This Term Sheet, taken together with the Preliminary Prospectus dated
July 7, 1997 (the "Preliminary Prospectus"), pursuant to Rule 434 under the
Securities Act of 1933, as amended, shall be deemed to constitute the final
prospectus for purposes of Section 10(a) of such Act with respect to the shares
of RP of the Putnam Municipal Opportunities Trust offered hereby. Capitalized
terms in this Term Sheet which are not defined herein will have the meaning
defined in the Preliminary Prospectus.
TERM SHEET
- ----------
Used pursuant to Rule 434 under the Securities Act of 1933, as amended
(Supplement to Preliminary Prospectus dated July 7, 1997)
$81,000,000
Putnam Municipal Opportunities Trust
Remarketed Preferred(R) Shares ["RP"(R)]
1,620 Shares, Series B
1,620 Shares, Series C
Liquidation Preference $25,000 Per Share
---------------
Terms of the Offering
The information appearing on the cover page of the Preliminary
Prospectus is supplemented and restated as follows:
Dividends on each share of RP will be cumulative from the Date of
Original Issue and will be payable, when, as and if declared, subject to certain
exceptions, on each Dividend Payment Date for each such share. The Initial
Dividend Period for the Series B RP will end on July 28, 1997. The Initial
Dividend Payment Date for the Series B RP will be July 29, 1997, and the
Applicable Dividend Rate on the Series B RP for the Initial Dividend Period will
be 3.45% per annum. The Initial Dividend Period for the Series C RP will end on
July 31, 1997. The Initial Dividend Payment Date for the Series C RP will be
August 1, 1997, and the Applicable Dividend Rate on the Series C RP for the
Initial Dividend Period will be 3.45% per annum.
The paragraph above also supplements information under "Prospectus
Summary -- Dividends and Dividend Periods" and "Description of RP -- Dividends--
Initial Dividend Payment Dates and Dividend Period" in the Preliminary
Prospectus.
---------------
<TABLE>
<CAPTION>
======================================================================================================================
Price to Sales Proceeds to
Public(1) Load(2) Fund(1)(3)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Per Share................ $25,000 $250 $24,750
- ----------------------------------------------------------------------------------------------------------------------
Total.................... $81,000,000 $810,000 $80,190,000
======================================================================================================================
</TABLE>
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and Putnam have agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting offering expenses payable by the Fund, estimated at
$368,045.
---------------
The shares of RP are offered by the Underwriter, subject to prior sale,
when as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
one certificate for the each series of RP will be delivered to the nominee of
The Depository Trust Company on or about July 17, 1997.
- ----------
(R) Registered trademark of Merrill Lynch & Co., Inc.
-------------------
Merrill Lynch & Co.
-------------------
The date of this Term Sheet is July 14, 1997.
<PAGE>
Remarketing
The text under "Prospectus Summary - Remarketing - Remarketing
Schedule" is supplemented and restated as follows:
Remarketing Schedule. A separate Remarketing will be held for each
series of RP. Each Remarketing for RP will take place over a two-Business Day
period consisting of the Remarketing Date (normally a Monday for Series B RP and
a Thursday for Series C RP) and the Settlement Date (normally a Tuesday for the
Series B RP and a Friday for the Series C RP). An example of the time sequence
of the events in a normal remarketing schedule is provided in Appendix A hereto.
The first Remarketing Date for the Series B RP will be July 28, 1997 and the
first Remarketing Date for the Series C RP will be July 31, 1997.
Underwriting
The text of the second paragraph under "Underwriting" in the
Preliminary Prospectus is supplemented and restated as follows:
The Underwriter has advised the Fund that it proposes initially to
offer the shares of RP to the public at the public offering price set forth on
the cover page of the Prospectus and to certain dealers at such price less a
concession not in excess of $137.50 per share. The Underwriter may allow, and
such dealers may reallow, a discount not in excess of $31.25 per share on sales
to certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed. The sales load of $250 per share
is equal to 1.0% of the initial public offering price. Investors must pay for
any shares of RP purchased in the initial public offering on or before July 17,
1997.
<PAGE>
[RED HERRING]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sales of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
[/RED HERRING]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 7, 1997
PROSPECTUS
==========
$81,000,000
Putnam Municipal Opportunities Trust
Remarketed Preferred[RegTM] Shares ["RP[RegTM]"]
1620 Shares, Series B
1620 Shares, Series C
Liquidation Preference $25,000 Per Share
---------------------
Putnam Municipal Opportunities Trust (the "Fund") is a closed-end,
non-diversified management investment company. The Fund's investment objective
is to seek as high a level of current income exempt from Federal income tax as
Putnam Investment Management, Inc., the Fund's investment manager ("Putnam"),
believes is consistent with preservation of capital. The Fund seeks to achieve
its investment objective primarily by investing in a portfolio of Municipal
Bonds issued by or for the benefit of entities principally engaged in those
sectors of the Municipal Bond market that in the opinion of Putnam, present the
most attractive opportunities to attain a high level of current income exempt
from Federal income tax, consistent with the preservation of capital.
The Fund is offering hereby 1,620 Remarketed Preferred Shares, Series B
(the "Series B RP") and 1,620 Remarketed Preferred Shares, Series C (the "Series
C RP" and with the Series B RP, "RP"), both with a liquidation preference of
$25,000 per share plus accumulated and unpaid dividends. Dividends on each share
of RP will be cumulative from the Date of Original Issue and will be payable,
when, as and if declared, subject to certain exceptions, on each Dividend
Payment Date for each such share. The Initial Dividend Period for the Series B
RP will end on July , 1997. The Initial Dividend Payment Date for the Series B
RP will be July , 1997, and the Applicable Dividend Rate on the Series B RP
for the Initial Dividend Period will be % per annum. The Initial Dividend
Period for the Series C RP will end on July , 1997. The Initial Dividend
Payment Date for the Series C RP will be July , 1997, and the Applicable
Dividend Rate on the Series C RP for the Initial Dividend Period will be %
per annum. After the Initial Dividend Period for such series of RP, each
subsequent Dividend Period for each series of RP will generally be a 7-day
Dividend Period, provided that prior to a Remarketing the Fund may elect subject
to certain limitations and upon giving notice to holders, a Special Dividend
Period. The Applicable Dividend Rate in effect from time to time on the shares
of each series of RP will be determined by the Remarketing Agent in a
Remarketing in advance of the Dividend Period for such series, as more fully
described herein. After the Initial Dividend Period, the Dividend Period and the
Applicable Dividend Rate for such Dividend Period for each series of RP may
differ.
---------------------
This Prospectus sets forth in concise form information that a prospective
investor ought to know before investing. Investors are advised to read this
Prospectus carefully and to retain it for future reference.
(continued on following page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Sales Proceeds to
Public(1) Load(2) Fund(1)(3)
- --------------------------------------------------------------------------------
Per Share ...... $25,000 $ $
- --------------------------------------------------------------------------------
Total ......... $81,000,000 $ $
================================================================================
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund has agreed to indemnify the Underwriter for certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(3) Before deducting offering expenses payable by the Fund, estimated at
$368,045.
---------------------
The shares of RP are offered by the Underwriter, subject to prior sale,
when, as and if issued by the Fund and accepted by the Underwriter, subject to
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
one certificate for each series of RP will be delivered to the nominee of The
Depository Trust Company on or about July , 1997.
[RegTM]Registered trademark of Merrill Lynch & Co., Inc.
Merrill Lynch & Co.
The date of this Prospectus is July , 1997.
<PAGE>
(continued from front cover)
Under normal market conditions, the Fund invests at least 80% of its total
assets in Municipal Bonds rated investment grade at the time of investment or,
if not rated, determined by Putnam to be of comparable quality. The Fund may
invest up to 20% of its total assets in Municipal Bonds rated below investment
grade or, if not rated, determined by Putnam to be of comparable quality at the
time of investment. Such lower-rated securities involve a higher degree of risk
and are predominantly speculative. The Fund may not invest more than 20% of its
total assets in Municipal Bonds not rated by a nationally recognized rating
service. There is no assurance that the Fund will achieve its investment
objective. The Fund may invest an unlimited portion of its assets in Municipal
Bonds that pay interest that is subject to the Federal alternative minimum tax.
See "Investment Objective and Policies" and "Taxation."
The Fund commenced investment operations in 1993. As of April 30, 1997, it
had net assets of $260,007,830, including $40,000,000 in outstanding Remarketed
Preferred Shares, Series A ("Series A RP"). The RP will be on a parity with the
outstanding Series A RP as to payment of dividends and on liquidation. The
Fund's address is One Post Office Square, Boston, Massachusetts 02109, and its
telephone number is (617) 292-1000.
Dividends on the RP, to the extent payable from tax-exempt interest earned
on the Fund's investments, will be exempt from Federal income tax in the hands
of holders of such shares, subject to the possible application of the Federal
alternative minimum tax. The Fund is currently required to allocate net capital
gains and other taxable income, if any, proportionately among shares of Common
Stock, Series A RP, Series B RP, and Series C RP. The Fund may either (i) give
notice of the amount of any taxable income to be included in the dividend prior
to the Remarketing in which the Applicable Dividend Rate for such dividend will
be determined, or (ii) include such taxable income in that dividend without
giving such notice and increase the dividend by an amount to offset (on the
basis of certain assumptions) the Federal tax effect thereof, all as more fully
described herein. See "Taxation" and "Remarketing--Remarketing Schedule; Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividend."
Each share of RP subject to Tender and Dividend Reset may be tendered in a
Remarketing by submitting to the Remarketing Agent no later than 12:00 noon, New
York City time, on the Remarketing Date an order to sell such share on such
date. Prospective purchasers should carefully review the Remarketing procedures
described herein and should note that (i) any notice to tender or to hold shares
is irrevocable, (ii) Remarketing will be conducted through telephone
communications, (iii) settlement for purchases and sales will be on the Business
Day following the Remarketing and (iv) ownership of RP will generally be
maintained in book-entry form by or through the Securities Depository. There can
be no assurance that shares tendered will be sold in a Remarketing. Shares of RP
can only be transferred pursuant to a Remarketing or in the secondary market, if
any. Shares of RP are redeemable, in whole or in part, at the option of the Fund
(except during a Non-Call period) on each Dividend Payment Date, and under
certain conditions, will be subject to mandatory redemption at $25,000 per share
plus accumulated but unpaid dividends (plus, in the case of an optional
redemption, any applicable premium). Shares of RP will not be redeemable at the
option of the Fund during the Intitial Dividend Period. See "Description of
RP--Redemption."
2
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus and the
Appendices hereto. Capitalized terms not defined in this Summary are defined in
the Glossary appearing on page 66 of this Prospectus or, in certain cases, are
defined elsewhere herein.
The Fund
Putnam Municipal Opportunities Trust (the "Fund") is a closed-end,
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended. The Fund commenced investment operations on May
28, 1993. The Fund has outstanding 16,157,092 shares of common stock traded on
the New York Stock Exchange under the symbol "PMO," and 800 shares of Series A
RP (together with the RP, the "Preferred Shares"), liquidation preference
$50,000 per share, which were issued on August 3, 1993. As of April 30, 1997,
the Fund had net assets of $260,007,830. See "The Fund." The Fund is managed by
Putnam Investment Management, Inc. ("Putnam").
The Offering
The Fund is offering 1,620 shares of each of the Series B RP and the Series
C RP at a purchase price of $25,000 per share. The shares of RP are being
offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated as underwriter
(the "Underwriter" or "Merrill Lynch").
The RP will be preferred shares of the Fund that entitle their holders to
receive cash dividends at a rate per annum that may vary for the successive
Dividend Periods for each series of RP. After the Initial Dividend Period, each
subsequent Dividend Period for both series of RP will generally be 7 days in
length or such other period as the Fund may determine for such series, as
described below. The Applicable Dividend Rate for a particular Dividend Period
for each series of RP will generally be determined by a Remarketing conducted on
the Business Day next preceding the start of such Dividend Period. The RP will
be on a parity with the outstanding Series A RP as to payment of dividends and
on liquidation.
Investment Objective and Policies
The Fund's investment objective is to seek as high a level of current
income exempt from Federal income tax as Putnam, the Fund's investment manager,
believes is consistent with the preservation of capital. The Fund seeks to
achieve its investment objective primarily by investing in a portfolio of
Municipal Bonds issued by or for the benefit of entities principally engaged in
those sectors of the Municipal Bond market that in the opinion of Putnam present
the most attractive opportunities to attain a high level of current income
exempt from Federal income tax, consistent with the preservation of capital.
There is no assurance that the Fund will achieve its objective.
Under normal market conditions, the Fund invests at least 80% of its total
assets in Municipal Bonds rated "investment grade" at the time of investment,
or, if not rated, determined by Putnam to be of comparable quality. Investment
grade Municipal Bonds are rated BBB or higher by S&P or Fitch or Baa or higher
by Moody's (or equivalently rated by another nationally recognized rating
service). The Fund may also invest up to 20% of its total assets in securities
considered below "investment grade" and rated BB or B by S&P and Fitch and Ba or
B by Moody's (or equivalently rated by another nationally recognized rating
service) or, if not rated, determined by Putnam to be of comparable quality. The
Fund will not invest more than 20% of its total assets in Municipal Bonds not
rated by a nationally recognized rating service. See "Investment Objective and
Policies," "Special Considerations and Risk Factors" and "Appendix
C--Description of Municipal Bond Ratings."
Under normal market conditions, the Fund may invest up to 50% of its total
assets in any sector of the Municipal Bond market.
The Fund may invest an unlimited portion of its assets in Municipal Bonds
subject to the Federal alternative minimum tax. See "Taxation."
