------------------------------------
Q WHY IS A SHAREHOLDER
MEETING BEING HELD?
A Shareholders of
Van Kampen Trust for Investment Grade Florida Municipals: You are being asked to
vote on a reorganization (the "Reorganization") of Van Kampen Trust for
Investment Grade Florida Municipals (the "Target Fund") into Van Kampen Trust
for Investment Grade Municipals (the "Acquiring Fund"), a closed-end investment
company that pursues the same investment objective and has similar investment
policies as the Target Fund.
Shareholders of Van Kampen Trust for Investment Grade Municipals: You are being
asked to vote on the issuance of common shares of beneficial interest by the
Acquiring Fund in connection with the Reorganization.
Q WHY IS THE
REORGANIZATION BEING RECOMMENDED?
A The Board of Trustees of
each Fund has determined that the Reorganization will benefit common
shareholders of the Target Fund and the Acquiring Fund. The Target Fund seeks to
offer its shareholders the opportunity to own securities exempt from Florida
intangible personal property taxes. As such, the Target Fund invests
substantially all of its total assets in Florida municipal securities, which are
exempt from such tax; however, effective January 1, 2007, the State of Florida
repealed the intangible personal property tax, thereby eliminating the Florida-
specific tax benefit to Florida taxpayers of investing in the Fund. Thus, the
Board of Trustees of the Funds has determined that the
Reorganization of the Target Fund into the similar Acquiring Fund would benefit
common shareholders. The Target Fund and the Acquiring Fund are similar. Each
Fund's investment objective is to seek to provide shareholders with a high level
of current income exempt from federal income taxes, consistent with preservation
of capital. Each Fund invests substantially all of its total assets in municipal
securities rated investment grade at the time of investment. Each Fund is
managed by the same investment advisory personnel. After the Reorganization, it
is anticipated that common shareholders of each Fund will experience a reduced
overall operating expense ratio, as certain fixed administrative costs will be
spread across the combined fund's larger asset base. In addition, it is
anticipated that shareholders of the Target Fund will benefit from increased
diversification as a result of the Reorganization. It is not anticipated that
the Reorganization will directly benefit holders of preferred shares of the
Funds; however, it is anticipated that preferred shareholders will not be
adversely effected by the Reorganization, and none of the expenses of the
Reorganization will be borne by preferred shareholders.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the Reorganization and shareholders of the Acquiring
Fund approve the issuance of common shares of beneficial interest by that Fund,
the assets and liabilities of the Target Fund will be combined with those of the
Acquiring Fund and the Target Fund will dissolve.
Shareholders of the Target Fund: You will become a shareholder of the Acquiring
Fund. If you are a holder of common shares of the Target Fund, you will receive
newly-issued common shares of the Acquiring Fund, and if you are a holder of
preferred shares of the Target Fund, you will receive newly-issued preferred
shares of the Acquiring Fund. The aggregate net asset value of the common shares
you receive in the Reorganization will equal the aggregate net asset value of
the common shares you own immediately prior to the Reorganization less the costs
of the Reorganization (though you may receive cash for fractional shares). The
aggregate liquidation preference of the preferred shares you receive in the
Reorganization will equal the aggregate liquidation preference of the preferred
shares you own immediately prior to the Reorganization. No certificates for
shares of the Acquiring Fund will be issued in connection with the
Reorganization, although such certificates will be available upon request.
Shareholders of the Acquiring Fund: You will remain a shareholder of the
Acquiring Fund.
Q WILL I HAVE TO PAY ANY
SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN CONNECTION WITH THE
REORGANIZATION?
A You will pay no sales loads
or commissions in connection with the Reorganization. However, if the
Reorganization is completed, the costs associated with the Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the Target Fund and the Acquiring Fund in proportion to their projected declines
in total operating expenses as a consequence of the Reorganization.
Q WILL I HAVE TO PAY ANY
FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is
intended to qualify as a "reorganization" within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended. If the
Reorganization so qualifies, in general, a shareholder of the Target Fund will
recognize no gain or loss upon the receipt of shares of the Acquiring Fund in
connection with the Reorganization. Additionally, the Target Fund will not
recognize any gain or loss as a result of the transfer of all of its assets and
liabilities in exchange for the shares of the Acquiring Fund or as a result of
its dissolution. Neither the Acquiring Fund nor its shareholders will recognize
any gain or loss in connection with the Reorganization.
Q WHY IS THE VOTE OF
COMMON SHAREHOLDERS OF THE ACQUIRING FUND BEING SOLICITED?
A Although the Acquiring
Fund will continue its legal existence and operations after the Reorganization,
the rules of the New York Stock Exchange and the Chicago Stock Exchange, on
which the Acquiring Fund's common shares are listed, require the common
shareholders of the Acquiring Fund to approve the issuance of additional common
shares of beneficial interest by the Acquiring Fund in connection with the
Reorganization. If the issuance of additional common shares of the Acquiring
Fund is not approved, the Reorganization will not occur.
Q HOW DOES THE BOARD OF
TRUSTEES OF MY FUND SUGGEST I VOTE?
A After careful consideration,
the Board of Trustees of each Fund recommend that you vote "FOR" each of the
items proposed.
Q HOW DO I VOTE MY PROXY?
A You may cast your vote by
mail, phone or internet. To vote by
mail, please mark your vote on the enclosed proxy card and sign, date and return
the card in the postage-paid envelope provided. If you choose to vote via phone
or internet, please refer to the instructions found on the proxy card
accompanying this Joint Proxy Statement/Prospectus. To vote by phone or
internet, you will need the "control number" that appears on the proxy card.
Q WHOM DO I CONTACT FOR
FURTHER INFORMATION?
A You can contact your
financial adviser for further information. You may also call Van Kampen's Client
Relations Department at (800) 341-2929 or visit our web site at
www.vankampen.com where you can send us an e-mail message by selecting "Contact
Us."
ABOUT THE PROXY CARD
--------------------------------------------------------------------------------
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
SHAREHOLDERS OF VAN KAMPEN TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS:
APPROVAL OF REORGANIZATION - mark "For," "Against" or "Abstain."
COMMON SHAREHOLDERS OF VAN KAMPEN TRUST FOR INVESTMENT GRADE MUNICIPALS:
APPROVAL OF ISSUANCE OF COMMON SHARES - mark "For," "Against" or "Abstain."
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
VAN KAMPEN XXXXX
JOINT SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
FOR AGAINST ABSTAIN
1. The proposal to [ ] [ ] [ ] 2. The proposal to approve the issuance of
approve the Common Shares.
Reorganization.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4.
To transact such other business as may
properly come before the Meeting.
Please be sure to sign and date this Proxy, Date
Shareholder sign here Co-owner sign here
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN TRUST FOR INVESTMENT GRADE
FLORIDA MUNICIPALS
AND
VAN KAMPEN TRUST FOR INVESTMENT GRADE
MUNICIPALS
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 18, 2007
Notice is hereby given that a joint special meeting of shareholders (the
"Special Meeting") of Van Kampen Trust for Investment Grade Florida Municipals
(the "Target Fund") and Van Kampen Trust for Investment Grade Municipals (the
"Acquiring Fund") will be held at the offices of Van Kampen Investments Inc., 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, on May 18, 2007 at 10:00
a.m. for the following purposes:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Acquiring Fund, the termination
of the Target Fund's registration under the Investment Company Act of
1940, as amended, and the dissolution of the Target Fund under applicable
state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on March 23, 2007 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF EACH FUND REQUESTS THAT YOU VOTE YOUR SHARES BY
INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND
SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS
ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED
STATES, OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE
INTERNET.
THE BOARD OF TRUSTEES OF THE TARGET FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
- FOR THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF TRUSTEES OF THE ACQUIRING FUND RECOMMENDS THAT YOU CAST YOUR
VOTE:
- FOR THE ISSUANCE OF ADDITIONAL COMMON SHARES OF THE ACQUIRING FUND IN
CONNECTION WITH THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT
PROXY STATEMENT/PROSPECTUS.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD PROMPTLY OR RECORD YOUR VOTING INSTRUCTIONS BY
TELEPHONE OR VIA THE INTERNET.
For the Board of Trustees,
Lou Anne McInnis
Assistant Secretary
Van Kampen Trust for Investment Grade
Florida Municipals
Van Kampen Trust for Investment Grade
Municipals
March 27, 2007
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD OR BY RECORDING YOUR VOTING INSTRUCTIONS
BY TELEPHONE OR VIA THE INTERNET
NO MATTER HOW MANY SHARES YOU OWN.
JOINT PROXY STATEMENT/PROSPECTUS
VAN KAMPEN TRUST FOR INVESTMENT GRADE
FLORIDA MUNICIPALS
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
MAY 18, 2007
This Joint Proxy Statement/Prospectus is furnished to you as a shareholder of
Van Kampen Trust for Investment Grade Florida Municipals (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 May 18, 2007 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 April 3, 2007.
The purposes of the Special Meeting are:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and the Acquiring Fund, the
termination of the Target Fund's registration under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the dissolution of
the Target Fund under applicable state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Reorganization Agreement that you are being asked to consider involves a
transaction that will be referred to in this Joint Proxy Statement/Prospectus as
the "Reorganization." The Reorganization seeks to combine two similar funds to
achieve certain economies of scale and other operational efficiencies, and the
Target Fund shareholders will benefit from increased diversification. Each Fund
pursues the same investment objective to seek to provide shareholders with a
high level of current income exempt from federal income taxes, consistent with
preservation of capital. The Acquiring Fund invests substantially all of its
total assets in municipal securities rated investment grade at the time of
investment. The Target Fund invests substantially all of its total assets in
Florida municipal securities rated investment grade at the time of investment.