In order to preserve capital, the Fund may engage in interest rate and
other hedging transactions by purchasing and selling financial futures contracts
and options on Municipal Bond indices and on U.S. Government securities.
3
<PAGE>
The Fund may also enter into forward commitments and repurchase agreements.
These investment practices entail risks and may give rise to taxable income.
The Fund may implement various temporary "defensive" strategies at times
when Putnam determines that conditions in the markets for Municipal Bonds make
pursuing the Fund's basic investment strategy inconsistent with the best
interests of its shareholders. These strategies may include an increase in the
portion of the Fund's assets invested in high-quality Municipal Bonds and
investments in taxable obligations.
Investment Manager
Putnam has been a manager of mutual funds since 1937. Putnam serves as the
investment manager for all funds in the Putnam family of funds, with
approximately $144 billion in assets under management in over 8 million
shareholder accounts as of April 30, 1997, including approximately $18 billion
invested generally in Municipal Bonds. Putnam currently employs seven portfolio
managers dedicated to the Municipal Bond market, supported by 29 investment
analysts and other research personnel. The Putnam Advisory Company, Inc., an
affiliate, manages domestic and foreign institutional accounts and foreign
mutual funds. Putnam Fiduciary Trust Company, another affiliate, provides
investment advice to institutional clients under its banking and fiduciary
powers. In addition to the Fund, the Putnam family of funds includes 17
closed-end funds, 8 of which, Putnam Investment Grade Municipal Trust, Putnam
Investment Grade Municipal Trust II, Putnam Investment Grade Municipal Trust
III, Putnam California Investment Grade Municipal Trust, Putnam New York
Investment Grade Municipal Trust, Putnam Tax-Free Health Care Fund, Putnam
Managed Municipal Trust and Putnam High Yield Municipal Trust, invest primarily
in Municipal Bonds. Putnam and its affiliates managed approximately $187 billion
in assets as of April 30, 1997. See "Investment Manager."
Investment Management and Administrative Service Fees
The Fund pays Putnam a quarterly investment management fee based on the
average weekly net asset value of the Fund at the annual rate of 0.50% of the
first $500 million of the average weekly net asset value of the Fund, 0.43% of
the next $500 million, 0.39% of the next $500 million, and 0.35% of any excess
over $1.5 billion of such average net asset value. The Fund pays Putnam a
quarterly administrative services fee at the annual rate of 0.20% of the first
$500 million of the average weekly net asset value of the Fund, 0.17% of the
next $500 million, 0.16% of the next $500 million, and 0.15% of any excess over
$1.5 billion of such average net asset value. Such fees will be reduced as
described herein if dividends payable on the Preferred Shares including the RP
during any dividend period plus expenses attributable to Preferred Shares for
that period exceed the gross income of the Fund during that period attributable
to the investment of the proceeds of the Preferred Shares. Putnam pays a fee
from its own assets to Princeton Administrators, L.P., an affiliate of Merrill
Lynch, at the rate of 0.15% of the Fund's average weekly net asset value for
certain administrative services reduced if, among other things, the net asset
value of the Fund exceeds $500 million. See "Investment Management Contract" and
"Administrative Services Contract."
Dividends and Dividend Periods
The Applicable Dividend Rate on the Series B RP for the Initial Dividend
Period ending July , 1997 will be % and the Applicable Dividend Rate on the
Series C RP for the Initial Dividend Period ending July , 1997 will be %.
For each Dividend Period thereafter, except as otherwise described herein, the
Applicable Dividend Rate on the shares of each series of RP will be the dividend
rate per annum determined by the Remarketing Agent in its sole discretion (which
discretion will be conclusive and binding on all holders of such series) in
accordance with the remarketing procedures described below. See
"Remarketing--Remarketing Procedures--Applicable Dividend Rates." Dividends on
shares of each series of RP will be cumulative from their Date of Original Issue
and will be payable, when, as and if declared by the Trustees, commencing on
July , 1997 for the Series B RP and July , 1997 for the Series C RP.
Thereafter, in the case of Dividend Periods which are not Special Dividend
Periods, dividends will be payable generally on each succeeding Tuesday for the
Series B RP and each succeeding Friday for the Series C RP, subject to certain
exceptions. Dividends for the RP will be paid through the Securities Depository
(The Depository Trust Company or a successor securities depository) on each
Dividend Payment Date for such series. The Securities Depository's normal
procedures provide for it to distribute dividends in same-day funds to Agent
Members, who are in turn expected to distribute such dividends to the person for
whom
4
<PAGE>
they are acting as agent in accordance with the instructions of such person. See
"Description of RP--Dividends-- Dividend Payment Dates." After the Initial
Dividend Period for each series of RP, each Dividend Period will generally
consist of 7 days (a "7-day Dividend Period"). However, the Fund may elect,
prior to any Remarketing, a Special Dividend Period for either or both series. A
"Special Dividend Period" is a Dividend Period consisting of a specified number
of days (other than 7), evenly divisible by seven and not fewer than seven nor
more than 364 (a "Short Term Dividend Period"), or a Dividend Period consisting
of a specified period of one whole year or more but not greater than five years
(a "Long Term Dividend Period"). As provided in the Bylaws, the Dividend Periods
for the Series A RP, Series B RP, and Series C RP will not be co-extensive.
Although the Fund does not currently intend to request a Special Dividend Period
for either series of RP, it may elect to do so in the future. See "Description
of RP--Dividends--Notification of Dividend Period."
Determination of Maximum Dividend Rate
Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period for either series of RP will not exceed the applicable Maximum
Dividend Rate. The Maximum Dividend Rate will depend on the credit rating or
ratings assigned to such shares and on the duration of the Dividend Period. The
Maximum Dividend Rate for any Dividend Period of a series of RP will be the
Applicable Percentage (specified below) of the Reference Rate on the applicable
Remarketing Date. "Reference Rate" means (i) with respect to any Dividend Period
having 28 or fewer days, the higher of the applicable "AA" Composite Commercial
Paper Rate and the Taxable Equivalent of the Short-Term Municipal Bond Rate,
(ii) with respect to any Short Term Dividend Period having more than 28 but
fewer than 183 days, the applicable "AA" Composite Commercial Paper Rate, (iii)
with respect to any Short Term Dividend Period having 183 or more but fewer than
365 days, the U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate. The "Applicable
Percentage" on any Remarketing Date for a series will be determined based on (i)
the lower of the credit rating or ratings assigned on such date to shares of RP
by Moody's and S&P (or if Moody's or S&P or both shall not make such rating
available, the equivalent of either or both of such ratings by a Substitute
Rating Agency or two Substitute Rating Agencies or in the event that only one
such rating shall be available, such rating) and (ii) whether the Fund has
provided to the Remarketing Agent, prior to the Remarketing establishing the
Applicable Dividend Rate for the succeeding Dividend Period for such series,
notification that net capital gain or other income subject to regular Federal
income tax will be included in such dividend (a "Tax Notification"), as follows:
Applicable Applicable
Percentage Percentage
of Reference of Reference
Rate- Rate-
Moody's S&P No Notification Notification
------- --- --------------- -------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
There is no minimum Applicable Dividend Rate in respect of any Dividend Period
for either series of RP.
The Applicable Dividend Rate for any Dividend Period for either series of
RP commencing during any Non-Payment Period, and the rate used to calculate any
applicable late charge, will generally be 200% of the Reference Rate (or 275%
of such rate if the Fund has provided a Tax Notification to the Remarketing
Agent with respect to that Dividend Period for such series).
Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends
Dividends paid by the Fund, to the extent paid from tax exempt interest
earned on Municipal Bonds and properly designated as exempt-interest dividends,
will be exempt from Federal income taxation, subject to the possible application
of the Federal alternative minimum tax. The Fund is required to allocate net
capital gain and other income subject to regular Federal income tax
proportionately among the Common Shares, Series A RP, Series B RP, and Series C
RP in accordance with the current practice of the Internal Revenue Service (the
"IRS"). The Fund may notify the Remarketing Agent of the amount of any net
capital gains or other taxable income to be included
5
<PAGE>
in any dividend on shares of RP prior to the Remarketing establishing the
Dividend Rate for such dividend. Alternatively, the Fund may include such income
in a dividend on shares of RP without giving advance notice thereof if it
increases the dividend by an additional amount to offset the Federal tax effect
thereof as described herein. The amount of taxable income allocable to shares of
RP will depend upon the amount of such income realized by the Fund and other
factors, but generally is not expected to be significant. If for any reason it
is determined after the payment of any dividend that a portion of that dividend
was subject to Federal income tax, the Fund will not be required to pay any
additional amount to compensate for any tax payable on the dividend (other than
Additional Dividends payable under the circumstances described in this
Prospectus). See "Taxation" and "Remarketing--Remarketing Schedule; Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividend."
If the Fund characterizes retroactively all or a portion of a dividend
already paid on shares of RP as consisting of net capital gain or other income
subject to regular Federal income tax solely because (i) the Fund has redeemed
all or a portion of the outstanding shares of RP or has liquidated and (ii) the
Fund, in its judgment, believes it is required, in order to comply with the
published position of the IRS described above, to allocate such taxable income
to the RP, the Fund will pay Additional Dividends (calculated assuming a rate of
tax equal to the Gross-up Tax Rate) to holders of shares of RP whose dividends
were so recharacterized. Such Additional Dividends will not include an amount to
compensate for the fact that the Additional Dividends or the amount so
recharacterized may be subject to state and local taxes. Additional Dividends
will be payable only in the foregoing circumstances. See "Description of
RP--Dividends--Additional Dividends."
The Fund will not be required to provide any notice of the prospective
inclusion of, or increase any dividend on shares of RP (including through the
payment of an Additional Dividend) as a result of the inclusion of, any taxable
income in any dividend other than in the circumstances described above. No
provision will be made to compensate holders of shares of RP for any alternative
minimum tax liability in respect of distributions on RP. See "Description of
RP--Dividends" and "Taxation."
Remarketing
The holder of a share of RP may elect to tender such share or hold such
share for the next Dividend Period for such series by providing notice to the
Remarketing Agent in connection with the Remarketing for that Dividend Period
for such series. If the holder of a share of RP fails to make such an election,
he shall continue to hold the share for the subsequent Dividend Period for such
series at the Applicable Dividend Rate for such series determined in the
Remarketing for such Dividend Period, unless the Dividend Period is a Special
Dividend Period of more than 60 days.
Prospective purchasers should carefully review the remarketing procedures
described below and more fully detailed in this Prospectus, including the
Appendices hereto, and should note that (i) an election to tender RP cannot be
revoked except as provided in the Bylaws and as more fully described in this
Prospectus, (ii) each Remarketing will be conducted through telephonic
communications, (iii) settlement for purchases and sales in a Remarketing will
be made on the Settlement Date, and (iv) each prospective purchaser and each
holder of shares of RP will be bound by the remarketing procedures, including
the Remarketing Agent's determination of the Applicable Dividend Rate pursuant
to the remarketing procedures.
Remarketing Schedule. A separate Remarketing will be held for each series
of RP. Each Remarketing for RP will take place over a two-Business Day period
consisting of the Remarketing Date (normally a Monday for Series B RP and a
Thursday for Series C RP) and the Settlement Date (normally a Tuesday for the
Series B RP and a Friday for the Series C RP). An example of the time sequence
of the events in a normal remarketing schedule is provided in Appendix A hereto.
The first Remarketing Date for the Series B RP will be July , 1997 and the
first Remarketing Date for the Series C RP will be July , 1997.
Remarketing Date. By 9:00 a.m., New York City time, on the Remarketing Date
for a series of RP, the Remarketing Agent will, after canvassing the market and
considering prevailing market conditions, provide to holders of shares of such
series of RP subject to Tender and Dividend Reset non-binding indications of the
Applicable Dividend Rate for the next succeeding 7-day Dividend Period or
Special Dividend Period for such series,
6
<PAGE>
as the case may be. THE ACTUAL APPLICABLE DIVIDEND RATE FOR SUCH DIVIDEND PERIOD
FOR SUCH SERIES MAY BE GREATER THAN OR LESS THAN THE RATE INDICATED IN SUCH NON-
BINDING INDICATIONS (BUT NOT GREATER THAN THE APPLICABLE MAXIMUM DIVIDEND RATE
FOR SUCH SERIES) AND WILL NOT BE DETERMINED UNTIL AFTER A HOLDER IS REQUIRED TO
ELECT TO HOLD OR TENDER ITS SHARES OF RP OR A NEW PURCHASER IS REQUIRED TO AGREE
TO PURCHASE SUCH SHARES OF RP. By 12:00 noon, New York City time, on such
Remarketing Date, each holder of shares of RP subject to Tender and Dividend
Reset must notify the Remarketing Agent of its desire on a share-by-share basis,
either to tender such share at a price of $25,000 per share or to continue to
hold such share for the next Dividend Period (whether a 7-Day Dividend Period or
a Special Dividend Period). Any holder or prospective purchaser may informally
indicate to the Remarketing Agent its Applicable Dividend Rate preferences.