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 auction preferred shares of the Target Fund
("Target Fund APS") (the Target Fund APS and the Acquiring Fund APS are
sometimes referred to herein collectively as "Preferred Shares" or as "APS"),
and will then terminate its registration under the 1940 Act, and dissolve under
applicable state law. The aggregate net asset value of Acquiring Fund Common
Shares received in the Reorganization will equal the aggregate net asset value
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 APS held immediately prior to the
Reorganization. The Acquiring Fund will continue to operate after the
Reorganization as a registered closed-end investment company with the investment
objective and policies described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganization, common shareholders of the Acquiring
Fund are being asked to approve the issuance of additional Acquiring Fund Common
Shares.
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.
2
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 March 27, 2007, 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 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 100 F Street, N.E., 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) 551-8090. 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, D.C. 20549.
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 "VTF." Reports, proxy statements and other information
concerning the Funds may be inspected at the offices of the NYSE,
3
20 Broad Street, New York, New York 10005 or the officers of the CHX, 440 South
LaSalle Street, Chicago, Illinois, 60605.
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.
---------------------
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 March 27, 2007.
4
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........................................ 16
Credit Risk............................................... 16
Income Risk............................................... 17
Nonpayment Risk........................................... 17
Call Risk................................................. 17
Municipal Securities Risk................................. 17
Florida Municipal Securities Risk......................... 17
Risks of Using Strategic Transactions..................... 18
Manager Risk.............................................. 18
Market Discount Risk...................................... 18
Leverage Risk............................................. 19
Anti-Takeover Provisions.................................. 20
Special Risks Related to Preferred Shares................. 20
COMPARISON OF THE FUNDS..................................... 21
Investment Objective and Policies......................... 21
Other Investment Practices and Policies................... 27
Investment Restrictions................................... 34
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............................................. 48
Certain Provisions of the Declaration of Trust............ 49
Conversion to Open-End Funds.............................. 50
Voting Rights............................................. 51
Financial Highlights...................................... 52
INFORMATION ABOUT THE REORGANIZATION........................ 54
General................................................... 54
Terms of the Reorganization Agreement..................... 56
5
PAGE
----
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 58
Shareholder Approval...................................... 60
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON
SHARES.................................................... 61
Shareholder Approval...................................... 61
OTHER INFORMATION........................................... 62
Voting Information and Requirements....................... 62
Shareholder Information................................... 64
Section 16(a) Beneficial Ownership Reporting Compliance... 64
Shareholder Proposals..................................... 64
Solicitation of Proxies................................... 65
Legal Matters............................................. 65
Other Matters to Come Before the Meeting.................. 65
EXHIBIT I: DESCRIPTION OF SECURITIES RATINGS................ I-1
6
------------------------------------------------------------------------------
SUMMARY
------------------------------------------------------------------------------
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy
Statement/Prospectus and in the Reorganization Statement of Additional
Information. Shareholders should read the entire Joint Proxy
Statement/Prospectus carefully.
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
THE PROPOSED REORGANIZATION. The Board of Trustees of each Fund, including the
trustees who are not "interested persons," as defined in the 1940 Act, of each
Fund, has unanimously approved the Reorganization Agreement. If the shareholders
of the Target Fund approve the Reorganization Agreement and the shareholders of
the Acquiring Fund approve the issuance of Acquiring Fund Common Shares (see
"Proposal 2: Issuance of Additional Acquiring Fund Common Shares"), Acquiring
Fund Common Shares and Acquiring Fund APS will be issued to holders of Target
Fund Common Shares and Target Fund APS, respectively, in exchange for
substantially all of the assets of the Target Fund and the assumption of
substantially all of the liabilities of the Target Fund. The Target Fund will
then terminate its registration under the 1940 Act and 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 APS held immediately prior to the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION. The Target Fund seeks
to offer its shareholders the opportunity to own securities exempt from Florida
intangible personal property taxes. As such, the Target Fund invests
substantially all of its total assets in Florida municipal securities, which are
exempt from such tax; however, effective January 1, 2007, the State of Florida
repealed the intangible personal property tax, thereby eliminating the
Florida-specific tax benefit to Florida taxpayers of investing in the Fund.
Thus, the Board of Trustees of the Funds has determined that the Reorganization
of the Target Fund into the similar Acquiring Fund would benefit common
shareholders. The Reorganization seeks to combine two similar Funds to achieve
certain economies of scale and other operational efficiencies, and the Target
Fund shareholders will benefit from greater diversification.
Each Fund is registered as a diversified, closed-end management investment
company under the 1940 Act. Each Fund invests primarily in investment grade
municipal securities. The investment objective of each Fund is to seek to
provide shareholders with a high level of current income exempt from federal
income taxes,
7
consistent with preservation of capital. The Target Fund also seeks to offer its
shareholders the opportunity to own securities exempt from Florida intangible
personal property taxes. The Target Fund intends to achieve its investment
objective primarily by investing in a portfolio of Florida municipal securities
which the Target Fund's investment adviser believes does not involve undue risk
to income or principal. Under normal market conditions, the Target Fund invests
substantially all of its total assets in Florida municipal securities rated
investment grade at the time of investment, but may invest up to 20% of its
total assets in non-Florida securities, securities below investment grade (but
not lower than B by Standard and Poor's ("S&P"), Moody's Investors Services,
Inc. ("Moody's") or Fitch Ratings, Ltd. ("Fitch")) and/or in unrated securities
(including securities deemed by the Funds' investment adviser to be investment
grade or lower, but not lower than B). Securities rated below investment grade
are commonly referred to as "junk bonds." The Acquiring Fund seeks to achieve
its investment objective primarily by investing in a diversified portfolio of
municipal securities which the Acquiring Fund's investment adviser believes does
not involve undue risk to income or principal. Under normal market conditions,
the Acquiring Fund invests substantially all of its total assets in municipal
securities rated investment grade at the time of investment, but may invest up
to 20% of its total assets in securities below investment grade (but not lower
than B by S&P, Moody's or Fitch) and/or in unrated securities (including
securities deemed by the Funds' investment adviser to be investment grade or
lower, but not lower than B). The Acquiring Fund generally will not invest more
than 25% of its assets in issuers located in the same state. Each Fund may
invest without limit in municipal securities subject to the alternative minimum
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. In addition, share-
8
holders of the Target Fund are expected to benefit from increased
diversification.
The table below illustrates the anticipated reduction in operating expenses
experienced by holders of common shares of the Target Fund and the Acquiring
Fund that are 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, 2006, (ii) the fees,
expenses and distributions to preferred shareholders paid by the Acquiring Fund
for the 12-month period ended October 31, 2006 and (iii) the pro forma fees,
expenses and distributions to preferred shareholders for the Acquiring Fund for
the 12-month period ended October 31, 2006, assuming the Reorganization had been
completed at the beginning of such period. As shown below, the Reorganization is
expected to result in decreased total annual expenses for shareholders of each
Fund (although such savings will not be immediately realized (see footnote (c)
to the table)).
FEE, EXPENSE AND DISTRIBUTIONS ON PREFERRED SHARES AND TABLE FOR COMMON
SHAREHOLDERS OF THE FUNDS AS OF OCTOBER 31, 2006
ACTUAL
----------------------- PRO FORMA
VAN KAMPEN ----------
TRUST FOR VAN KAMPEN VAN KAMPEN
INVESTMENT TRUST FOR TRUST FOR
GRADE INVESTMENT INVESTMENT
FLORIDA GRADE GRADE
MUNICIPALS MUNICIPALS MUNICIPALS
---------- ---------- ----------
Common Shareholder Transaction Expenses(a):
Maximum Sales Load (as a percentage of
offering price(b).................... None None None
Dividend Reinvestment Plan Fees........ None None None
Annual Expenses (as a percentage of net
assets attributable to common shares):
Investment Advisory Fees(c)............ 0.85% 0.87% 0.87%
Other Expenses......................... 0.42% 0.41% 0.39%
------ ------ ------
Total Annual Expenses(c)............... 1.27% 1.28% 1.26%
------ ------ ------
Distributions:
Distributions on Preferred Shares(d)... 1.88% 2.10% 2.05%
------ ------ ------
Total Annual Expenses and Distributions
on Preferred Shares.................. 3.15% 3.38% 3.31%
------ ------ ------
---------------
(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 broker-
9
age 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 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, 2006, 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, 2006. The Acquiring Fund will benefit more from
projected annual expense savings of the Reorganization than the Target 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. If the projected declines in total annual operating
expenses as a result of the Reorganization are not realized, the Funds will
incur the reduction to net asset value reflecting the Reorganization
expenses, without the corresponding savings. The net asset value per common
share of each Fund will be reduced at the closing date of the 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 for the Acquiring
Fund than the Target Fund. In the event the Reorganization is not completed,
the Adviser will bear the costs
10
associated with 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 PER COMMON
FUND SHARES ONLY) SAVINGS DOLLARS/PERCENTAGE (IN YEARS) SHARE
---- ------------ --------- ------------------ ---------- ----------------
Target Fund $200,562,076 $ 20,058 $ 40,115/7% 2.00 < $0.01
Acquiring Fund $743,366,993 $148,669 $ 297,338/54% 2.00 $0.01
The Adviser $ 210,547/39%
Total Expenses $548,000/100%
---------------
(d)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. As of October 31, 2006, VTF
had an outstanding preferred share leverage ratio (i.e., the liquidation
preference of preferred shares relative to total assets of such Fund) of
approximately 35% and VGM had an outstanding preferred share leverage ratio
of approximately 37%. Assuming the Reorganization was completed as of October
31, 2006, the combined fund on a pro-forma basis would have had a preferred
share leverage ratio of approximately 36%. Because the line "Distributions on
Preferred Shares" shows preferred share distributions as a percentage of net
assets attributable to common shares, the amount shown is affected not only
by the applicable preferred share dividend rates and capital gain
distribution rates but also by the applicable preferred share leverage ratio
of each Fund. Funds with higher preferred share leverage ratios, all other
things equal, would have higher "Distributions on Preferred Shares" than
funds with lower leverage ratios; and, if the leverage is producing its
intended results (i.e., providing more income for common shareholders than
its costs), funds with higher preferred share leverage ratios, all other
things equal, would have higher distributions on common shares than funds
with lower leverage ratios. Thus, the increase in "Distributions on Preferred
Shares" for VTF from the actual to the pro forma column is due in part to
changes in the expected leverage ratio of the combined fund. The proposed
Reorganization is intended to combine the Funds with their existing capital
structures, which will result in a weighted combined leverage ratio that each
Fund's Board and management believe is within an appropriate range under
current market conditions; the combined fund may consider changes to its
leverage ratio based on varying market conditions in the future.
11
EXAMPLE. The following example is intended to help you compare the costs of
investing in the Acquiring Fund pro forma after the Reorganization with the
costs of investing in the Target Fund and the Acquiring Fund without the
Reorganization. An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for each Fund (as a
percentage of net assets attributable to common shares) set forth in the table
above and (2) a 5% annual return throughout the period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Van Kampen Trust for Investment Grade
Florida Municipals................... $ 13 $ 40 $ 70 $153
Van Kampen Trust for Investment Grade
Municipals........................... $ 13 $ 41 $ 70 $155
Pro Forma--Van Kampen Trust for
Investment Grade Municipals.......... $ 13 $ 40 $ 69 $152
The example set forth above assumes Common Shares of each Fund were purchased
in the initial offerings and the reinvestment of all dividends and distributions
and uses a 5% annual rate of return as mandated by SEC regulations. The example
should not be considered a representation of past or future expenses or annual
rates of return. Actual expenses or annual rates of return may be more or less
than those assumed for purposes of the example.
FURTHER INFORMATION REGARDING THE REORGANIZATION. The Target Fund Board has
determined that the Reorganization is in the best interests of holders of Target
Fund Common Shares and that the interests of such shareholders will not be
diluted as a result of the Reorganization. Similarly, the Board of Trustees of
the Acquiring Fund has determined that the Reorganization is in the best
interests of holders of Acquiring Fund Common Shares and that the interests of
such shareholders will not be diluted as a result of the Reorganization. It is
not anticipated that the Reorganization will directly benefit the holders of
Preferred Shares of either Fund; however, 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
12
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 May 18, 2007.
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 50% of the outstanding Target Fund APS, each
voting separately as a class. This means that both classes of shares, Target
Fund Common Shares and APS, must approve the Reorganization Agreement separately
in order for the Reorganization to occur. 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 1, 2007, but it may be at a different time as
described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization 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 May 18, 2007. Shareholder approval of the issuance of
additional Acquiring Fund Common Shares requires the affirmative vote of a
majority of the votes cast on the proposal, provided that the total votes cast
on the proposal represents more than 50% in interest of all securities entitled
to vote on the proposal. Subject to the requisite approval of the shareholders
of each Fund with regard to the Reorganization, it is expected that the Closing
Date will be after
13
the close of business on or about June 1, 2007, 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.
------------------------------------------------------------------------------
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
------------------------------------------------------------------------------
The Reorganization seeks to combine two similar Funds to achieve certain
economies of scale and other operational efficiencies and the Target Fund
shareholders will benefit from greater diversification. The Target Fund seeks to
offer its shareholders the opportunity to own securities exempt from Florida
intangible personal property taxes. As such, the Target Fund invests
substantially all of its total assets in Florida municipal securities, which are
exempt from such tax; however, effective January 1, 2007, the State of Florida
repealed the intangible personal property tax, thereby eliminating the
Florida-specific tax benefit to Florida taxpayers of investing in the Fund.
Thus, the Board of Trustees of the Funds has determined that the Reorganization
of the Target Fund into the similar Acquiring Fund would benefit common
shareholders.
Each Fund is registered as a diversified, closed-end management investment
company under the 1940 Act. Each Fund pursues the same investment objective to
seek to provide shareholders with a high level of current income exempt from
federal income taxes, consistent with preservation of capital. The Target Fund
also seeks to offer its shareholders the opportunity to own securities exempt
from Florida intangible personal property taxes. The Target Fund intends to
achieve its investment objective primarily by investing in a portfolio of
Florida municipal securities which the Target Fund's investment adviser believes
does not involve undue risk to income or principal. Under normal market
conditions, the Target Fund invests substantially all of its total assets in
Florida municipal securities rated investment grade at the time of investment.
The Acquiring Fund seeks to achieve its investment objective primarily by
investing in a diversified portfolio of municipal securities which the Acquiring
Fund's investment adviser believes does not involve undue risk to income or
principal. Under normal market conditions, the Acquiring Fund invests
substantially all of its total assets in municipal securities rated investment
grade at the time of investment. The Acquiring Fund generally will not invest
more than 25% of its assets in issuers located in the same state. 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
14
holders of Target Fund Common Shares and Acquiring Fund APS to holders of Target
Fund APS, and will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The aggregate net asset value of Acquiring
Fund Common Shares received in the Reorganization will equal the aggregate net
asset value on the Target Fund Common Shares held immediately prior to the
Reorganization less the costs of the Reorganization (though common shareholders
may receive cash for fractional shares). The aggregate liquidation preference of
Acquiring Fund APS received in the Reorganization will equal the aggregate
liquidation preference of Target Fund APS held immediately prior to the
Reorganization. The Acquiring Fund will continue to operate as a registered
closed-end investment company with the investment 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 Target Fund's investment adviser, that common shareholders of
the Target Fund will experience a reduced annual operating expense ratio as a
result of the Reorganization. The combined fund resulting from the
Reorganizations will have a larger asset base than either Fund has currently;
certain fixed administrative costs, such as costs of printing shareholder
reports and proxy statements, legal expenses, audit fees, mailing costs and
other expenses, will be spread across this larger asset base, thereby lowering
the expense ratio for common shareholders of the combined fund. In addition,
shareholders of the Target Fund are expected to benefit from improved
diversification.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests substantially all
of its total assets in municipal securities rated investment grade at the time
of investment, any risks inherent in such investments are equally applicable to
both Funds and will apply to the combined fund after the Reorganization. As the
Target Fund invests primarily in Florida municipal securities, it is subject to
additional risks applicable to such investments. See "-- Florida Municipal
Securities Risk." 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
15
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. Securities rated BBB by S&P or Baa by Moody's are in the
lowest of the four investment grades and are considered by the rating agencies
to be medium-grade obligations which possess speculative characteristics so that
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
in the case of higher-rated securities. Each Fund may also invest up to 20% of
its total assets in municipal securities that are rated, at the time of
investment, BB/Ba or B by S&P, Moody's or Fitch or that are unrated, but
determined to be of comparable quality by its investment adviser. Securities
rated below investment grade are commonly referred to as "junk bonds." 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. The credit quality of below-investment grade
securities is considered speculative by recognized rating agencies with respect
to the issuer's continuing ability to pay interest and principal. Lower-grade
securities may have less liquidity and a higher incidence of default than
higher-grade securities. The Funds may incur higher expenditures to protect its
interests in such securities. The credit risks and market prices of lower-grade
securities generally are more sensitive to negative issuer developments, such as
reduced revenues or increased expenditures, or adverse economic conditions, such
as a recession, than are higher-grade securities.
16
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 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 an unlimited portion of its 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.
FLORIDA MUNICIPAL SECURITIES RISK
Since the Target Fund, under normal market conditions, invests substantially
all of its total assets in Florida municipal securities, it is more exposed to
risks affecting issuers of Florida municipal securities than the Acquiring Fund.
Many different social, environmental and economic factors may affect the
financial condition of Florida and its political subdivisions. The yields of
Florida municipal securities may
17
move differently and adversely compared to the yields of overall debt securities
markets. The Target Fund had faced the additional risk of investing in Florida
Municipal securities that changes in applicable tax laws or tax treatments
reduce or eliminate the certain Florida-specific tax benefits. On January 1,
2007, the State of Florida repealed the intangible personal property tax,
thereby eliminating the Florida-specific tax benefits to Florida taxpayers of
investing in the Fund.