However, any such notice given to the Remarketing Agent to tender or hold shares
for a particular Dividend Period is irrevocable and may not be conditioned upon
the level at which the Applicable Dividend Rate is set. Accordingly, the
Applicable Dividend Rate with respect to a Dividend Period may be greater or
less than such rate preferences. Any such notice may not be revoked by the
holder; provided that the Remarketing Agent may, in its sole discretion, (i) at
the request of a holder that has tendered one or more shares of RP to the
Remarketing Agent, waive such holder's tender and thereby enable such holder to
continue to hold such share or shares for the next Dividend Period for such
series, as agreed to by the holder and the Remarketing Agent at such time, so
long as such tendering holder has indicated that it would accept the new
Applicable Dividend Rate for such Dividend Period, and (ii) at the request of a
holder that has elected to hold one or more of its shares of such series of RP,
waive such holder's election with respect thereto, either such waiver to be
contingent upon the Remarketing Agent's being able to remarket all shares of
such series tendered to it in such Remarketing. Subject to the last sentence of
this paragraph, holders of shares of RP that fail on a Remarketing Date for such
shares to elect to tender or hold such shares will be deemed to have elected to
continue to hold such shares for the next Dividend Period if each of the current
Dividend Period and the next Dividend Period for such series is a 7-day Dividend
Period or a Special Dividend Period of a series of 60 days or less. If, on a
Remarketing Date for shares of a series of RP, the current Dividend Period for
such series is a Special Dividend Period of more than 60 days, or the succeeding
Dividend Period for such series has been designated by the Trustees as a Special
Dividend Period of more than 60 days, then holders of such shares of such series
that fail to elect to tender or hold such shares will be deemed to have elected
to tender such shares.
Between 12:00 noon and 3:00 p.m., New York City time, on each Remarketing
Date for RP, except during a Non-Payment Period, the Remarketing Agent will
determine the Applicable Dividend Rate for the next Dividend Period for such
series, which will be the lowest rate per annum (but not greater than the
applicable Maximum Dividend Rate) available, which the Remarketing Agent
believes will enable the Remarketing Agent to remarket on behalf of the holders
thereof all shares of such series of RP tendered to it on such Remarketing Date
at a price of $25,000 per share. Such determination will be made in the sole
discretion of the Remarketing Agent and will be conclusive and binding on the
Fund and on the holders of shares of such series of RP.
If a Remarketing for shares of a series of RP does not take place because
there is no Remarketing Agent or the Remarketing Agent is not required to
conduct a Remarketing pursuant to the terms of the Remarketing Agreement, then,
except during a Non-Payment Period, the Applicable Dividend Rate for the
subsequent Dividend Period for such series of RP will be the applicable Maximum
Dividend Rate, and such Dividend Period will be a 7-day Dividend Period. See
"Remarketing." If the Remarketing Agent is unable to remarket on the Remarketing
Date all shares of a series of RP tendered (or deemed tendered) to it at a price
of $25,000 per share, the next Dividend Period for all shares of such series of
RP will be a 7-day Dividend Period and the Applicable Dividend Rate therefor
shall be the Maximum Dividend Rate for such 7-day Dividend Period. See
"Remarketing--Remarketing Procedures--Allocation of Shares; Failure to Remarket
at $25,000 Per Share."
There can be no assurance that the Remarketing Agent will be able to
remarket all shares of a series of RP tendered in a Remarketing. If any shares
of a series of RP tendered in a Remarketing are not remarketed, a holder thereof
may be required to hold some or all of its shares of such series at least until
the end of the next Dividend Period therefor or to sell its shares outside a
Remarketing. In such case, the remarketing procedures may require an allocation
of shares of such series of RP on a pro rata basis, to the extent practicable,
or by lot, as determined by the Remarketing Agent in its sole discretion, which
may result in a holder's selling a number of shares of such series of RP that is
less than the number of such shares specified in such holder's tender order. See
"Remarketing--
7
<PAGE>
Remarketing Procedures--Allocation of Shares; Failure to Remarket at $25,000 Per
Share," "Remarketing--Restrictions on Transfer" and "Remarketing--The
Remarketing Agent."
Settlement Date. On a Settlement Date for shares of a series of RP, which
will be the first Business Day following the related Remarketing Date and which
will be the first day of the new Dividend Period for such series, each person
purchasing shares of RP as a result of a Remarketing must pay, or cause its
Agent Member to pay on its behalf, the purchase price against delivery of such
shares by the holder thereof or its Agent Member.
After the initial sale of shares of RP through this offering, settlement
for purchases and sales of shares of RP in a Remarketing will generally be made
with respect to each share of RP through the Securities Depository on the
related Settlement Date therefor in accordance with its normal procedures, which
provide for payment in same-day funds.
Shares of RP tendered in a Remarketing will be purchased solely out of the
proceeds received from purchasers of shares of such series of RP in such
Remarketing. Neither the Fund, nor the Paying Agent or the Remarketing Agent
will be obligated to provide funds to make payment upon any holder's tender in a
Remarketing unless, in the case of the Paying Agent or the Remarketing Agent,
the shares are purchased for its own account. Tendered shares of RP will also be
subject to purchase in a Remarketing by the Remarketing Agent for its own
account or as nominee for others, although the Remarketing Agent is not
obligated to purchase any shares.
Remarketing Agent. The Remarketing Agent for both series of RP initially
will be Merrill Lynch. Performance by the Remarketing Agent will be subject to
certain conditions. The Remarketing Agent may not terminate the Remarketing
Agreement except in accordance with the procedures set forth in such agreement.
See "Remarketing--The Remarketing Agent."
Restrictions on Transfer
Unless during a Non-Payment Period the Fund waives this requirement, shares
of each series of RP will be held only by book entry through the Securities
Depository. The Securities Depository maintains an account for each Agent
Member, which, in turn, will maintain records of its clients' beneficial
ownership. The Paying Agent will maintain a record of certain beneficial owners
of shares of each series of RP, for purposes of determining owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time. Any certificate for shares of RP will bear a legend to the
effect that such certificate is issued subject to certain provisions restricting
transfers of such shares. See "Remarketing--Restrictions on Transfer."
Secondary Market
The Remarketing Agent has advised the Fund that it currently intends to
make a secondary trading market in the shares of RP outside Remarketings but has
no obligation to do so. Neither series of RP will be registered on any stock
exchange or on any automated quotation system. If the Remarketing Agent
purchases shares of RP in the secondary market or in a Remarketing, it may be in
the position of holding for its own account or as nominee for others shares of
RP at the time it determines the Applicable Dividend Rate for such series in a
Remarketing therefor, and may tender such shares in such Remarketing. See
"Remarketing--Restrictions on Transfer--Secondary Market."
Asset Maintenance; Rating Agency Requirements
Under the Bylaws, the Fund must maintain 1940 Act RP Asset Coverage of at
least 200%. See "Investment Objective and Policies--Asset Maintenance."
In connection with their respective ratings of both series of RP, Moody's
and S&P have each established asset coverage guidelines which are incorporated
into the Bylaws. These guidelines require the Fund among other things to
maintain investment-grade assets with a value (discounted in accordance with
each rating agency's guidelines) equal to the RP Basic Maintenance Amount. They
also impose restrictions on the securities in which the Fund may invest, limit
the Fund's use of futures, options and forward commitments, and prohibit the use
of borrowing for
8
<PAGE>
leverage and the Fund's entering into short sales, securities lending and
reverse repurchase agreements. These requirements are explained in greater
detail in Appendix B. If the Fund fails to meet such asset maintenance
requirements and such failure is not cured, the Fund will be required under
certain circumstances to redeem some or all of the shares of RP. See
"Description of RP--Redemption."
Mandatory Redemption
If the RP Basic Maintenance Amount or the 1940 Act RP Asset Coverage is not
maintained or restored as specified herein, Preferred Shares will be subject to
mandatory redemption on a date specified by the Trustees, out of funds legally
available therefor. In such event, Series B RP and Series C RP would be redeemed
at the redemption price of $25,000 per share, and Series A RP would be redeemed
at the redemption price of $50,000, plus amounts equal in each case to dividends
thereon (whether or not earned or declared) accumulated but unpaid to the date
fixed for redemption. Any such redemption will be limited to the number of
shares necessary to restore the RP Basic Maintenance Amount or the 1940 Act RP
Asset Coverage, as the case may be. See "Description of RP--Redemption."
Optional Redemption
Except as described under "Description of RP--Redemption," shares of RP are
redeemable, in whole or in part, at the option of the Fund, on the next
succeeding scheduled Dividend Payment Date (except during a Non-Call Period)
applicable to shares of such series of RP called for redemption, out of funds
legally available therefor, at the redemption price of $25,000 per share plus an
amount equal to dividends thereon (whether or not earned or declared)
accumulated but unpaid to the date fixed for redemption plus any premium
accruing during a Premium Call Period for such series.
Liquidation Preference
The liquidation preference of the shares of RP will be $25,000 per share
plus accumulated but unpaid dividends, if any. See "Description of
RP--Dividends--Dividend Payments" and "Description of RP--Liquidation/
Bankruptcy."
Voting Rights
The Bylaws, in accordance with the 1940 Act, require that the holders of
Preferred Shares, voting as a separate class, have the right to elect at least
two Trustees at all times and to elect a majority of the Trustees at any time
two years' dividends on the Preferred Shares are unpaid. The holders of
Preferred Shares will vote as a separate series or class on certain other
matters as required under the Bylaws, the 1940 Act and Massachusetts law. See
"Description of RP--Voting Rights" and "Description of RP--Certain Provisions in
the Declaration of Trust."
Ratings
It is a condition to their issuance that the shares of RP be issued with
ratings of "aaa" from Moody's and AAA from S&P.
9
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund's investment policies and practices entail certain risks. Various
factors, including changes in interest rates, ratings, condition of the issuer,
business conditions in the issuer's industry and general economic conditions,
affect the value of municipal bonds and payment of principal and interest
thereon. Securities rated below investment grade are considered to be
speculative and may involve greater risk. Because the Fund is a
"non-diversified" investment company, it is more likely to invest a higher
percentage of its assets in the securities of a single issuer or of a limited
number of issuers than a diversified investment company that invests in a
broader range of securities. This practice involves an increased risk of loss to
the Fund if the issuers were unable to make interest or principal payments or if
the market values of such securities were to decline. Concentration of the
Fund's investments in individual sectors of the Municipal Bond market involves
special considerations and risks. As a result of its policy of concentrating its
investments in sectors of the Municipal Bond market, the Fund will be more
susceptible to economic, business, political, regulatory and other developments
generally affecting issuers in such sectors. Because of active management of the
Fund's portfolio allocation, its portfolio turnover rate may be greater and the
Fund will be more dependent on Putnam's investment analysis than funds with a
policy of maintaining investments in a broader range of segments or sectors in
the Municipal Bond market. Investment practices of the Fund, including
investment in inverse floating obligations, engaging in interest rate and other
hedging transactions, sales of futures contracts and options and entering into
forward commitments and repurchase agreements, may increase risk to the Fund.
The preferred position of the Preferred Shares, including the RP, on liquidation
and the Fund's redemption obligations in the event that it fails to maintain the
RP Basic Maintenance Amount or the 1940 Act RP Asset Coverage in part mitigate
against the risks arising from the Fund's investment policies and practices.
The Fund has not established any limit on the percentage of its portfolio
that may be invested in Municipal Bonds subject to the alternative minimum tax
provisions of Federal tax law, and dividends paid to holders of RP by the Fund
may be taxable to shareholders under the alternative minimum tax. The Fund may
not be a suitable investment for investors who are already subject to the
Federal alternative minimum tax or who would become subject to the Federal
alternative minimum tax as a result of an investment in the Fund. No provision
will be made to compensate holders of RP for any alternative minimum tax
liability in respect of distributions on the RP. Investors should consider the
possible effect of the Federal alternative minimum tax on an investment in RP.
See "Taxation."
The 1940 Act RP Asset Coverage requirement and the rating agency asset
maintenance guidelines require that the Fund maintain certain asset levels with
respect to the Preferred Shares. See "Investment Objective and Policies--
Asset Maintenance" and Appendix B. In the event that the Fund's assets fall
below these levels, the Fund may be required to redeem some or all of the then
outstanding shares of RP. See "Description of RP--Redemption."
The credit rating of the RP could be reduced while an investor holds the
RP. A decrease in the rating of a share of the RP may affect the ability to
remarket the shares and may reflect a reduction in the Fund's ability to pay
dividends and/or the redemption price and liquidation value in respect of the RP
in accordance with the terms of the RP.
The actual Applicable Dividend Rate for any dividend period after the
Initial Dividend Period for a series of RP may be greater than or less than the
rate indicated in the non-binding indications of the Applicable Dividend Rate
furnished to holders of RP (but, except during a Non-Payment Period, not greater
than the applicable Maximum Dividend Rate) and will not be determined until
after a holder is required to elect to hold or tender its shares of RP.
There can be no assurance that the Remarketing Agent will be able to
remarket all shares of RP tendered in a Remarketing. If any shares of RP
tendered in a Remarketing are not remarketed, a holder thereof may be required
to hold some or all of its shares at least until the end of the next Dividend
Period therefor (or longer if Remarketings continue to fail) or to sell its
shares outside a Remarketing. In such case, the remarketing procedures may
require an allocation of shares of such series of RP on a pro rata basis, to the
extent practicable, or by lot, as determined by the Remarketing Agent in its
sole discretion, which may result in a holder's selling a number of shares of
such series of RP that is less than the number of shares specified in such
holder's tender order. Thus, under certain circumstances, shares of RP may be
illiquid investments. See "Remarketing--Remarketing Procedures--Allocation of
Shares; Failure to Remarket at $25,000 Per Share," "Remarketing--Restrictions on
Transfer" and "Remarketing--The Remarketing Agent." Neither the Remarketing
Agent nor the Fund is obligated to purchase shares of RP in a Remarketing or
otherwise, nor is the Fund required to redeem shares of RP in the event of
failed Remarketings.
10
<PAGE>
There can be no assurance that a secondary market for RP will develop or,
if it does develop, that it will provide liquidity of investment.
Under Federal tax law in effect on the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
RP) does not exceed two percent of the average adjusted basis of the
shareholder's trade or business assets (in the case of most corporations) or
portfolio investments (in the case of individuals). Currently proposed
legislation would further limit or repeal this two-percent de minimis exception,
which could reduce the total after-tax yield of the RP to investors to whom the
de minimis exception would otherwise apply.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The table below presents selected per share data, total returns, and ratios
for the life of the Fund for each share of beneficial interest. Except for
certain information identified below, the information in the table has been
audited and reported on by Coopers & Lybrand L.L.P., the Fund's independent
auditors, whose report appears in this prospectus. See "Report of independent
accountants."
<TABLE>
<CAPTION>
For the period
May 28, 1993
Year Ended April 30 (commencement
---------------------------------------- of operations) to
1997 1996 1995 April 30, 1994
---------------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value of common shares, beginning of
period ............................................. $ 13.50 $ 13.23 $ 13.57 $ 14.07(d)
Investment Operations:
Net investment income .............................. .99 .99 1.02 .94(a)
Net realized and unrealized gain (loss) on
investments ....................................... .20 .36 (.16) (.59)
Total from investment operations ............... 1.19 1.35 .86 .35
Less Distributions:
From net investment income
To preferred shareholders ........................ (.09) (.09) (.08) (.05)(f)
To common shareholders ........................... (.96) (.99) (.99) (.70)
In excess of net investment income:
To common shareholders (.03) -- -- --
From net realized gain on investments:
To common shareholders ........................... -- -- (.09) (.05)
In excess of capital gains:
To common shareholders ........................... -- -- (.03) --
Total distributions .............................. (1.08) (1.08) (1.19) (.80)
Preferred share offering costs ..................... -- -- -- (.05)
Common share offering costs ........................ -- -- (.01)(g) --
Net asset value of common shares, end of period ... $ 13.61 $ 13.50 $ 13.23 $ 13.57
Market value of common shares, end of period ...... $ 13.875 $ 13.625 $ 12.250 $ 12.625
Total Investment Return of common shares at
market value (%)(b) .............................. 9.24 19.64 5.82 (11.22)*
Net Assets, end of period (in thousands) ............ $260,008 $258,119 $253,785 $259,295
Ratio of expenses to average net assets (%) (c)(e) 1.08 1.05 .95 .94*
Ratio of net investment income to average net
assets (%)(c) .................................... 6.60 6.54 6.04 6.14*
Portfolio turnover rate (%) ........................ 20.52 49.97 59.13 60.52*
UNAUDITED
Net assets, net of Preferred Shares, end of period
(in thousands) .................................... $219,933 $218,048 $213,785 $219,295
Preferred Shares (800 shares issued and outstanding
at $50,000 per share) (in thousands) (f) ............ $ 40,000 $ 40,000 $ 40,000 $ 40,000
Asset coverage per $50,000 ........................... 550% 545% 534% 548%
</TABLE>
- ------------
* Not annualized.
(a) Reflects a waiver of the management fee for the period May 28, 1993 to June
13, 1993. As a result of the waiver, expenses of the Fund for the period
ended April 30, 1994 reflect a reduction of less than $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(d) Represents initial net asset value of $14.10 less offering expenses of
$0.03.
(e) The ratio of expenses to average net assets for the year ended April 30,
1996 and thereafter includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts.
(f) Remarketed Preferred Shares, Series A, were issued on August 3, 1993.
(g) Adjustments of the original offering costs to reflect actual costs incurred.
12
<PAGE>
THE FUND
Putnam Municipal Opportunities Trust (the "Fund") is a closed-end,
non-diversified management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund was organized as a
Massachusetts business trust on April 1, 1993, and commenced operations on May
28, 1993. The Fund has outstanding 16,157,092 shares of common stock which trade
on the New York Stock Exchange under the symbol "PMO." The Fund also has
outstanding 800 shares of Series A RP. As of April 30, 1997, the Fund had net
assets of $260,007,830. A copy of the Agreement and Declaration of Trust (the
"Agreement and Declaration of Trust"), which is governed by Massachusetts law,
is on file with the Secretary of State of The Commonwealth of Massachusetts. The
Fund's principal office is located at One Post Office Square, Boston,
Massachusetts 02109, and its telephone number is (617) 292-1000.
INVESTMENT MANAGER
The Fund's investment manager is Putnam Investment Management, Inc.
("Putnam"), a Massachusetts corporation with offices at One Post Office Square,
Boston, Massachusetts 02109. Putnam is a wholly owned subsidiary of Putnam
Investments, Inc., a holding company which is in turn wholly owned by Marsh &
McLennan Companies, Inc., a publicly owned holding company whose principal
businesses are international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
Putnam has been managing mutual funds since 1937. The firm serves as the
investment manager for the funds in the Putnam family, with approximately $144
billion in assets in over 8 million shareholder accounts as of April 30, 1997,
including approximately $18 billion generally invested in Municipal Bonds. In
addition to the Fund, the Putnam family of funds includes 17 closed-end funds,
8 of which, Putnam Investment Grade Municipal Trust, Putnam Investment Grade
Municipal Trust II, Putnam Investment Grade Municipal Trust III, Putnam
California Investment Grade Municipal Trust, Putnam New York Investment Grade
Municipal Trust, Putnam Tax- Free Health Care Fund, Putnam Managed Municipal
Trust, and Putnam High Yield Municipal Trust, invest primarily in Municipal
Bonds. An affiliate, The Putnam Advisory Company, Inc., manages domestic and
foreign institutional accounts and foreign mutual funds. Another affiliate,
Putnam Fiduciary Trust Company, provides investment advice to institutional
clients under its banking and fiduciary powers. Putnam and its affiliates
managed approximately $187 billion in assets as of April 30, 1997.
Putnam performs a detailed credit analysis on all of the Municipal Bonds in
which a fund invests. Putnam currently employs 7 portfolio managers dedicated to
the Municipal Bond market, supported by 29 investment analysts and other
research personnel. Their investment analysis is supported by Putnam's computer
modeling techniques and issuer data base. The portfolio manager who is currently
primarily responsible for the day-to-day management of the Fund's portfolio is
identified under "Trustees and Officers" below. Putnam considers a Municipal
Bond's rating by a national rating service as only one factor in its analysis of
the security.
USE OF PROCEEDS
The net proceeds of this offering are estimated to be $79,821,955, after
payment of the sales load and offering expenses.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective and policies during a period estimated not to exceed
three months from completion of the offering, depending on market conditions and
the availability of appropriate securities. Pending such investment, the
proceeds will be invested in high-quality, short-term money market instruments.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
April 30, 1997, and as adjusted to give effect to the issuance of the RP
offered hereby.
<TABLE>
<CAPTION>
Actual As Adjusted
------------- -------------
<S> <C> <C>
Preferred Shares, without par value, 6,000 shares
authorized; 800 shares of Series A RP issued and
outstanding at $50,000 per share liquidation
preference; as adjusted for issuance of 1,620
shares of Series B RP and 1,620 shares of Series
C RP issued and outstanding at $25,000 per share
liquidation preference $ 40,000,000 $ 121,000,000
Common Shares, without par value, unlimited
shares authorized; 16,157,092 shares issued and
outstanding 226,378,565 225,200,520
Distributions in excess of net investment income (415,009) (415,009)
Net unrealized appreciation of investments 3,242,497 3,242,497
Accumulated net realized loss on investments (9,198,223) (9,198,223)
------------- -------------
Net assets $ 260,007,830 $ 339,829,785
============= =============
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek as high a level of current
income exempt from Federal income tax as Putnam believes is consistent with
preservation of capital.
The Fund will seek to achieve its investment objective primarily by
investing in a portfolio of Municipal Bonds issued by or for the benefit of
entities principally engaged in those sectors of the Municipal Bond market that
in the opinion of Putnam present the most attractive opportunities to attain a
high level of current income exempt from Federal income tax, consistent with the
preservation of capital. Under normal market conditions, the Fund will not
invest more than 50% of its total assets in any one sector. In managing the
Fund's portfolio, Putnam will perform detailed analyses of the sectors of the
Municipal Bond market, and, depending on the results of its analysis, may from
time to time adjust the proportion of the Fund's assets allocated among the
various sectors. Putnam's analyses will be based on a variety of factors,
including market conditions, general economic conditions, technological
developments and political considerations. The sectors in which the Fund invests
and the proportion of the Fund, if any, allocated to such sectors may change
over time. Investment in a limited number of sectors in the Municipal Bond
market and active management of portfolio allocation involve certain risks.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in Municipal Bonds rated investment grade at the time of investment
or, if not rated, determined by Putnam to be of comparable quality. Investment
grade Municipal Bonds are rated BBB or higher by Standard & Poor's Ratings
Services ("S&P") or Fitch Investors Service, Inc. ("Fitch") or Baa or higher by
Moody's Investors Service, Inc. ("Moody's") (or equivalently rated by another
nationally recognized rating service) in the case of long-term obligations, and
have equivalent ratings in the case of short-term obligations. For a description
of the ratings of each of the rating agencies, see Appendix C to this
Prospectus.
The Fund may invest up to 20% of its total assets in securities that are
rated BB or B by S&P and Fitch and Ba or B by Moody's (or equivalently rated by
another nationally recognized rating service) in the case of long-term
obligations (and equivalently rated in the case of short-term obligations) or,
if non-rated, determined by Putnam to be of comparable quality, at the time of
investment. The Fund may only invest in securities rated at least B or in
unrated securities deemed by Putnam to be of comparable quality. While offering
opportunities for higher yields, such lower-rated securities are considered by
the rating agencies or by Putnam, as the case may be, below investment grade and
to involve higher risk. Such lower-rated securities are regarded by the rating
agencies or by Putnam, as the case may be, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. The Fund will not necessarily
dispose of a security when its rating is reduced below its rating at the time of
purchase, although Putnam will monitor the investment to determine whether
continued investment in the security will assist in meeting the Fund's
investment objective. See "Risk Factors--Lower-rated Municipal Bonds" and
Appendix C.
14
<PAGE>
The Fund will not invest more than 20% of its total assets in Municipal
Bonds not rated by a nationally recognized rating service at the time of
commitment. Although the ratings of S&P, Fitch, or Moody's of the Municipal
Bonds in the Fund's portfolio are relative and subjective, and are not absolute
standards of quality, such ratings reflect the assessment of S&P, Fitch, or
Moody's, as the case may be, at the time of issuance of the rating, of the
issuer's ability to make timely payments of interest and to repay principal or
the economic viability of the special revenue source. Such ratings, however, do
not reflect an assessment of the market value of the obligation. The Fund will
not necessarily dispose of a security when its rating is reduced below its
rating at the time of purchase, although Putnam will monitor the investment to
determine whether continued investment in the security is consistent with the
Fund's investment objective. The rating services undertake no obligation to
update their ratings of securities. See Appendix C.
The Fund may invest an unlimited portion of its assets in Municipal Bonds
subject to the Federal alternative minimum tax, and as a result a substantial
portion of the Fund's distributions may be taxable to certain shareholders.
Subject to the limitations set forth in this Prospectus, the Fund may engage in
certain hedging transactions involving the use of futures contracts, options on
futures contracts, and options on indices of Municipal Bonds and on U.S.
Government securities. Such hedging transactions may give rise to taxable gains.
All or a portion of the Fund's distributions may be subject to state and local
taxation.
An investment in the Fund may not be appropriate for all investors, and
there is no assurance the Fund will achieve its investment objective.
Municipal Bonds
Municipal Bonds include obligations of States and their political
subdivisions, and a territory or a U.S. possession, or any of their agencies,
instrumentalities or other governmental units, the interest on which, in the
opinion of bond counsel, is exempt from federal income tax other than minimum
corporate income tax. These securities are issued to obtain funds for various
public purposes, such as the construction of public facilities, the payment of
general operating expenses or the refunding of outstanding debts. They may also
be issued to finance various private activities, including the lending of funds
to public or private institutions for the construction of housing, educational
or medical facilities, or to fund short-term cash requirements. They may also
include certain types of industrial development bonds, private activity bonds or
notes issued by public authorities to finance privately owned or operated
facilities.
Short-term Municipal Bonds may be issued as interim financing in
anticipation of tax collections, revenue receipts or bond sales to finance
various public purposes. Municipal Bonds may also include obligations issued by
certain other governmental entities, such as U.S. territories, if these debt
obligations generate interest income that is exempt from federal income tax.
The two principal classifications of Municipal Bonds are general obligation
and special obligation (or special revenue obligation) bonds.
General obligation bonds involve a pledge of the credit of an issuer
possessing taxing power and are payable from the issuer's general unrestricted
revenues. Their payment may depend on an appropriation by the issuer's
legislative body. The characteristics and methods of enforcement of general
obligation bonds vary according to the law applicable to the particular issuer.
Special obligation (or special revenue obligation) bonds are payable only
from the revenues derived from a particular facility or class of facilities, or
a specific revenue source, and generally are not payable from the unrestricted
revenues of the issuer. Industrial development bonds and private activity bonds
are in most cases special obligation bonds, whose credit quality is tied to the
private user of the facilities.
The fund may also invest in securities representing interests in Municipal
Bonds known as "inverse floating obligations" or "residual interest bonds."
These obligation pay interest rates that vary inversely with changes in the
interest rates of specified short-term Municipal Bonds or an index or short-term
Municipal Bonds. The interest rates on inverse floating obligations or residual
interest bonds will typically decline as short-term market interest rates
increase and increase as short-term market rates decline. These securities have
the effect of providing a degree of investment leverage. They will generally
respond to changes in market interest rates more rapidly than fixed-rate
long-term securities (typically twice as fast). As a result, the market values
of inverse floating obligations and residual interest bonds will generally be
more volatile than the market values of fixed-rate Municipal Bonds.