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 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
18
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 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
19
both the costs of issuing Preferred Shares and any decline in the value of a
Fund's investments (including investments purchased with the proceeds from any
Preferred Shares offering) will be borne entirely by holders of such Fund's
Common Shares, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of Common Shares than if a Fund
were not leveraged. If a Fund is liquidated, holders of that Fund's Preferred
Shares will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Shares of such Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its Common Shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required Common Share dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either its
Common Shares or its Preferred Shares, such Fund may have to liquidate certain
of its investments. In addition, each Fund has the authority to redeem its
Preferred Shares for any reason and may be required to redeem all or part of its
Preferred Shares in the following circumstances:
- if the asset coverage for the Preferred Shares declines below 200%, either
as a result of a decline in the value of a Fund's portfolio investments or
as a result of the repurchase of Common Shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the Preferred Shares.
Redemption of the Preferred Shares or insufficient investment income to make
dividend payments, may reduce the net asset value of a Fund's Common Shares and
require a Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such provisions could limit the ability of common
shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of either Fund.
SPECIAL RISKS RELATED TO PREFERRED SHARES
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
20
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. Broker-dealers may maintain a secondary trading market
in the Preferred Shares 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 Preferred Shares with a
liquid trading market. It may not be possible to sell Preferred Shares 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 Preferred Shares. Preferred Shares may only be transferred outside
of auctions to or through broker-dealers or other persons as a Fund permits.
RATINGS AND ASSET COVERAGE RISKS. Although the Preferred Shares of each Fund
have been rated "Aaa" by Moody's and "AAA" by S&P, such ratings do not eliminate
or necessarily mitigate the risks of investing in Preferred Shares. Moody's or
S&P could downgrade its rating of the Preferred Shares or withdraw its rating at
any time, which may make the Preferred Shares less liquid at an auction or in
the secondary market. If a Fund fails to satisfy its asset coverage ratios, it
will be required to redeem a sufficient number of Preferred Shares in order to
return to compliance with the asset coverage ratios. A Fund may voluntarily
redeem preferred shares under certain circumstances in order to meet asset
coverage tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The Funds pursue the same investment objective and have similar investment
policies. Each Fund's investment objective is to seek to provide shareholders
with a high level of current income exempt from federal income taxes, consistent
with preservation of capital. The Target Fund also seeks to offer its
shareholders the opportunity to own securities exempt from Florida intangible
personal property taxes.
21
Each Fund seeks to achieve its investment objective primarily by investing in
a portfolio of municipal securities which the its investment adviser believes
does not involve undue risk to income or principal. Under normal market
conditions, each Fund invests at least 80% of its total assets in municipal
securities. The foregoing policy is a fundamental policy of each Fund and cannot
be changed without shareholder approval. In normal market conditions, the
Acquiring Fund invests substantially all of its total assets in municipal
securities rated investment grade at the time of investment. In normal market
conditions, the Target Fund invests substantially all of its total assets in
Florida municipal securities rated investment grade at the time of investment.
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. Up
to 20% of each Fund's total assets may be invested in securities below
investment grade (but not lower than B by S&P, Moody's or Fitch) and/or in
unrated municipal securities (including securities deemed by its investment
adviser to be investment grade or lower, but not lower than B). Securities rated
below investment grade are commonly referred to as "junk bonds." Each Fund may
be more dependent upon the investment adviser's investment analysis of such
unrated municipal securities than is the case with respect to rated municipal
securities.
The foregoing policies with respect to credit quality of portfolio investments
apply only at the time of purchase of a security, and the Funds are not required
to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) downgrades its assessment
of the credit characteristics of a particular issuer or. In determining whether
a Fund will retain or sell such a security, the investment adviser may consider
such factors as the investment 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.
The most significant difference between the Funds is that the Target Fund
invests substantially all of its total assets in Florida municipal securities,
whereas the Acquiring Fund invests substantially all of its total assets in
municipal securities and generally will not invest more than 25% of its assets
in issuers located in the same state. As such, the Target Fund is more likely to
be affected by adverse political, economic or regulatory developments affecting
issuers of Florida municipal securities. If the Reorganization is consummated,
the Adviser does not intend to immediately dispose of Target Fund securities as
a result of the Reorganization, but expects to sell such securities in the
ordinary course of its business. Until such time the Acquiring Fund may have a
higher concentration of Florida municipal securities in its portfolio than
normal.
Each Fund may invest in municipal securities subject to the alternative
minimum tax provisions of federal tax law. Neither Fund has established any
limit on the percentage
22
of its respective 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 either Fund may be
taxable under the alternative minimum tax. The Funds may not be suitable
investments for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Funds.
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. Florida
municipal securities are municipal securities the interest on which, in the
opinion of bond counsel or other counsel to the issuer of such securities is, at
the time of issuance, exempt from Florida intangible personal property taxes;
however, as of January 1, 2007, the State of Florida repealed the intangible
personal property tax, thereby eliminating the Florida-specific tax benefit to
Florida investors of investing in Florida municipal securities.
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
23
lease obligations may include "nonappropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Custodial receipts are underwritten by securities dealers or banks and evidence
ownership of future interest payments, principal payments or both on certain
municipal securities. Participation certificates are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Municipal securities may not
be backed by the faith, credit and taxing power of the issuer. The Funds may
also invest in 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 also invest in inverse floating rate investments. Inverse
floating rate investments are variable rate debt instruments that pay interest
at rates that move in the opposite direction of prevailing interest rates.
Inverse floating rate investments tend to underperform the market for fixed rate
bonds in a rising interest rate environment, but tend to outperform the market
for fixed rate bonds when interest rates decline or remain relatively stable.
Inverse floating rate investments have varying degrees of liquidity. Inverse
floating rate investments in which each Fund may invest may include derivative
instruments, such as residual interest bonds ("RIBs") or tender option bonds
("TOBs"). Such instruments are typically created by a special purpose trusts
that hold long-term fixed rate bonds and sells two classes of beneficial
interests: short-term floating rate interests, which are sold
24
to third party investors, and the inverse floating residual interests, which are
purchased by a Fund. The short-term floating rate interests have first priority
on the cash flow from the bond held by the special purpose trust and a Fund is
paid the residual cash flow from the bond held by the special purpose trust.
Each Fund generally invests in inverse floating rate investments that include
embedded leverage, thus exposing the Fund to greater risks and increased costs.
The market value of a "leveraged" inverse floating rate investment generally
will fluctuate in response to changes in market rates of interest to a greater
extent than the value of an unleveraged inverse floating rate investment. The
extent of increases and decreases in the value of inverse floating rate
investments generally will be larger than changes in an equal principal amount
of a fixed rate securities having similar credit quality, redemption provisions
and maturity, which may cause each Fund's net asset value to be more volatile
than if it had not invested in inverse floating rate investments. Consistent
with applicable SEC guidance, to the extent that a Fund has ongoing obligations
to any party in connection with investments in inverse floating rate
investments, any such obligations will not be senior securities for purposes of
the 1940 Act or borrowings for purposes of a Fund's limitations on borrowings
provided that the Fund segregates an amount of cash and/or liquid securities
equal in value to its obligations in respect of such inverse floating rate
investments. Each Fund will not invest more than 15% of its net assets in
inverse floating rate investments.
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. To the extent that a Fund invests a
significant portion of its assets in a limited number of segments of the
municipal securities market, the Fund will be more susceptible to economic,
political, regulatory and factors influencing such segments.
Under normal market conditions, the Target Fund invests substantially all of
its total assets in Florida municipal securities. Therefore it is more
susceptible to factors adversely affecting issuers of Florida municipal
securities than the Acquiring Fund. The Acquiring Fund does not have a policy
limiting its investments in municipal securities whose issuers are located in
the same state. However, it is not the present intention of the Acquiring Fund
to invest more than 25% of the value of its total assets in issuers located in
the same state. If the Acquiring 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.
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
25
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.
There is no limitation on the percentage of either 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 property or services than those
covered by the lease obligation. The Funds invest in lease obligations which
contain non-appropriation clauses only if such obligations are rated investment
grade at the time of investment or if the Adviser believes, at the time of
investment, such obligations have credit characteristics equivalent to, and to
be of comparable quality as, securities that are rated investment grade.
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
26
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, this taxable income will be distributed on a pro rata basis among the
Preferred Shares and the Common Shares. It is impossible to predict whether, or
for how long, a Fund will use any such defensive strategies. Further, the yields
on such securities may approach or be less than the then current dividend rate
payable to 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 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
27
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.
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.
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.
28
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 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").
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
29
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 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.
30
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 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
31
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 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
32
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 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.
Each 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
either Fund is allocated to the Fund Common Shares and the 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.
33
These transactions are subject to market fluctuation; the value of the municipal
securities at delivery may be more or less than their purchase price, and yields
generally available on municipal securities when delivery occurs may be higher
than yields on the municipal securities obtained pursuant to such transactions.
Because the Fund engaging in such transactions relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in 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. 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.
34
2. Issue senior securities, as defined in the 1940 Act, other than preferred
shares of beneficial interest, except to the extent such issuance might be
involved with borrowings described under subparagraph (3) below or with
respect to hedging and risk management transactions or the writing of
options within limits described in the Fund's Prospectus.