15
<PAGE>
The Fund may also invest in participations in lease obligations or
installment purchase contract obligations and tax-exempt commercial paper.
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 purposes on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
In addition, the tax treatment of such obligations in the event of non-
appropriation is unclear.
Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable.
Selection of Investments
Putnam will buy and sell securities for the Fund's portfolio with a view to
seeking a high level of current income exempt from Federal income tax and will
select securities constituting a portfolio which Putnam believes does not
involve undue risk to income or principal considered in relation to the
particular investment policies of the Fund. As a result, the Fund will not
necessarily invest in the highest yielding Municipal Bonds permitted by its
investment policies if Putnam determines that market risks or credit risks
associated with such investments would subject the Fund's portfolio to excessive
risk. The potential for realization of capital gains resulting from possible
changes in interest rates will not be a major consideration. Putnam will be free
to take full advantage of the entire range of maturities offered by Municipal
Bonds and may adjust the average maturity of the Fund's portfolio from time to
time, depending on its assessment of the relative yields available on securities
of different maturities and its expectations of future changes in interest
rates.
Portfolio Turnover
The length of time the Fund has held a particular security is not generally
a consideration in investment decisions. A change in the securities held by the
Fund is known as "portfolio turnover." As a result of the Fund's investment
policies, under certain market conditions its portfolio turnover rate may be
higher than that of other investment companies.
Portfolio turnover generally involves some expense, including brokerage
commissions or dealer markups and other transaction costs on the sale of
securities and reinvestment in other securities. These transactions may result
in realization of taxable capital gains. See "Financial Highlights."
Rating Agency Guidelines
The composition of the Fund's portfolio will reflect guidelines established
by Moody's and S&P in connection with the Fund's receipt of a rating for the
shares of RP on their date of original issue of at least "aaa" by Moody's and
AAA by S&P. Moody's and S&P, nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described under "Investment
Objective and Policies--Asset Maintenance" and in Appendix B have been developed
by Moody's and S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and variable rate preferred stocks,
generally on a case-by-case basis through discussions with the issuers of these
securities. The guidelines are generally designed to ensure that assets
underlying outstanding debt or preferred stock will be sufficiently varied and
will be of sufficient quality and amount to justify investment-grade ratings.
The guidelines do not have the force of law but have been adopted by the Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of RP, which ratings are generally relied
upon by institutional investors in purchasing such securities. The guidelines
include a set of tests for portfolio composition and asset coverage that
supplement (and in some cases are more restrictive than) the applicable
requirements under the 1940 Act.
16
<PAGE>
Asset Maintenance
1940 Act RP Asset Coverage. The Fund will be required under the Bylaws to
maintain, as of the last Business Day of each month in which any shares of RP
are outstanding, asset coverage of at least 200% with respect to outstanding
senior securities which are stock, including the shares of RP (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares of a closed-end
investment company as a condition of paying dividends on its common shares)
("1940 Act RP Asset Coverage"). If the Fund fails to maintain 1940 Act RP Asset
Coverage and such failure is not cured as of the last Business Day of the
following month (the "1940 Act Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the Preferred Shares. See
"Description of RP--Redemption."
Based on the composition of the Fund's portfolio at April 30, 1997, 1940
Act RP Asset Coverage with respect to the shares of RP, following the issuance
of all shares of RP offered hereby and after giving effect to payment of the
estimated sales load and offering costs for the shares of RP, would be computed
as follows:
Value of Fund assets less
liabilities not constituting
Senior securities $339,829,785
---------------------------- = ------------ = 280.85%
Senior securities $121,000,000
representing indebtedness
plus liquidation value
of the Preferred Shares
RP Basic Maintenance Amount. In connection with their respective ratings of
the RP, Moody's and S&P have each established asset coverage guidelines which
are incorporated into the Bylaws designed to ensure the payment of the
liquidation preference and the Fund's other obligations in respect of its
outstanding shares of RP. These guidelines require the Fund among other things
to maintain investment-grade assets with a value (discounted in accordance with
each rating agency's guidelines) equal to the RP Basic Maintenance Amount. These
guidelines impose restrictions on the securities in which the Fund may invest,
limit the Fund's use of futures, options and forward commitments, and prohibit
the use of borrowing for leverage and the Fund's entering into short sales,
securities lending and reverse repurchase agreements. These requirements are
explained in greater detail in Appendix B. If the Fund fails to meet such
requirements and such failure is not cured, the Fund will be required under
certain circumstances to redeem some or all of the shares of RP. See
"Description of RP--Redemption."
General. The Fund may, but is not required to, adopt any modifications to
these guidelines that may hereafter be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the shares of RP may, at any time, change or
withdraw any such rating. As set forth in the Bylaws, the Trustees may, without
shareholder approval, modify certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, provided in
certain cases the Trustees have obtained written confirmation from Moody's and
S&P that any such change would not impair the ratings then assigned by Moody's
and S&P to the RP.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the RP are not recommendations to purchase, hold or
sell shares of RP, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. Nor do the rating agency guidelines
address the likelihood that a holder of shares of RP will be able to sell such
shares in a Remarketing. The ratings are based on current information furnished
to Moody's and S&P by the Fund and Putnam and information obtained from other
sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.
17
<PAGE>
OTHER INVESTMENT PRACTICES
The Fund may engage in the following incidental investment practices, some
of which may result in taxable income, and each of which may involve certain
special risks. The investment guidelines imposed by Moody's and S&P limit, and
in some cases prohibit, the Fund's use of certain of these investment practices
without the express authorization of the applicable rating agency.
Financial Futures and Options
The Fund may invest in options and certain financial futures contracts.
There can be no assurance that the Fund's hedging transactions will be
effective. For so long as shares of RP are rated by Moody's, the Fund will not
purchase or sell futures contracts or write, purchase or sell options on futures
contracts or write put or call options (except covered call or put options) on
portfolio securities unless it receives written confirmation from Moody's that
engaging in such transactions would not impair the rating then assigned to the
shares of RP by Moody's, except that the Fund may purchase or sell
exchange-traded futures contracts based on the Municipal Index or Treasury Bonds
and purchase or sell exchange-traded put options on such futures contracts and
purchase, write or sell exchange-traded call options on such futures contracts
(collectively "Moody's Hedging Transactions"), subject to the limitations
described in Appendix B. For so long as shares of RP are rated by S&P, the Fund
will not purchase or sell futures contracts or write, purchase or sell options
on futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the rating then assigned to the shares of RP by S&P, except that the Fund may
purchase or sell futures contracts based on the Municipal Index or Treasury
Bonds with remaining maturities of ten years or more and write, purchase or sell
put and call options on such contracts (collectively "S&P Hedging Transactions")
subject to the limitations described in Appendix B.
The Fund may purchase and sell financial futures contracts and options,
including index futures contracts on the Municipal Bond Index. This index is
intended to represent a numerical measure of market performance for long-
term tax-exempt bonds. An "index future" is a contract to buy or sell units of a
particular securities index at an agreed price on a specified future date.
Depending on the change in value of the index between the time the Fund enters
into and terminates an index futures contract, the Fund realizes a gain or loss.
The Fund may also purchase and sell put and call options on index futures
or on indexes directly, in addition to or as an alternative to purchasing and
selling index futures. The Fund may also purchase and sell futures contracts and
related options on U.S. Treasury securities, including U.S. Treasury bills,
notes and bonds ("U.S. government securities") and options directly on U.S.
government securities.
In addition, the Fund may purchase put and call options on, or warrants to
purchase, Municipal Bonds either directly or through custodial arrangements in
which the Fund and other investors own an interest in one or more options on
Municipal Bonds.
The Fund will engage in these transactions for hedging purposes and, to the
extent permitted by applicable law, for nonhedging purposes, such as to manage
the effective duration of the Fund's portfolio or as a substitute for direct
investment.
The use of futures and options involves certain special risks and may
result in the realization of taxable income or capital gains. Futures and
options transactions involve costs and may result in losses.
Certain risks arise from the possibility of imperfect correlations among
movements in the prices of financial futures and options purchased or sold by
the Fund, of the underlying bond index or U.S. government securities and, in the
case of hedging transactions, of the Municipal Bonds that are the subject of the
hedge.
Other risks arise from the potential inability to close out futures or
options positions. There can be no assurance that a liquid secondary market will
exist for any futures contract or option at a particular time. Certain
provisions of the Internal Revenue Code and certain regulatory requirements may
limit the use of futures and options transactions. The successful use of these
strategies further depends on the ability of Putnam to forecast interest rates
and market movements correctly.
See Appendix D for more detailed information about these practices,
including limitations designed to reduce risks.
18
<PAGE>
Forward Commitments
The Fund may make contracts to purchase securities for a fixed price at a
future date, beyond customary settlement time ("forward commitments"), if it
holds, and maintains until the settlement date in a segregated account, cash,
cash equivalents or short-term, fixed income securities in an amount sufficient
to meet the purchase price, or if it enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Fund's other assets. Where such
purchases are made through dealers, the Fund relies on the dealer to consummate
the sale. The dealer's failure to do so may result in the loss to the Fund of an
advantageous yield or price. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio or for
delivery pursuant to options contracts it has entered into, the Fund may dispose
of a commitment prior to settlement if Putnam deems it appropriate to do so. The
Fund may realize capital gains or losses upon the sale of forward commitments.
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to up to 25% of
its total assets (taken at current value). A repurchase agreement is a contract
under which the Fund acquires a security for a relatively short period (usually
not more than one week) subject to the obligation of the seller to repurchase
and the Fund to resell such security at a fixed time and price (representing the
Fund's cost plus interest). It is the Fund's present intention to enter into
repurchase agreements only with commercial banks and registered broker-dealers.
Repurchase agreements may also be viewed as loans made by the Fund which are
collateralized by the securities subject to repurchase. Putnam will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligations,
including the interest factor. If the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale including accrued interest are less than the resale price provided in the
agreement including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, the Fund may incur delays and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and required to return the
underlying collateral to the seller's estate. The Fund's investments in
repurchase agreements generally will give rise to taxable income.
Certain Restrictions
For so long as shares of RP are rated by Moody's or S&P, the Fund will not,
unless it has received any required written confirmation from Moody's or S&P, as
the case may be, that such action would not impair the ratings then assigned to
the RP by Moody's or S&P, as the case may be, (i) borrow money except for the
purpose of clearing transactions in portfolio securities, (ii) engage in short
sales of securities, (iii) lend any portfolio securities, (iv) issue any class
or series of shares of beneficial interest ranking prior to the RP with respect
to the payment of dividends or the distribution of assets upon liquidation of
the Fund, (v) merge or consolidate into or with any other corporation or entity,
(vi) engage in reverse repurchase agreements, or (vii) designate a new Pricing
Service.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which may not be
changed without the affirmative vote of a "majority of the outstanding voting
securities" of the Fund (which is defined in the 1940 Act to mean the
affirmative vote of the lesser of (1) more than 50% of the outstanding Common
Shares and of the outstanding Preferred Shares of the Fund, each voting as a
separate class, or (2) 67% or more of the Common Shares and of the Preferred
Shares, each voting as a separate class, present at a meeting if more than 50%
of the outstanding Shares of each class are represented at the meeting in person
or by proxy). The Fund may not:
1. Issue senior securities, as defined in the 1940 Act, other than shares of
beneficial interest with preference rights, except to the extent such
issuance might be involved with respect to borrowings described under
restriction 2 below or with respect to transactions involving financial
futures, options, and other financial instruments.
2. Borrow money in excess of 10% of the value (taken at the lower of cost or
current value) of its total assets (not including the amount borrowed) at
the time the borrowing is made, and then only from banks as a temporary
measure (not for leverage) in situations which might otherwise require the
untimely disposition of portfolio investments or for extraordinary or
emergency purposes. Such borrowings will be repaid before any additional
investments are purchased.
19
<PAGE>
3. Underwrite securities issued by other persons except to the extent that,
in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under the Federal securities laws.
4. Purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, securities which are secured by
interests in real estate, and securities representing interests in real
estate, and it may acquire and dispose of real estate or interests in real
estate acquired through the exercise of its rights as a holder of debt
obligations secured by real estate or interests therein.
5. Purchase or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options and may
enter into foreign exchange contracts and other financial transactions not
involving physical commodities.
6. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities.
7. With respect to 50% of its total assets, invest in the securities of any
issuer if, immediately after such investment, more than 5% of the total
assets of the Fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to
obligations issued or guaranteed as to interest or principal by the U.S.
Government or its agencies or instrumentalities.
8. With respect to 50% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer.
9. Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities or tax-exempt securities, except tax-exempt
securities backed only by the assets and revenues of non-governmental
issuers) if, as a result of such purchase, more than 25% of the Fund's
total assets would be invested in any one industry.
All percentage limitations on investments described in this Prospectus will
apply at the time of investment and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above and the Fund's
policy under normal market conditions to invest at least 80% of its assets in
Municipal Bonds, the other investment policies described in this Prospectus are
not fundamental and may be changed by approval of the Fund's Trustees.
TRUSTEES AND OFFICERS
The Trustees of the Fund are responsible for the general oversight of the
Fund's business. The Trustees and executive officers of the Fund and their
principal occupations during the last five years are set forth below. The
mailing address of each of the officers and Trustees is One Post Office Square,
Boston, Massachusetts 02109.