3. Borrow money, except for temporary or emergency purposes from banks or for
repurchase of the Fund's shares, and then only in an amount not exceeding
one-third of the Fund's total assets, including the amount borrowed. The
Fund will not mortgage, pledge or hypothecate any assets except in
connection with a borrowing. The Fund will not purchase portfolio
securities during any period that such 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.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of or the Fund's interest with respect to the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial 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.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except as described in the Fund's prospectus.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to municipal securities would be deemed to
constitute such control or participation, and 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.
35
9. 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.
10. 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.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interests in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
municipal securities (in which case the Fund may liquidate real estate
acquired as a result of a default on a mortgage), and except to the extent
that financial futures and related options the Fund may invest in are
considered to be commodities or commodities contracts.
12. With respect to 75% of its total assets, purchase any securities (other
than tax-exempt obligations guaranteed by the United States Government or
by its agencies or instrumentalities), if as a result more than 5% of the
Fund's total assets would 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 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.
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 services more than three million retail
36
investor accounts, has extensive capabilities for managing institutional
portfolios and has more than $116 billion under management or supervision as of
December 31, 2006. 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. 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.
The Adviser furnishes offices, necessary facilities and equipment and provides
administrative services to both the Target Fund and the Acquiring Fund, in
addition to providing investment advisory services to both the Target Fund and
the Acquiring Fund. A discussion regarding the basis for the Board of Trustees'
approval of the investment advisory agreement between the (i) Acquiring Fund and
the Adviser is available in the Acquiring Fund's Annual Report for the period
ended October 31, 2006 and (ii) the Target Fund and the Adviser is available in
the Target Fund's Annual Report for the period ended October 31, 2006.
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 members of the
Adviser's Municipal Fixed Income team. The Municipal Fixed Income team is made
up of established investment professionals. Current members of the team jointly
and primarily responsible for the day-to-day management of each Fund's portfolio
are Thomas Byron and Robert Wimmel, each a Vice President of the Adviser, and
John Reynoldson, an Executive Director of the Adviser.
Thomas Byron has been associated with the Adviser in an investment management
capacity since 1981 and joined the team that manages each Fund in 1997. Robert
Wimmel has been associated with the Adviser in an investment management capacity
since 1996 and joined the team that manages each Fund in 2001. John Reynoldson
has been associated with the Adviser in an investment management capacity since
1987 and joined the team that manages each Fund in 2001.
37
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 and certain affiliates of
the Adviser are named as defendants in a derivative action 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
derivative action was coordinated with a direct action alleging related
violations of defendants' statutory disclosure obligations and fiduciary duties
with respect to the payments described above. In addition, this derivative
action was stayed by agreement of the parties pending rulings on the motions to
dismiss the direct action and the motion to dismiss another derivative action,
brought by the same plaintiff that brought this derivative action, alleging
market timing and late trading in the Van Kampen funds. In April 2006, the court
granted defendants' motion to dismiss the direct action. In June 2006, the court
granted defendants' motion to dismiss the market timing action. Accordingly, the
stay on this action was lifted. Plaintiff and defendants have agreed, subject to
court approval, that this action should be dismissed in light of the rulings
dismissing the two cases discussed above. The court has approved a notice to
shareholders regarding the dismissal.
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
38
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. On October 16, 2006, pursuant to an order of the United States Supreme
Court finding a lack of appellate jurisdiction, the federal court of appeals
vacated a prior order of the district court dismissing the case with prejudice,
and remanded the case to the Illinois state court where it had been filed. In
November 2006, defendants again removed the case to the federal district court
based on intervening authority. In December 2006, plaintiffs moved to remand the
case back to Illinois state court. While defendants believe they have
meritorious defenses, the ultimate outcome of this matter is not presently
determinable at this stage of the litigation.
OTHER SERVICE PROVIDERS
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND PAYING AGENT. State
Street Bank and Trust Company is the custodian for each Fund. Its principal
business address is One Lincoln Street, Boston, Massachusetts, 02111.
Computershare Trust Company, N.A., c/o Computershare Investor Services, P.O. Box
43011, Providence, Rhode Island, 02940-3011, is the transfer agent, dividend
disbursing agent and registrar for the Common Shares of each Fund. Deutsche Bank
Trust Company Americas ("Deutsche Bank"), 60 Wall St., 27th Floor, New York, New
York 10005, is the auction agent and dividend paying agent for each Fund's 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, 2006, and the pro forma
capitalization of the combined fund as if the Reorganization had occurred on
that date.
CAPITALIZATION AS OF OCTOBER 31, 2006 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
ACTUAL PRO FORMA
-------------------------- ----------
VAN KAMPEN VAN KAMPEN VAN KAMPEN
TRUST FOR TRUST FOR TRUST FOR
INVESTMENT INVESTMENT INVESTMENT
GRADE FLORIDA GRADE GRADE
MUNICIPALS MUNICIPALS MUNICIPALS
------------- ---------- ----------
NET ASSETS CONSIST OF:
Common Shares ($.01 par value)*.... $ 117 $ 438 $ 556
Paid in surplus.................... 181,662 664,624 846,044
Net unrealized appreciation........ 19,011 72,245 91,256
Accumulated undistributed net
investment income................ 249 2,330 2,579
Accumulated net realized gain
(loss)........................... (477) 3,730 3,253
NET ASSETS APPLICABLE TO
COMMON SHARES.................... 200,562 743,367 943,688**
PREFERRED SHARES ($.01 par value,
with liquidation preference of
$25,000)*........................ 106,000 430,000 536,000
NET ASSETS INCLUDING PREFERRED
SHARES........................... 306,562 1,173,367 1,479,688
---------------
* Based on the number of outstanding shares listed in "Outstanding Securities
of the Funds" table below.
** Reflects a non-recurring cost associated with the Reorganization of
approximately $548,000, with $40,115 to be borne by Target Fund common
shareholders, $297,338 to be borne by Acquiring Fund common shareholders and
$210,547 to be borne by the Adviser, assuming the Reorganization is approved
and completed.
40
OUTSTANDING SECURITIES OF THE FUNDS AS OF OCTOBER 31, 2006
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
AMOUNT BY FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ---------- --------------- -------------------
Van Kampen Trust for
Investment Grade Florida
Municipals
Common Shares............. Unlimited 0 11,711,732
Preferred Shares.......... 100,000,000 0 4,240
Van Kampen Trust for
Investment Grade
Municipals
Common Shares............. Unlimited 0 43,799,086
Preferred Shares.......... 100,000,000 0 17,200
ADDITIONAL INFORMATION ABOUT COMMON SHARES OF THE FUNDS
GENERAL. Common shareholders of a Fund are entitled to share equally in
dividends declared by the Fund's Board of Trustees payable to holders of the
common shares and in the net assets of the Fund available for distribution to
holders of the common shares after payment of the preferential amounts payable
to preferred shareholders. Common shareholders do not have preemptive or
conversion rights and a Fund's common shares are not redeemable. The outstanding
common shares of each Fund are fully paid and nonassessable (except as described
under "Governing Law" below). So long as any preferred shares of a Fund are
outstanding, holders of the Fund's common shares will not be entitled to receive
any dividends or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding preferred shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to such preferred
shares would be at least 200% after giving effect to such distributions.
PURCHASE AND SALE. Purchase and sale procedures for the Common Shares of each
of the Funds are identical. Investors typically purchase and sell Common Shares
of the Funds through a registered broker-dealer on the NYSE or CHX, thereby
incurring a brokerage commission set by the broker-dealer. Alternatively,
investors may purchase or sell Common Shares of the Funds through privately
negotiated transactions with existing shareholders.
41
COMMON SHARE PRICE DATA The following table sets forth the high and low sales
prices for Common Shares of each Fund on the NYSE for each full quarterly period
within each Fund's two most recent fiscal years and for the first fiscal quarter
of the current fiscal year of each Fund, along with the net asset value and
discount or premium to net asset value for each quotation.
TARGET FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
January 31, 2007...... $15.50 $17.30 (10.40)% $14.77 $16.95 (12.86)%
October 31, 2006...... $14.95 $17.13 (12.73) $14.32 $16.71 (14.30)
July 31, 2006......... $14.89 $16.86 (11.68) $14.04 $16.48 (14.81)
April 30, 2006........ $15.27 $17.12 (10.81) $14.50 $16.70 (13.17)
January 31, 2006...... $14.89 $17.11 (12.97) $14.09 $16.77 (15.98)
October 31, 2005...... $15.32 $17.50 (12.46) $14.41 $16.89 (14.68)
July 31, 2005......... $15.34 $17.63 (12.99) $14.79 $17.24 (14.21)
April 30, 2005........ $15.52 $17.78 (12.71) $14.48 $16.83 (13.96)
January 31, 2005...... $15.67 $17.51 (10.51) $14.85 $16.92 (12.23)
ACQUIRING FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
January 31, 2007...... $15.67 $17.16 (8.68)% $14.84 $16.76 (11.46)%
October 31, 2006...... $15.05 $16.97 (11.31) $14.42 $16.52 (12.71)
July 31, 2006......... $14.81 $16.64 (11.00) $14.02 $16.23 (13.62)
April 30, 2006........ $14.91 $16.89 (11.72) $14.45 $16.44 (12.10)
January 31, 2006...... $14.97 $16.84 (11.10) $14.14 $16.49 (14.25)
October 31, 2005...... $15.20 $17.38 (12.54) $14.31 $16.79 (14.77)
July 31, 2005......... $15.17 $17.49 (13.26) $14.72 $17.13 (14.07)
April 30, 2005........ $15.40 $17.70 (12.99) $14.27 $16.81 (15.11)
January 31, 2005...... $15.40 $17.45 (11.75) $14.72 $16.93 (13.05)
As of March 23, 2007, (i) the net asset value per share for Target Fund Common
Shares was $17.04 and the market price per share was $15.76, representing a
discount to net asset value of 7.51%, and (ii) the net asset value per share for
Acquiring Fund Common Shares was $16.83 and the market price per share was
$15.70, representing a discount to net asset value of 6.71%.
Common Shares of the Target Fund have traded at both a discount and a premium
to net asset value since the Target Fund's inception. Common Shares of the
Acquiring Fund have historically traded at a discount to net asset value. In
order to reduce or eliminate a market value discount from net asset value, the
Board of Trustees of each Fund may, subject to the terms and conditions of its
preferred shares, authorize that Fund from time to time to repurchase the common
shares in the open market or to tender for the common shares at net asset value.
The Board of Trustees of each Fund, in consultation with the Adviser, will
review on a
42
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. Each Fund is required to allocate net capital gains and
other taxable income, if any, received by the Fund among its Common Shares and
Preferred Shares on a pro rata basis in the year for which such capital gains
and other income is realized.
Expenses of each Fund are accrued each day. Net realized capital gains, if
any, are expected to be distributed to shareholders at least once a year. While
there are any Preferred Shares of a Fund outstanding, such Fund may declare any
cash dividend or other distribution on its Common Shares, unless at the time of
such declaration, (1) all accrued Preferred Shares dividends have been paid and
(2) the value of the Fund's total assets (determined after deducting the amount
of such dividend or other distribution), less all liabilities and indebtedness
of the Fund, is at least 200% (as required by the 1940 Act) of the liquidation
value of the outstanding Preferred Shares (expected to equal the aggregate
original purchase price of the outstanding Preferred Shares plus any accrued and
unpaid dividends thereon, whether or not earned or declared on a cumulative
basis). In addition to the requirements of the 1940 Act, each Fund may be
required to comply with other asset coverage requirements as a condition of a
Fund obtaining a rating of its 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 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.
43
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. Computershare
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 43010,
Providence, Rhode Island 02940-3010. 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. Each Fund is permitted to issue preferred shares of beneficial
interest to the extent permitted by the 1940 Act. Both Target Fund APS and
Acquiring Fund APS are preferred shares of beneficial interest which entitle
their holders to receive dividends when, as and if declared by the Board of
Trustees of such Fund out of funds legally available therefor, at a rate per
annum that may vary for successive dividend periods. Both Funds' APS have a
liquidation preference of $25,000 per share. Neither Target Fund APS nor
Acquiring Fund APS are traded on a stock exchange or over-the-counter. Holders
of each Fund's APS do not have preemptive rights to purchase any shares of APS,
or any other preferred shares that might be issued. The value per share of a
Fund's Preferred Shares equals its liquidation preference plus accumulated but
unpaid dividends per share.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of preferred shares so long as no single series has priority
over another to the distribution of assets of the Fund or the payment of
dividends. The Target Fund currently has two series of APS outstanding, Series A
APS and Series B APS. Except as described in the Prospectus offering Target Fund
APS, the terms of each series of Target Fund APS are the same. The Acquiring
Fund currently has seven series of APS outstanding, Series A APS, Series B APS,
Series C APS, Series D APS, Series E APS, Series F APS and Series G APS. Except
as described in the Prospectus offering Acquiring Fund APS, the terms of each
series of Acquiring Fund APS are the same. If the Reorganization is approved
44
and completed, the combined fund will have nine series of APS. The Acquiring
Fund will issue Series H APS and Series I APS in exchange for Target Fund APS.
The aggregate liquidation preference of each series will equal the aggregate
liquidation preference of the existing shares that the respective series
replaces. The number of days in the regular dividend period for each series, the
number of shares in each series and the liquidation preference per share will be
similar to the existing preferred shares.
PURCHASE AND SALE. APS of the Acquiring Fund and APS of the Target Fund
generally are purchased and sold through auctions generally conducted every 28
days by Deutsche Bank, as the auction agent for the applicable Fund's APS (the
"Auction Agent") unless the applicable Fund elects to declare a special dividend
period. Unless otherwise permitted by the Funds, existing and potential holders
of each Fund's APS only may participate in auctions through broker-dealers who
have entered into agreements with the APS Auction Agent ("Broker-Dealers").
Broker-Dealers submit the orders of their respective customers who are existing
and potential holders of APS to the Auction Agent. On or prior to each auction
date for the APS (the business day next preceding the first day of each dividend
period), each holder may submit orders to buy, sell or hold APS to its
participating Broker-Dealer. Outside of these auctions, shares of APS may be
purchased or sold through Broker-Dealers for the APS in a secondary trading
market maintained by the Broker-Dealers. However, there can be no assurance that
a secondary market will develop or if it does develop, that it will provide
holders with a liquid trading market for the APS of either Fund.
DIVIDENDS AND DISTRIBUTIONS. The holders of the APS are entitled to receive,
when, as and if declared by the Board of Trustees of the Fund, out of funds
legally available therefore, cumulative cash dividends on their shares.
Dividends on a Fund's APS so declared and payable shall be paid in preference to
and in priority over any dividends so declared and payable on such Fund's Common
Shares.
Both Funds are required to allocate net capital gains and other taxable
income, if any, proportionately among Common Shares and APS. The amount of
taxable income allocated to the APS depends upon the amount of such income
realized by each Fund, but is generally not expected to be significant.
In normal circumstances, whenever a Fund intends to include any net capital
gains or other taxable income in any dividend on APS, such Fund will notify the
Auction Agent of the amount to be so included prior to the Auction establishing
the applicable rate for such dividend. The Auction Agent will in turn notify
each broker-dealer who will notify existing and potential holders of each Fund's
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 a Fund retroactively allocates any net
capital gains or other income taxable for federal income tax purposes to its APS
without having given advance
45
notice thereof, as described above, by reason of the fact that such allocation
is made as a result of (i) the realization of net capital gains or other income
taxable for federal income tax purposes, (ii) the redemption of all or a portion
of the Fund's outstanding APS or (iii) the liquidation of the Fund, the Fund
will make certain payments to holders of its APS to which such allocation was
made to substantially offset the tax effect thereof. In no other instances will
the relevant 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.
While the Funds normally utilize the auction procedures described above, each
Fund may utilize special dividend periods in certain circumstances to set the
dividend rate.
DIVIDEND RATES. The following table provides information about the dividend
rates for each Fund's Preferred Shares as of a recent auction.
AUCTION DATE PREFERRED SHARES RATE
------------ ---------------- ----
2/28/07 Target Fund APS--Series A 3.600
3/21/07 Target Fund APS--Series B 3.620
3/16/07 Acquiring Fund APS--Series A 3.650
2/23/07 Acquiring Fund APS--Series B 3.650
2/28/07 Acquiring Fund APS--Series C 3.650
3/6/07 Acquiring Fund APS--Series D 3.540
3/16/07 Acquiring Fund APS--Series E 3.750
2/23/07 Acquiring Fund APS--Series F 3.610
3/2/07 Acquiring Fund APS--Series G 3.500
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 APS 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
46
current requirements necessary for S&P and Moody's to issue the above-described
ratings for Preferred Shares, which ratings generally are relied upon by
institutional investors in purchasing such securities. The guidelines provide a
set of tests for portfolio composition and asset coverage that supplement (and
in some cases are more restrictive than) the applicable requirements under the
1940 Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for a Fund's Preferred Shares, at any time, may change or
withdraw any such rating. As set forth in the Certificate of Vote of Trustees
Establishing Preferred Shares of each Fund (each a "Certificate of Vote"), the
Board of Trustees of each Fund, without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating 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 APS 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. The liquidation preference per share of each Fund's 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
47
to no other payments except for any Additional Dividends. The liquidation
preference per share of each Fund's 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 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 January 21, 1992 and
commenced operations on March 27, 1992; 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.
48
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws. Each Fund is registered as a diversified, closed-end
management investment company under the 1940 Act.
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
Each Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving common shareholders of an opportunity to sell their
Common Shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. The Board of Trustees of each
Fund is divided into three classes, with the term of one class expiring at the
annual meeting of shareholders. At each annual meeting, 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).
49
The Board of Trustees of each Fund has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Massachusetts law or the 1940 Act, are in the best interest of
shareholders of each respective Fund generally. Reference should be made to the
Declaration of Trust of each Fund on file with the SEC for the full text of
these provisions.
The Declaration of Trust of each Fund further provides that no trustee,
officer, employee or agent of the Fund is liable to the Fund or to any
shareholder, nor is any trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or her own bad faith, willful misfeasance, gross negligence, or
reckless disregard of their duties. It also provides that all third persons
shall look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a trustee or officer is entitled to be
indemnified against all liability in connection with the affairs of the Fund.
CONVERSION TO OPEN-END FUND
Each Fund may be converted to an open-end investment company at any time by an
amendment to its Declaration of Trust. Each Fund's Declaration of Trust provides
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
50
advantageous to do so, and could adversely affect the ability of the Fund to
meet its investment objective.
VOTING RIGHTS
Voting rights are identical for the holders of each Fund's Common Shares.