Trustees
George Putnam (70), Chairman and President. Chairman and Director of Putnam
Investment Management, Inc. and Putnam Mutual Funds Corp. Director, Freeport
McMoRan, Inc., Freeport Copper and Gold, Inc., McMoRan Oil and Gas Inc., General
Mills, Inc., Houghton Mifflin Company, and Marsh & McLennan Companies, Inc.(b)*
William F. Pounds (69), Vice Chairman. Professor of Management, Alfred P.
Sloan School of Management, Massachusetts Institute of Technology. Director of
EG&G, Inc., IDEXX Laboratories, Inc., Perseptive Biosystems, Inc., Management
Sciences for Health, Inc. and Sun Company, Inc.(b)
Jameson A. Baxter (53). President, Baxter Associates, Inc. (a management
and financial consultant). Director of Avondale Federal Savings Bank, ASHTA
Chemicals, Inc. and Banta Corporation. Chairman Emeritus of the Board of
Trustees, Mount Holyoke College.
- ------------
(a) George Putnam, III is the son of George Putnam.
(b) Members of the Executive Committee of the Trustees. The Executive Committee
meets between regular meetings of the Trustees as may be required to review
investment matters and other affairs of the fund and may exercise all of the
powers of the Trustees.
* Trustees who are or may be deemed to be "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund, Putnam Management or Putnam
Mutual Funds.
20
<PAGE>
Hans H. Estin (68). Vice Chairman, North American Management Corp. (a
registered investment adviser). (b)
John A. Hill (55). Chairman and Managing Director, First Reserve
Corporation (a registered investment adviser). Director of Maverick Tube
Corporation, PetroCorp Incorporated, Snyder Oil Corporation, Weatherford
Enterra, Inc. and various First Reserve Funds.
Ronald J. Jackson (53). Former Chairman, President and Chief Executive
Officer of Fisher-Price, Inc., Director of Safety 1st, Inc., Trustee of Salem
Hospital and the Peabody Essex Museum.
Elizabeth T. Kennan (59). President Emeritus and Professor, Mount Holyoke
College. Director of the Kentucky Home Life Insurance Companies, NYNEX
Corporation, Northeast Utilities and Talbots. Trustee of the University of Notre
Dame.
Lawrence J. Lasser (54). Vice President. President, Chief Executive Officer
and Director of Putnam Investments, Inc. and Putnam Investment Management, Inc.
Director of Marsh & McLennan Companies, Inc.*
Robert E. Patterson (52). Executive Vice President and Director of
Acquisitions, Cabot Partners Limited Partnership (a registered investment
adviser).
Donald S. Perkins (70). Director of various corporations, including AON
Corp., Cummins Engine Company, Inc., Current Assets L.L.C., Illinova and
Illinois Power Company, LaSalle Street Fund, Inc., Lucent Technologies, Inc.,
and Time Warner Inc.*
George Putnam, III (45). President, New Generation Research, Inc.
(publisher of bankruptcy information) and New Generation Advisors, Inc. (a
registered investment adviser).(a)*
A.J.C. Smith (63). Chairman and Chief Executive Officer, Marsh & McLennan
Companies, Inc. Director, Trident Corp.*
W. Nicholas Thorndike (64). Director of various corporations and charitable
organizations, including Courier Corporation, Data General Corporation, Bradley
Real Estate, Inc. and Providence Journal Co.
Officers
Charles E. Porter (58), Executive Vice President. Managing Director of
Putnam Investment Management, Inc. and Putnam Investments, Inc. Executive Vice
President of the Putnam Funds.
Patricia C. Flaherty (50), Senior Vice President, Senior Vice President of
Putnam Investment Management, Inc. and Putnam Investments, Inc.
John D. Hughes (62), Senior Vice President and Treasurer of the Putnam
Funds.
Gordon H. Silver (49), Vice President. Director and Senior Managing
Director of Putnam Investment Management, Inc. and Putnam Investments, Inc. Vice
President of the Putnam Funds.
Gary N. Coburn (51), Vice President. Senior Managing Director of Putnam
Investment Management, Inc. and Putnam Investments, Inc. Vice President of
certain of the Putnam Funds.
Jerome J. Jacobs (38), Vice President. Managing Director of Putnam
Investment Management, Inc. and Putnam Investments, Inc.
William J. Curtin (37), Vice President. Managing Director of Putnam
Investment Management, Inc. and Putnam Investments, Inc.
Blake E. Anderson (40), Vice President. Managing Director of Putnam
Investment Management, Inc.
- ------------
(a) George Putnam, III is the son of George Putnam.
(b) Members of the Executive Committee of the Trustees. The Executive Committee
meets between regular meetings of the Trustees as may be required to review
investment matters and other affairs of the fund and may exercise all of the
powers of the Trustees.
* Trustees who are or may be deemed to be "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund, Putnam Management or Putnam
Mutual Funds.
21
<PAGE>
William N. Shiebler (55), Vice President. Director and Senior Managing
Director of Putnam Investments, Inc. President and Director of Putnam Mutual
Funds Corp. Vice President of the Putnam Funds.
John R. Verani (58), Vice President. Senior Vice President of Putnam
Investment Management, Inc. and Putnam Investments, Inc. Vice President of the
Putnam Funds.
Paul G. Bucuvalas (46), Assistant Treasurer. Assistant Treasurer of the
Putnam Funds.
Paul M. O'Neil (43), Vice President. Vice President of Putnam Investment
Management, Inc. and Putnam Investments, Inc.
Beverly Marcus (53), Clerk and Assistant Treasurer. Clerk and Assistant
Treasurer of the Putnam Funds.
------------
In connection with the election of the Fund's Trustees, holders of
Preferred Shares including RP (along with the holders of any other preferred
shares of the Fund), voting as a separate class, are entitled to elect two of
the Fund's Trustees, and the remaining Trustees will be elected by holders of
Common Shares and Preferred Shares voting together as a single class. Messrs.
Hill and Patterson are the Trustees elected by holders of Preferred Shares. See
"Description of RP--Voting Rights" and "Description of Shares."
Except as stated below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Prior to 1996, Mr. Curtin was Managing Director of Lehman Brothers. Prior to
1996, Mr. Jacobs was Principal at The Vanguard Group. Prior to 1993, Mr. Jackson
was Chairman of the Board, President and Chief Executive Officer of
Fisher-Price, Inc.
Mr. Anderson is primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Anderson has been employed by Putnam Investment
Management, Inc. for the past 9 years, in the management of tax exempt funds in
the Putnam family of funds.
The Agreement and Declaration of Trust of the Fund provides that the Fund
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Fund, except if it is determined in the manner specified
in the Agreement and Declaration of Trust that they have not acted in good faith
in the reasonable belief that their actions were in the best interests of the
Fund or that such indemnification would relieve any officer or Trustee of any
liability to the Fund or its shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Fund,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
Each Trustee receives a fee for his or her services. Each Trustee also
receives fees for serving as Trustee of other Putnam funds. The Trustees
periodically review their fees to assure that such fees continue to be
appropriate in light of their responsibilities as well as in relation to fees
paid to trustees of other mutual fund complexes. The current practice of the
Trustees is to meet monthly over a two-day period, except in August. The
Compensation Committee, which consists solely of Trustees not affiliated with
Putnam and is responsible for recommending Trustee compensation, estimates that
Committee and Trustee meeting time together with the appropriate preparation
requires the equivalent of at least three business days per Trustee meeting. The
following table shows the year each Trustee was first elected a Trustee of the
Putnam funds, the fees paid to each Trustee by the fund for fiscal 1997 and the
fees paid to each Trustee by all of the Putnam funds during calendar 1996:
22
<PAGE>
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Estimated annual
Aggregate retirement benefits benefits from all Total compensation
compensation accrued as part of Putnam Funds from all
Trustee/Year from the Fund(1) Fund expenses(2) upon retirement(3) Putnam Funds(4)
------------ ---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Jameson A. Baxter/1994 $798 $162.25 $85,646 $ 172,291(5)
Hans H. Estin/1972 794 559.30 85,646 171,291
John A. Hill/1985 792 208.92 85,646 170,791(5)
Ronald J. Jackson/1996 (6) 721 17.57 85,646 94,807(5)
Elizabeth T. Kennan/1992 793 374.91 85,646 171,291
Lawrence J. Lasser/1992 792 281.18 85,646 169,791
Robert E. Patterson/1984 814 167.37 85,646 182,291
Donald S. Perkins/1982 798 608.79 85,646 170,291
William F. Pounds/1971 (7) 853 564.03 98,146 197,291
George Putnam/1957 798 642.13 85,646 171,291
George Putnam, III/1984 798 110.14 85,646 171,291
A.J.C. Smith/1986 783 373.71 85,646 169,791
W. Nicholas Thorndike/1992 808 538.64 85,646 181,291
</TABLE>
- ------------
(1) Includes an annual retainer and an attendance fee for each meeting attended.
(2) The Trustees approved a Retirement Plan for Trustees of the Putnam funds on
October 1, 1996. Prior to that date, voluntary retirement benefits were paid
to certain retired Trustees.
(3) Assumes that each Trustee retires at the normal retirement date. Estimated
benefits for each Trustee are based on Trustee fee rates in effect during
calendar 1996.
(4) As of December 31, 1996, there were 96 funds in the Putnam family.
(5) Includes compensation deferred pursuant to a Trustee Compensation Deferral
Plan.
(6) Elected as a Trustee in May 1996.
(7) Includes additional compensation for service as Vice Chairman of the Putnam
Funds.
Under a Retirement Plan for Trustees of the Putnam Funds (the "Plan"), each
Trustee who retires with at least five years of service as a Trustee of the
Funds is entitled to receive an annual retirement equal to one half of the
average annual compensation paid to such Trustee for the last three years of
service prior to retirement. This retirement benefit is payable during a
Trustee's lifetime, beginning the year following retirement, for a number of
years equal to such Trustee's years of service. A death benefit is also
available under the Plan which assures that the Trustee and his or her
beneficiaries will receive benefit payments for the lesser of an aggregate
period of (i) ten years or (ii) such Trustee's total years of service.
The Plan Administrator (a committee comprised of Trustees that are not
"interested persons" of the fund, as defined in the Investment Company Act of
1940) may terminate or amend the Plan at any time, but no termination or
amendment will result in a reduction in the amount of benefits (i) currently
being paid to a Trustee at the time of such termination or amendment, or (ii) to
which a current Trustee would have been entitled to receive had he or she
retired immediately prior to such termination or amendment.
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<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
Except as set forth in the following table, no person or "group" (as
defined by regulation of the Commission) was known to the Fund to be the
beneficial or record owner of 5% or more of the Common Shares as of June 30,
1997.
Name and Address Amount of Record Ownership Percent
- ---------------- -------------------------- -------
Cede & Co.
7 Hanover Square
New York, NY 10004 14,652,249 90.68%
As of June 30, 1997, the officers and Trustees of the Fund owned less than
1% of the outstanding Common Shares.
Except as set forth in the following table, no person or "group" (as
defined by regulation of the Commission) was known to the Fund to be the
beneficial or record owner of 5% or more of the Series A RP as of June 30, 1997.
Name and Address Amount of Record Ownership Percent
- ---------------- -------------------------- -------
Cede & Co.
7 Hanover Square
New York, NY 10004 800 100%
As of June 30, 1997, the officers and Trustees of the Fund owned less than
1% of the outstanding Series A RP.
INVESTMENT MANAGEMENT CONTRACT
Under a Management Contract between the Fund and Putnam, subject to such
policies as the Trustees may determine, Putnam, at its own expense, furnishes
continuously an investment program for the Fund and makes investment decisions
on behalf of the Fund. Subject to the control of the Trustees, Putnam also
places all orders for the purchase and sale of the Fund's portfolio securities.
As compensation for the services rendered and expenses borne by Putnam
under the Management Contract, the Fund pays Putnam a quarterly fee based on the
Fund's average net asset value (determined as described below), including assets
attributable to any RP that may be outstanding, at the annual rate of 0.50% of
the first $500 million of the average net asset value of the Fund, 0.43% of the
next $500 million, 0.39% of the next $500 million, and 0.35% of any excess over
$1.5 billion of such average net asset value. If dividends payable on the
Preferred Shares during any dividend period plus expenses attributable to the
Preferred Shares for that period exceed the gross income of the Fund during that
period attributable to the investment of the proceeds of the Preferred Shares,
then the fee payable to Putnam for that period will be reduced by an amount
equal to the product of such excess and a fraction, the numerator of which shall
be the fee otherwise payable to Putnam pursuant to the Management Contract and
the denominator of which shall be the sum of the fee otherwise payable to Putnam
pursuant to the Management Contract and the administrative services fee
otherwise payable to Putnam under the Administrative Services Contract,
described below, between the Fund and Putnam; provided, however, that the amount
of such reduction for any such dividend period shall not exceed the amount
determined by multiplying (i) the aggregate liquidation preference of the
average number of shares of the Preferred Shares outstanding during the dividend
period, by (ii) the percentage of the aggregate net asset value of the Fund
which the fee payable to Putnam during such period pursuant to the Management
Contract would constitute without giving effect to such reduction. Average net
asset value is to be determined by taking the average of the weekly
determinations of the net asset value, determined at the close of the last
business day of each week, for each week which ends during the quarter.
Under the Management Contract, under which the management fee payable to
Putnam was paid at the rate described above, the Fund incurred the following
fees in the preceding three fiscal periods:
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<PAGE>
Reflecting a reduction
in the following
Fiscal Management amounts pursuant
period fee paid to a fee waiver
------ -------- ---------------------
1997 $1,303,216 $0
1996 $1,308,444 $0
1995 $1,270,593 $0
The Management Contract may be terminated without penalty by vote of the
Trustees or the shareholders of the Fund, or by Putnam, on 30 days' written
notice. It may be amended only by a vote of the shareholders of the Fund. The
Management Contract also terminates without payment of any penalty in the event
of its assignment. The Management Contract provides that it will continue in
effect only so long as such continuance is approved at least annually by vote of
either the Trustees or the shareholders, and, in either case, by a majority of
the Trustees who are not "interested persons" of Putnam or the Fund. In each of
the foregoing cases, the vote of the shareholders is the affirmative vote of the
lesser of (i) 67% or more of the Common Shares and Preferred Shares, voting
together as a single class, if the holders of more than 50% of the Common Shares
and Preferred Shares are present or represented by proxy, or (ii) 50% or more of
the Common Shares and Preferred Shares, voting together as a single class.
The Management Contract provides that Putnam shall not be subject to any
liability to the Fund or to any shareholder of the Fund for any act or omission
in the course of or connected with rendering services to the Fund in the absence
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
its duties on the part of Putnam.
ADMINISTRATIVE SERVICES CONTRACT
Under an Administrative Services Contract between the Fund and Putnam,
Putnam, at its own expense and subject to the control of Trustees, manages,
supervises, and conducts the non-investment related affairs and business of the
Fund, furnishes office space and equipment, and provides bookkeeping and
clerical services (including determination of the Fund's net asset value, but
excluding transfer agency services). As compensation for the services rendered,
facilities furnished, and expenses borne by Putnam under the Administrative
Services Contract, the Fund will pay Putnam a quarterly fee based on the Fund's
average net asset value (determined as described below) including assets
attributable to any Preferred Shares that may be outstanding, at the annual rate
of 0.20% of the first $500 million of the average net asset value of the Fund,
0.17% of the next $500 million, 0.16% of the next $500 million, and 0.15% of any
excess over $1.5 billion of such average net asset value. If dividends payable
on Preferred Shares during any dividend period plus expenses attributable to
Preferred Shares for that period exceed the gross income of the Fund during that
period attributable to the investment of the proceeds of such Preferred Shares,
then the administrative services fee payable to Putnam for that period will be
reduced by an amount equal to the product of such excess and a fraction, the
numerator of which shall be the fee otherwise payable to Putnam pursuant to the
Administrative Services Contract and the denominator of which shall be the sum
of the fee otherwise payable to Putnam pursuant to the Administrative Services
Contract and the management fee otherwise payable to Putnam under the Management
Contract between the Fund and Putnam; provided, however, that the amount of such
reduction for any such period shall not exceed the amount determined by
multiplying (i) the aggregate liquidation preference of the average number of
shares of such Preferred Shares outstanding during that period, by (ii) the
percentage of the aggregate net asset value of the Fund which the fee payable to
Putnam during such period pursuant to the Administrative Services Contract would
constitute without giving effect to such reduction. Average net asset value is
determined by taking the average of the weekly determinations of the net asset
value, determined as of the close of the last business day of each week, for
each week that ends during the quarter. In providing services under the
Administrative Services Contract, Putnam utilizes certain administrative
services provided by Princeton Administrators, L.P. ("Princeton"), an affiliate
of Merrill Lynch, pursuant to the contract between Putnam and Princeton
described below.
Under the terms and conditions of the Administrative Services Contract, in
addition to the fee paid to Putnam, the Fund reimburses Putnam for a portion of
the compensation and related expenses of certain officers of the Fund and their
assistants who provide certain administrative services for the Fund and the
other funds in the Putnam Family, each of which bears an allocated share of the
foregoing costs. The aggregate amount of all such payments and reimbursements
will be determined annually by the Trustees. Putnam pays all other salaries of
officers of the
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<PAGE>
Fund. The Fund pays all expenses not otherwise borne by Putnam including,
without limitation, legal, custody, and shareholder servicing expenses.
Pursuant to the Administrative Services Contract, the Fund incurred fees in
the amounts of $521,287, $523,393 and $508,236, respectively, during fiscal
1997, 1996 and 1995. In addition, the Fund reimbursed Putnam in the amounts of
$7,384, $8,421 and $12,000, respectively, for administrative services during
fiscal 1997, 1996 and 1995, including $6,501, $7,377 and $11,361, respectively,
for compensation of certain fund officers.
The Administrative Services Contract provides that Putnam shall not be
subject to any liability to the Fund or to any shareholder of the Fund for any
act or omission in the course of or connected with rendering services to the
Fund in the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of its duties on the part of Putnam.
Putnam has entered into an agreement with Princeton for certain
administrative services which Putnam utilizes in providing services to the Fund
under the Administrative Services Contract. Services provided to Putnam by
Princeton may include, among other things, the preparation or review of certain
filings with governmental and regulatory authorities and of reports to
shareholders and securities rating agencies. Putnam from its own assets (and not
from the assets of the Fund) pays a fee to Princeton for such services in an
amount equal to 0.15% of the average weekly net assets of the Fund. The rate at
which the fee is payable by Putnam will be reduced if, among other things, the
net asset value of the Fund exceeds $500 million. Princeton has no
responsibility with respect to the Fund's investments.
PORTFOLIO TRANSACTIONS
Investment Decisions
Investment decisions for the Fund and for the other investment advisory
clients of Putnam and its affiliates, The Putnam Advisory Company, Inc. and
Putnam Fiduciary Trust Company, are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients rather
than other clients even though it could have been bought or sold for such other
clients at the same time. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling the security. In some
instances, one client may sell a particular security to another client. It also
sometimes happens that two or more clients simultaneously purchase or sell the
same security, in which event each day's transactions in such security are,
insofar as possible, averaged as to price and allocated between such clients in
a manner which in Putnam's opinion is equitable to each and in accordance with
the amount being purchased or sold by each. There may be circumstances when
purchases or sales of securities for one or more clients will have an adverse
effect on other clients.
Brokerage and Research Services
Most purchases and sales of portfolio investments by the Fund will be with
underwriters of or dealers in tax exempt municipal securities and other tax
exempt securities, acting as principal. In such cases, the price paid by the
Fund usually will include an undisclosed dealer commission or markup.
Accordingly, the Fund will not ordinarily pay significant brokerage commissions.
In underwritten offerings, the price paid by the Fund will include a disclosed,
fixed commission or discount retained by the underwriter or dealer. Transactions
on U.S. stock exchanges and other agency transactions involve the payment by the
Fund of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction.
Putnam will place orders for the purchase and sale of portfolio securities
for the Fund and will buy and sell securities for the Fund through a substantial
number of broker-dealers. In so doing, Putnam will seek to obtain for the Fund
the most favorable price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions as described below. In seeking the
most favorable price and execution, Putnam, having in mind the Fund's best
interests, will consider all factors it deems relevant, including, by way of
illustration, the price, the size of the transaction, the nature of the market
for the security, the amount of the commission, the timing of the transaction
taking into account market prices and trends, the reputation, experience and
financial stability of the broker-dealer involved and the quality of service
rendered by the broker-dealer in other transactions.
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<PAGE>
The following table shows brokerage commissions paid by the Fund during the
fiscal periods indicated:
Fiscal Brokerage
period commissions
------ -----------
1997 $22,009
1996 $ 847
1995 $65,946
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive "brokerage and research services" (as defined in the Securities
Exchange Act of 1934) from broker-dealers which execute portfolio transactions
for the clients of such advisers and from third parties with which such
broker-dealers have arrangements. Consistent with this practice, Putnam receives
brokerage and research services from many broker-dealers with which Putnam
places the Fund's portfolio transactions and from third parties with which these
broker-dealers have arrangements. These services include such matters as general
economic and security market reviews, industry and company reviews, evaluations
of securities, recommendations as to the purchase and sale of securities,
newspapers, magazines, pricing services, quotation services, news services and
personal computers utilized by Putnam's managers and analysts. Where the
services referred to above are not used exclusively by Putnam for research
purposes, Putnam, based upon its own allocations of expected use, bears that
portion of the cost of these services which directly relates to their
non-research use. Some of these services are of value to Putnam and its
affiliates, The Putnam Advisory Company, Inc. and Putnam Fiduciary Trust
Company, in advising various of its clients (including the Fund), although not
all of these services are necessarily useful and of value in managing the Fund.
The management fee paid by the Fund is not reduced because Putnam and its
affiliate receive these services even though Putnam might otherwise be required
to purchase some of these services for cash.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 and by
the Management Contract, Putnam may cause the Fund to pay a broker-dealer which
provides brokerage and research services to Putnam an amount of disclosed
commission for effecting a securities transaction on a stock exchange or other
agency basis for the Fund in excess of the commission which another
broker-dealer would have charged for effecting that transaction. Putnam's
authority to cause the Fund to pay any such greater commissions is also subject
to such policies as the Trustees may adopt from time to time.
The following table shows transactions placed by the Fund with brokers and
dealers during the most recent fiscal year to recognize research, statistical
and quotation services rendered to Putnam and its affiliates:
Dollar value Percent of
of these total Amount of
transactions transactions commissions
------------ ------------ -----------
$2,894,185 1.42% $18,125
The Management Contract provides that commissions, fees, brokerage or
similar payments received by Putnam or an affiliate in connection with the
purchase and sale of portfolio securities of the Fund, less any direct expenses
approved by the Trustees, shall be recaptured by the Fund through a reduction of
the fee payable by the Fund under the Management Contract. Putnam seeks to
recapture for the Fund soliciting dealer fees on the tender of the Fund's
portfolio securities in tender or exchange offers. Any such fees which may be
recaptured are likely to be minor in amount.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such policies as the Trustees may determine, Putnam may consider
sales of shares of the Fund by underwriters and dealers in this offering or in
the previous offerings of the Fund's Common and Preferred Shares (and, if
permitted by law, sales of the other Putnam funds) as a factor in the selection
of broker-dealers to execute portfolio transactions for the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund determines the net asset value of its Common Shares at least once
each week as of the close of business on the last day on which the New York
Stock Exchange is open. Net asset value of the Common Shares is determined by
dividing the value of all assets of the Fund (including accrued interest and
dividends), less all
27
<PAGE>
liabilities (including accrued expenses) and the liquidation value of any
outstanding Preferred Shares, by the total number of Common Shares outstanding.
Municipal Bonds are stated on the basis of valuations provided by a pricing
service approved by the Trustees, which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. The Fund believes that reliable market quotations are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations provided by
such pricing service will be based upon fair market value determined on the
basis of the factors listed above. Securities, other than tax-exempt securities,
for which market quotations are readily available are stated at market value.
Short-term investments having remaining maturities of 60 days or less are stated
at amortized cost, which approximates market value. All other securities and
assets are valued at their fair value following procedures approved by the
Trustees. If any securities held by the Fund are restricted as to resale, Putnam
determines their fair value following procedures approved by the Trustees. The
Trustees periodically review such valuations and procedures. The fair value of
such securities is generally determined as the amount which the Fund could
reasonably expect to realize from an orderly disposition of such securities over
a reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of securities, if any (including any registration expenses that
might be borne by the Fund in connection with such disposition). In addition,
specific factors are also generally considered such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities, and any available analysts' reports regarding the issuer.
REMARKETING
General
The Bylaws provide that the Applicable Dividend Rate for each series of RP
for each Dividend Period therefor (except the Initial Dividend Period) will be
(i) unless such Dividend Period commences during a Non-Payment Period (described
below under "Description of RP--Dividends--Non-Payment Period; Late Charge"),
equal to the lower of (a) the rate per annum that the Remarketing Agent
determines on the Remarketing Date preceding the first day of such Dividend
Period pursuant to the procedures set forth in the Bylaws and (b) the applicable
Maximum Dividend Rate or (ii) if such Dividend Period commences during a
Non-Payment Period, equal to the Non-Payment Period Rate, which is a multiple
(generally 200%) of the Reference Rate described below under "Remarketing--
Remarketing Procedures--Reference Rate." During a Non-Payment period, each
Dividend Period which commences will be a 7-day Dividend Period, the shares of
RP will not be subject to Tender and Dividend Reset, and the holders of RP will
not be able to tender their shares in a Remarketing. See "Description of
RP--Dividends--Non-Payment Period; Late Charge."
The Fund will enter into a Paying Agent Agreement with Bankers Trust
Company. The Paying Agent Agreement will provide, among other things, that the
Paying Agent will (i) act as transfer agent, registrar, dividend and redemption
price disbursing agent, settlement agent and agent for certain notifications
(including notices of redemption) with respect to the RP and (ii) carry out
certain other procedures. See "Description of RP--Redemption."
Remarketing Schedule; Advance Notice of Allocation of Taxable Income; Inclusion
of Taxable Income in Dividend
A separate Remarketing will be held for each series of RP. Each Remarketing
for the shares of each series of RP will take place over a two-Business Day
period consisting of the Remarketing Date (normally a Monday for Series B RP and
a Thursday for Series C RP) and the Settlement Date (normally a Tuesday for
Series B RP and a Friday for Series C RP).
If, for example, in the case of Series B RP, Monday or Tuesday of a
particular week is not a Business Day, the normal remarketing schedule will be
adjusted as follows: (i) if Monday is not a Business Day, Friday shall be
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<PAGE>
the Remarketing Date and Tuesday shall be the Settlement Date; and (ii) if
Tuesday is not a Business Day, Monday shall be the Remarketing Date and
Wednesday shall be the Settlement Date. If, for any reason, neither of the
foregoing clauses can be given effect, the Remarketing Agent shall, in its sole
discretion, adjust the remarketing schedule as appropriate to complete such
Remarketing.
A description of the time sequence of the events in a normal remarketing
schedule is provided in Appendix A to this Prospectus.