Holders of each Fund's Common Shares are entitled to one vote for each share
held.
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. 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 other 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.
The Certificate of Vote establishing the Preferred Shares of each Fund
provides that such Fund shall not take certain actions relating to the
preferences, rights or powers of holders of such Fund's Preferred Shares without
the affirmative vote of the holders of a majority of the outstanding Preferred
Shares. Additionally, an affirmative vote of a majority of the outstanding
shares of each series of Preferred Shares, 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 such Fund's Preferred Shares. 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.
51
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED OCTOBER 31
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING
OF THE PERIOD............ $ 16.91 $ 17.37 $ 17.16 $ 17.79 $ 17.69 $ 16.53 $ 16.00 $ 17.89 $ 17.71 $ 17.32
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net Investment Income.... 1.07(a) 1.01 1.05 1.10 1.20 1.16 1.25 1.26 1.28 1.30
Net Realized and
Unrealized Gain/Loss... .27 (.42) .57 .04 .12 1.40 .60 (1.79) .26 .50
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders:
Net Investment Income.... (.31) (.23) (.11) (.04) (.14) (.27) (.38) (.30) (.34) (.32)
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Total from Investment
Operations............... 1.02 .36 1.50 1.03 1.16 2.19 1.47 (.85) 1.19 1.46
Distributions Paid to
Common Shareholders:
Net Investment Income.... (.77) (.82) (1.03) (1.10) (.97) (.83) (.94) (.99) (.99) (.99)
Net Realized Gain........ (.04) -0- (.26) (.56) (.09) (.20) -0- (.05) (.02) (.08)
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
NET ASSET VALUE, END OF
THE PERIOD............... $ 17.12 $ 16.91 $ 17.37 $ 17.16 $ 17.79 $ 17.69 $ 16.53 $ 16.00 $ 17.89 $ 17.71
======= ======= ======= ======= ======= ======= ======= ======= ======== ========
Common Share Market Price
at End of the Period..... $ 14.85 $ 14.52 $ 15.64 $ 16.32 $ 15.80 $ 15.14 $ 13.50 $ 14.75 $ 18.625 $17.1875
Total Return(b)........... 8.03% -1.97% 3.71% 14.37% 11.63% 20.31% -2.28% -15.79% 14.75% 11.00%
Net Assets Applicable to
Common Shares at End of
the Period (In
millions)................ $ 200.6 $ 198.0 $ 96.7 $ 95.4 $ 98.9 $ 98.4 $ 68.6 $ 66.4 $ 74.1 $ 73.3
Ratio of Expenses to
Average Net Assets
Applicable to Common
Shares(c)................ 1.27% 1.54% 1.44% 1.43% 1.52% 2.01% 1.78% 1.73% 1.68% 1.70%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(c)......... 6.33% 5.85% 6.16% 6.33% 6.84% 7.72% 7.76% 7.36% 7.19% 7.47%
Portfolio Turnover........ 39% 15% 14% 25% 33% 23% 42% 24% 18% 2%
SUPPLEMENTAL RATIOS:
Ratio of Expenses
(Excluding Interest and
Residual Trust Expense)
to Average Net Assets
Applicable to Common
Shares(c)................ 1.22% 1.17% 1.27% 1.28% 1.41% 1.55% 1.68% 1.61% 1.58% 1.60%
Ratio of Expenses
(Excluding Interest and
Residual Trust Expense)
to Average Net Assets
Including Preferred
Shares(c)................ .79% .74% .80% .82% .89% .98% 1.03% 1.02% 1.01% 1.01%
Ratio of Expenses to
Average Net Assets
Including Preferred
Shares(c)................ .83% .97% .90% .91% .96% 1.14% 1.11% 1.11% 1.09% 1.09%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(d)......... 4.51% 4.51% 5.51% 6.11% 6.05% 5.99% 5.39% 5.59% 5.27% 5.62%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding.............. 4,240 4,240 2,240 2,240 2,240 2,240 1,600 1,600 800 800
Asset Coverage Per
Preferred Share(e)....... $72,359 $71,725 $68,169 $67,613 $69,188 $68,932 $67,875 $66,491 $142,646 $141,590
Involuntary Liquidating
Preference Per Preferred
Share.................... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000
Average Market Value Per
Preferred Share.......... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000
(a) Based on average shares outstanding.
(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 distributions to preferred shareholders.
(d) Ratios reflect the effect of distributions 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.
52
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED OCTOBER 31,
2006 2005 2004 2003 2002(A) 2001 2000
---- ---- ---- ---- ------- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 16.80 $ 17.34 $ 17.15 $ 17.46 $ 17.51 $ 16.22 $ 15.63
------- ------- ------- ------- ------- ------- --------
Net Investment Income............. 1.11(a) 1.09 1.09 1.10 1.18 1.25 1.32
Net Realized and Unrealized
Gain/Loss....................... 0.47 (0.48) .31 .09 .18 1.24 .64
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (0.29) (0.22) (.10) (.08) (.10) (.32) (.40)
Net Realized Gain............... (0.06) 0.00 (.01) (.03) (.07) -0- -0-
------- ------- ------- ------- ------- ------- --------
Total from Investment Operations... 1.23 0.39 1.29 1.08 1.19 2.17 1.56
Distributions Paid to Common
Shareholders:
Net Investment Income........... (0.82) (0.93) (1.00) (1.07) (1.03) (.88) (.97)
Net Realized Gain............... (0.24) 0.00 (.10) (.32) (.21) -0- -0-
------- ------- ------- ------- ------- ------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 16.97 $ 16.80 $ 17.34 $ 17.15 $ 17.46 $ 17.51 $ 16.22
======= ======= ======= ======= ======= ======= ========
Common Share Market Price at End of
the Period........................ $ 14.94 $ 14.61 $ 15.34 $ 15.58 $ 15.80 $ 14.94 $13.5625
Total Return(b).................... 9.86% 1.31% 5.76% 7.60% 14.56% 16.85% 6.41%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 743.4 $ 736.0 $ 468.3 $ 463.3 $ 471.6 $ 473.0 $ 438.1
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.28% 1.17% 1.27% 1.28% 1.41% 1.55% 1.68%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 6.68% 6.51% 6.43% 6.40% 6.89% 7.37% 8.44%
Portfolio Turnover................. 25% 25% 18% 23% 33% 29% 31%
SUPPLEMENTAL RATIOS:
Ratio of Expenses (Excluding
Interest and Residual Trust
Expenses) to Average Net Assets
Applicable to Common Shares(c).... 1.17% 1.54% 1.44% 1.43% 1.52% 2.01% 1.78%
Ratio of Expenses (Excluding
Interest and Residual Trust
Expenses) to Average Net Assets
Including Preferred Shares(c)..... .73% .97% .90% .91% .96% 1.14% 1.11%
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... 0.81% 0.74% .80% .82% .89% .98% 1.03%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 4.94% 5.22% 5.82% 5.92% 6.30% 5.49% 5.86%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 17,200 17,200 10,600 10,600 10,600 10,600 10,600
Asset Coverage Per Preferred
Share(e).......................... $68,253 $67,812 $69,204 $68,721 $69,511 $69,623 $ 66,332
Involuntary Liquidating Preference
Per Preferred Share............... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 25,000
Average Market Value Per Preferred
Share............................. $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 25,000
YEAR ENDED OCTOBER 31,
1999 1998 1997
---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 17.64 $ 17.29 $ 16.58
-------- -------- --------
Net Investment Income............. 1.33 1.35 1.37
Net Realized and Unrealized
Gain/Loss....................... (1.94) .42 .74
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.32) (.34) (.35)
Net Realized Gain............... (.02) (.02) -0-
-------- -------- --------
Total from Investment Operations... (.95) 1.41 1.76
Distributions Paid to Common
Shareholders:
Net Investment Income........... (.99) (1.00) (1.05)
Net Realized Gain............... (.07) (.06) -0-
-------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 15.63 $ 17.64 $ 17.29
======== ======== ========
Common Share Market Price at End of
the Period........................ $13.6875 $ 17.00 $ 16.125
Total Return(b).................... -13.97% 12.40% 8.92%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 422.2 $ 476.6 $ 467.0
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.61% 1.58% 1.60%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 7.87% 7.73% 8.16%
Portfolio Turnover................. 33% 29% 40%
SUPPLEMENTAL RATIOS:
Ratio of Expenses (Excluding
Interest and Residual Trust
Expenses) to Average Net Assets
Applicable to Common Shares(c).... 1.73% 1.68% 1.70%
Ratio of Expenses (Excluding
Interest and Residual Trust
Expenses) to Average Net Assets
Including Preferred Shares(c)..... 1.11% 1.09% 1.09%
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... 1.02% 1.01% 1.01%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 6.00% 5.80% 6.06%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 10,600 5,300 5,300
Asset Coverage Per Preferred
Share(e).......................... $ 64,827 $139,932 $138,116
Involuntary Liquidating Preference
Per Preferred Share............... $ 25,000 $ 50,000 $ 50,000
Average Market Value Per Preferred
Share............................. $ 25,000 $ 50,000 $ 50,000
(a) Based on average shares outstanding.
(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.
53
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 APS.
Upon receipt by the Target Fund of such shares, the Target Fund will (i)
distribute the Acquiring Fund Common Shares to the holders of Target Fund Common
Shares and (ii) distribute the Acquiring Fund APS to the holders of Target Fund
APS. As soon as practicable after the 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 APS, as applicable, in exchange for such
shareholders' shares in the Target Fund. Such distribution will be accomplished
by opening new accounts on the books of the Acquiring Fund in the names of the
common and preferred shareholders of the Target Fund and transferring to those
shareholder accounts the Acquiring Fund Common Shares and the Acquiring Fund 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
54
Fund for the former preferred shareholders of Target Fund APS 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. 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
APS. Each holder of Target Fund APS 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
APS 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, other than to reflect the costs of the Reorganization, and will
result in no dilution of the value per share of Acquiring Fund Common Shares,
Acquiring Fund APS or Target Fund APS. However, as a result of the
Reorganization, a shareholder of either Fund will hold a reduced percentage of
ownership in the larger combined entity than he or she did in either of the
separate Funds.
No sales charge or fee of any kind will be charged to shareholders of the
Target Fund in connection with their receipt of Acquiring Fund Common Shares or
Acquiring Fund APS in the Reorganization. Holders of Target Fund APS will find
that the auction dates and dividend payment dates for the Acquiring Fund APS
received in the Reorganization are ordinarily (i.e., except in the case of a
special dividend period) on a 28 day schedule, similar to the schedule of
dividend payment dates for Target Fund APS. The auction procedures for the
Acquiring Fund APS and the Target Fund APS are similar. As a result of the
Reorganization, the last dividend period for the Target Fund APS prior to the
Closing Date and the initial dividend period for the Acquiring Fund APS issued
in connection with the Reorganization after the Closing Date may be shorter than
the ordinary dividend period for such shares.
55
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 U.S.
federal income 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
56
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. 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. In the
event the
57
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
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 solely for Acquiring Fund Common
Shares
58
and Acquiring Fund APS and the assumption by the Acquiring Fund of
substantially all of the liabilities of the Target Fund and the subsequent
liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
Shares solely for Acquiring Fund Common Shares pursuant to the
Reorganization or all of his, her or its Target Fund APS solely for
Acquiring Fund APS pursuant to the Reorganization (except with respect to
cash received in lieu of a fractional share of the Acquiring Fund, as
discussed below).
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Target Fund surrendered in exchange therefor (reduced
by any amount of tax basis allocable to a fractional share for which cash
is received).
- The holding period of the Acquiring Fund Common Shares or Acquiring Fund
APS, 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
59
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.
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 50% of the outstanding Target Fund APS, each voting separately as a
class. This means that both classes of shares, Target Fund Common Shares and
APS, must approve the Reorganization Agreement separately in order for the
Reorganization to occur.
60
------------------------------------------------------------------------------
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
------------------------------------------------------------------------------
Pursuant to the Reorganization Agreement, which is described more fully under
"Proposal 1: Reorganization of the Target Fund" herein, the Acquiring Fund will
acquire substantially all of the assets and assume substantially all of the
liabilities of the Target Fund in exchange for 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 APS, and will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The Acquiring Fund Board, based upon its
evaluation of all relevant information, anticipates that the Reorganization will
benefit holders of Acquiring Fund Common Shares.
The aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value on the Target Fund
Common Shares held immediately prior to the Reorganization, less the costs of
the Reorganization (though Target Fund 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
Target Fund APS held immediately prior to the Reorganization. The Reorganization
will result in no dilution of net asset value of the Acquiring Fund Common
Shares. 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.
61
------------------------------------------------------------------------------
OTHER INFORMATION
------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
GENERAL. A list of shareholders of the each Fund entitled to be present and
vote at the Special Meeting will be available at the offices of such 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 March 23,
2007 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 11,704,031.7535 Target Fund Common
Shares and 4,240 Target Fund APS and the Acquiring Fund had outstanding
43,774,985.9431 Acquiring Fund Common Shares and 17,200 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 therein. Unless instructions to the contrary are marked, proxies will
be voted
62
"FOR" the approval of each proposal. Abstentions and broker non-votes (i.e.,
where a nominee such as a broker, holding shares for beneficial owners,
indicates that instructions have not been received from the beneficial owners,
and the nominee does not exercise discretionary authority) are not treated as
votes "FOR" a proposal.
With respect to Proposal 1, abstentions and broker non-votes have the same
effect as votes "AGAINST" the proposals since their approvals are based on the
affirmative vote of a majority of the total Target Fund Common Shares
outstanding and a majority of the total Target Fund APS outstanding, each voting
as a separate class. With respect to Proposal 2, abstentions will not be treated
as votes "FOR" the proposal but will be counted as votes cast on the proposal
and will therefore have the same effect as votes "AGAINST" the proposal. Broker
non-votes will not be treated as 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 APS. Pursuant to the rules of
the NYSE, Target Fund APS held in "street name" may be voted under certain
conditions by broker-dealer firms and counted for purposes of establishing a
quorum of that Fund if no instructions are received one business day before the
Special Meeting or, if adjourned, one business day before the day to which the
Special Meeting is adjourned. These conditions include, among others, that (i)
at least 30% of the Target Fund's preferred shares outstanding have voted on the
Reorganization and (ii) less than 10% of the Target Fund's preferred shares
outstanding have voted against the Reorganization. In such instance, the
broker-dealer firm will vote such uninstructed Target Fund APS on the
Reorganization in the same proportion as the votes cast by all holders of Target
Fund APS who voted on the Reorganization. The Fund will include shares held of
record by broker-dealers as to which such authority has been granted in its
tabulation of the total number of shares present for purposes of determining
whether the necessary quorum of shareholders of the Fund exists.
63
SHAREHOLDER INFORMATION
As of March 23, 2007, 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 February 15,
2007, 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
INDEPENDENT TRUSTEES SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
-------------------- ------------ ------------------- ------------ -------------------
Arch.................... none 0% 637 <1%
Choate.................. none 0% none 0%
Dammeyer................ none 0% 32,606 <1%
Heagy................... none 0% 58 <1%
Kennedy................. none 0% 58 <1%
Kerr.................... none 0% none 0%
Nelson.................. none 0% none 0%
Sonnenschein............ none 0% 175 <1%
Woolsey................. none 0% 685 <1%
INTERESTED TRUSTEE
Whalen.................. none 0% 1,415 <1%
To the knowledge of the Funds, no executive officers owned, directly or
beneficially, Common Shares of the Funds as of March 23, 2007 and no trustees or
executive officers owned Preferred Shares of the Funds as of that date.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of the Fund's equity securities to file forms with the SEC
and the NYSE, as applicable, reporting their affiliation with the Fund and
reports of ownership and changes in ownership of Fund shares. These persons and
entities are required by SEC regulation to furnish the Fund with copies of all
such forms they file. Based on a review of these forms furnished to each Fund,
each Fund believes that during its last fiscal year, its trustees, officers,
investment adviser and affiliated persons of the investment adviser complied
with the applicable filing requirements.
SHAREHOLDER PROPOSALS
To be considered for presentation at a 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
64
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.
Information regarding the deadline for timely submission of proposals intended
to be presented at the year 2008 Annual Meetings of the Funds will be provided
in the proxy statement relating to the 2007 Annual Meetings of the Funds, which
is expected to take place later this year. If the Reorganization of the Target
Fund is approved and completed prior to its 2007 Annual Meeting, such Fund will
cease to exist and will not hold its 2007 Annual Meeting.
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 April 3, 2007. 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 $9,857 for the
Target Fund and approximately $39,422 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) and, to the extent
Reorganization expenses exceed certain limits, the additional expenses will be
borne by the Adviser.
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.
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
65
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 Trust for Investment Grade
Florida Municipals
Van Kampen Trust for Investment
Grade Municipals
March 27, 2007
66
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 addresses 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:
- 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;
- Nature of and provisions of the obligation;
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- Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only
to a 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
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will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated "C" is currently
highly vulnerable to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
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.
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.
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A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. Ratings of "B-1", "B-2" and "B-3" may be assigned
to indicate finer distinctions within the "B" category. 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.
B-1: A short-term obligation rated "B-1" is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-2: A short-term obligation rated "B-2" is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3: A short-term obligation rated "B-3" is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
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's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
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
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does not perform an audit in connection with any credit rating and may, on
occasion, rely on unaudited financial information. Credit ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, "AAA/A-1+"). With short-term demand debt, S&P note
rating symbols are used with the commercial paper rating symbols (for example,
"SP-1+/A-1+").
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM OBLIGATION RATINGS
Moody's long-term obligation ratings are opinions of the relative credit risk
of fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
MOODY'S LONG-TERM RATING DEFINITIONS:
AAA: Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
AA: Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A: Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
BAA: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
BA: Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
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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.
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:
- Notes containing features that link interest or principal to the
credit performance of any third party or parties (i.e., credit-linked
notes);
- Notes allowing for negative coupons, or negative principal;
- Notes containing any provision that could obligate the investor to
make any additional payments;
- 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.
For credit-linked securities, Moody's policy is to "look through" to the
credit risk of the underlying obligor. Moody's policy with respect to non-credit
linked obligations is to rate the issuer's ability to meet the contract as
stated, regardless of potential losses to investors as a result of non-credit
developments. In other words, as long as the obligation has debt standing in the
event of bankruptcy, we will assign the appropriate debt class level rating to
the instrument.
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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 (not rated)
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.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term debt 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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