The Internal Revenue Service has taken the position in a published revenue
ruling that the Fund is required for each taxable year to allocate net capital
gain and other income subject to regular Federal income tax, if any,
proportionately with respect to each of its classes of shares in accordance with
the percentage of total Fund distributions received by each such class of shares
with respect to such year. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such dividends among the
holders of the Common Shares, Series A RP, Series B RP, and Series C RP in
proportion to the total dividends paid to each such class during or with respect
to the taxable year, or otherwise as provided by applicable law. Whenever the
Fund intends to include any net capital gain or other income subject to regular
Federal income tax in a dividend on shares of any series of RP solely because
the Fund, in its judgment, believes it is required, in order to comply with the
published position of the Internal Revenue Service, to allocate taxable income
to such shares, the Fund may notify the Remarketing Agent of the amount to be so
included at least five Business Days prior to the Remarketing Date on which the
Applicable Dividend Rate for such dividend is to be established. Alternatively,
if the Fund has not provided the notice referred to in the preceding sentence,
yet nevertheless prior to paying the dividend intends to include such income in
a dividend on shares of any series of RP solely because the Fund, in its
judgment, believes it is required, in order to comply with the published
position of the Internal Revenue Service, to allocate such income to shares of
any series of RP, it will (i) increase the dividend by an amount such that the
return to a holder of RP with respect to such dividend (as so increased and
after giving effect to Federal income tax at the Gross-Up Tax Rate) equals the
Applicable Dividend Rate and (ii) notify the Paying Agent of the additional
amount to be included in the dividend at least five Business Days prior to the
applicable Dividend Payment Date. In the event the Fund has provided notice of
an inclusion of taxable income in an upcoming dividend on RP as referred to
above, yet, after giving such notice but prior to paying the dividend the Fund
intends to include additional taxable income in such dividend solely because, in
the judgment of the Fund, it is required to do so in order to comply with the
IRS's published ruling, the Fund will (i) increase the dividend by an amount
such that the return to a holder of RP with respect to such dividend (as so
increased and after giving effect to Federal income tax at the Gross-Up Tax
Rate) shall equal the return such holder of RP would have received, after
application of Federal income tax, if such additional amount of taxable income
were not included in such dividend (and such dividend were not increased to take
account of any additional taxable income) and (ii) notify the Paying Agent of
the additional amount to be included in the dividend at least five Business Days
prior to the applicable Dividend Payment Date. Neither the underlying dividend
nor the additional amounts referred to in the two preceding sentences will be
increased to compensate for the fact that they may be subject to state and local
taxes. The Gross-Up Tax Rate shall be equal to the sum of (i) the percentage of
the taxable income included in the dividend that is taxable for Federal income
tax purposes as ordinary income, multiplied by the greater of (A) the highest
marginal Federal corporate income tax rate (without regard to the phase- out of
graduated rates) applicable to ordinary income or (B) the highest marginal
Federal individual income tax rate applicable to ordinary income (including any
surtax but without regard to any phase-out of personal exemptions or any
limitation on itemized deductions), and (ii) the percentage of the taxable
income included in the dividend that is taxable for Federal income tax purposes
as long-term capital gain, multiplied by the greater of (A) the highest marginal
effective Federal corporate income tax rate (without regard to the phase-out of
graduated rates) applicable to long-term capital gain or (B) the highest
marginal effective Federal individual income tax rate applicable to long- term
capital gain (including any surtax and computed by taking into account the
effective reduction of such rate by any available capital gain deduction or
exclusion, but without regard to any phase-out of personal exemptions or any
limitation on itemized deductions). If for any reason it is determined after the
payment of any dividend that a portion of that dividend was subject to Federal
income tax, the Fund will not be required to pay any additional amount to
compensate for any tax payable on the dividend (other than Additional Dividends
payable under the circumstances described in this Prospectus). The Fund will not
be required to provide any notice of the prospective inclusion of, or increase
any dividend on shares of any series of RP as a result of the inclusion of, any
taxable income in any dividend (other than in the circumstances described above
and in the circumstances under which the Fund is required to pay Additional
Dividends). No provision will be made to compensate holders of shares of RP for
29
<PAGE>
any alternative minimum tax liability in respect of distributions on shares of
RP. See "Description of RP-- Dividends--Additional Dividends."
The Remarketing Agent
The Remarketing Agent for the RP initially will be Merrill Lynch.
The Fund will enter into a Remarketing Agreement with the Remarketing Agent
which will provide, among other things, that the Remarketing Agent will follow
certain procedures for remarketing shares of RP on behalf of holders thereof as
provided in the Bylaws for the purpose of determining the Applicable Dividend
Rate that will enable the Remarketing Agent to remarket shares of each series of
RP tendered to it at a price of $25,000 per share for a 7-day Dividend Period or
a Special Dividend Period, as the case may be. See "Remarketing--Remarketing
Procedures--Applicable Dividend Rates" below. Each periodic operation of such
procedures with respect to shares of RP is referred to as a "Remarketing." Under
certain circumstances, shares of RP tendered in a Remarketing may be tendered or
purchased by the Remarketing Agent for its own account. See
"Remarketing--Remarketing Procedures--Tender by Holders" below.
For its services in determining the Applicable Dividend Rate and
remarketing shares of RP for a 7-day Dividend Period, the Remarketing Agent will
receive from the Fund a fee for such period calculated at a rate equal to
approximately .25% per annum of the average amount of RP outstanding during the
Dividend Period. If the Dividend Period is a Special Dividend Period longer than
60 days, the Fund will instead pay to the Remarketing Agent a fee, to be
determined by mutual consent of the Fund and the Remarketing Agent, based on the
selling concession that would be applicable to an underwriting of a fixed or
variable rate preferred stock issue with a similar dividend period. The
Remarketing Agent will pay to selected broker-dealers a portion of the fees
described above, reflecting shares sold through such broker-dealers to
purchasers in Remarketings.
The Fund and Putnam have agreed to indemnify the Remarketing Agent against
certain liabilities arising out of or in connection with its duties under the
Remarketing Agreement.
Any Remarketing Agent may resign and be discharged from its duties with
respect to the RP under a Remarketing Agreement by giving at least 60 days'
prior notice in writing to the Fund, the Securities Depository, the Paying Agent
and each other Remarketing Agent, if any, and the Fund may remove a Remarketing
Agent under a Remarketing Agreement by giving at least 60 days' prior notice in
writing to such Remarketing Agent, the Securities Depository, the Paying Agent
and any other Remarketing Agent of such removal; provided that if (i) the
resigning or removed Remarketing Agent is at the time the sole Remarketing
Agent, or (ii) each other Remarketing Agent elects to resign or is removed
within one week of delivery of such notice, then such resignation or removal
will not be effective until a successor remarketing agent which is a nationally
recognized broker-dealer shall have entered into a remarketing agreement with
the Fund in which such successor remarketing agent shall have agreed to conduct
Remarketings with respect to the RP in accordance with the terms and conditions
of the Bylaws.
A Remarketing Agent may also terminate a Remarketing Agreement or may
resign by giving notice in writing to the Fund, the Securities Depository, the
Paying Agent and each other Remarketing Agent, if any, if any of the following
events has occurred and has not been cured prior to the proposed date of such
termination or resignation (in each case for a period of 30 days after notice
thereof has been given to the Fund specifying the condition or event): (i) the
rating of the RP shall have been downgraded or withdrawn by a national rating
service, the effect of which, in the opinion of the Remarketing Agents or
Remarketing Agent, as the case may be, is to affect materially and adversely the
market price of such RP or the ability of the Remarketing Agents or Remarketing
Agent, as the case may be, to remarket such shares; (ii) all of the shares of RP
shall have been called for redemption; or (iii) without the prior written
consent of the Remarketing Agent or Remarketing Agents, as the case may be, the
Agreement and Declaration of Trust, the Bylaws or the Paying Agent Agreement
shall have been amended in any manner that, in the opinion of the Remarketing
Agent or Remarketing Agents, as the case may be, materially changes the nature
of the RP or the remarketing procedures with respect thereto.
The Remarketing Agent is not obligated to set the Applicable Dividend Rate
on shares of RP or to remarket such shares during a Non-Payment Period as
provided in the Bylaws or at any time that certain conditions specified in the
Remarketing Agreement have not been met or any of the events set forth in
clauses (i), (ii) or (iii) of the immediately preceding paragraph has occurred.
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<PAGE>
Restrictions on Transfer
General. The Paying Agent will maintain a record of certain beneficial
owners of shares of RP, for purposes of determining such owners entitled to
participate in Remarketings and for certain other purposes. The Paying Agent
will only record transfers of such beneficial ownership, in a Remarketing or
otherwise, of which it is notified in accordance with its procedures in effect
from time to time.
Book Entry Only. DTC initially will act as Securities Depository for the
Agent Members with respect to RP. Except as discussed below, as long as DTC is
the Securities Depository, one certificate for the outstanding shares of each
series of RP will be registered in the name of Cede & Co. ("Cede") as nominee of
the Securities Depository, and Cede will be the holder of record of all shares
of each series of RP. Each such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions contained in the
Bylaws. Unless the Fund shall have waived this requirement during a Non-Payment
Period, shares of RP may be held only in book entry form through the Securities
Depository (which, either directly or through a nominee, will be the registered
owner of shares of RP as described above), and the Fund will issue stop-transfer
instructions to the Paying Agent for the shares of RP to this effect. If the
Fund shall have waived the foregoing requirement during a Non-Payment Period, a
holder of shares of such series of RP may obtain a certificate or certificates
for such shares. The Fund is advised that DTC is a New York-chartered limited
purpose trust company, which performs services for its participants (including
the Agent Members), some of which (and/or their representatives) own DTC. The
Fund is advised further that DTC maintains lists of its participants and will
maintain as record holder the positions (beneficial ownership interests) held by
each Agent Member in the shares of RP, whether such Agent Member is a holder for
its own account or as a nominee for another holder. The Fund shall have no
obligation, including without limitation any obligation to provide notice or to
make any payment (in respect of any dividend or otherwise), to any person
(including without limitation any holder of any beneficial interest in shares of
RP, whether or not such interest is reflected on the share transfer books of the
Paying Agent) other than the holders of record of the shares of RP shown on the
share transfer books of the Paying Agent from time to time. The share transfer
books of the Fund as kept by the Paying Agent shall be conclusive as to who is
the holder of record of any share of RP at any time and as to the number of
shares of RP of each series held from time to time by any such holder. No
Remarketing Agent, Paying Agent, Securities Depository, or Agent Member will
have any obligation to any person having any interest in any share of RP other
than the holder of record and the beneficial owner thereof as shown from time to
time on the share transfer books kept by the Paying Agent. The Paying Agent
shall have no obligation to record any transfer of record or beneficial
ownership in any share unless and until it shall have received proper notice and
evidence of such transfer and the right of the transferee in accordance with the
Paying Agent's procedures in effect from time to time.
Secondary Market. The Remarketing Agent has advised the Fund that it
currently intends to make a secondary trading market in the RP outside of
Remarketings. However, the Remarketing Agent has no obligation to make a
secondary market in the shares of RP outside of Remarketings. The RP will not be
registered on any stock exchange or on any automated quotation system. If a
Remarketing Agent purchases shares of RP in the secondary market or in a
Remarketing, it may be in the position of holding for its own account or as
nominee for others shares of RP subject to a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.
Remarketing Procedures
Tender by Holders. Each share of RP is subject to Tender and Dividend Reset
only on the relevant Remarketing Date for such series at the end of each
Dividend Period applicable to such share.
Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date for a series of RP in the Remarketing at the end of each
Dividend Period, the holder of a share of such series of RP may elect to tender
such share or hold such share for the next Dividend Period. If the holder of
such share of RP elects to hold such share, such holder shall hold such share of
RP at the Applicable Dividend Rate for a 7-day Dividend Period or a Special
Dividend Period if the succeeding Dividend Period with respect to such share has
been designated by the Fund as a Special Dividend Period, provided that, except
during a Non-Payment Period, if (i) there is no Remarketing Agent, (ii) the
Remarketing Agent is not required to conduct a Remarketing or (iii) the
Remarketing Agent is unable to remarket in the Remarketing on such Remarketing
Date all such shares of such series of RP tendered (or deemed tendered) to it at
a price of $25,000 per share, then the next Dividend Period for all shares of
such series of RP shall be a 7-day Dividend Period and the Applicable Dividend
Rate therefor shall be the applicable Maximum Dividend Rate.
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Shares of a series of RP may be tendered only in a Remarketing which
commences on the Remarketing Date immediately prior to the end of the current
Dividend Period with respect thereto. By 9:00 a.m., New York City time, on such
Remarketing Date, the Remarketing Agent will, after canvassing the market and
considering prevailing market conditions at the time for such shares and similar
securities, provide to holders of such shares non-binding indications of the
Applicable Dividend Rate for the next succeeding 7-day Dividend Period or
Special Dividend Period, as the case may be. THE ACTUAL APPLICABLE DIVIDEND RATE
FOR SUCH DIVIDEND PERIOD MAY BE GREATER OR LESS THAN THE RATE INDICATED IN SUCH
NON-BINDING INDICATIONS (BUT NOT GREATER THAN THE APPLICABLE MAXIMUM DIVIDEND
RATE) AND WILL NOT BE DETERMINED UNTIL AFTER A HOLDER IS REQUIRED TO ELECT TO
HOLD OR SELL ITS SHARES OF RP AND A NEW PURCHASER IS REQUIRED TO AGREE TO
PURCHASE SUCH SHARES OF RP. See Appendix A.
By 12:00 noon, New York City time, on any Remarketing Date with respect to
such series of RP, each holder of shares of such RP must notify the Remarketing
Agent of its desire (on a share-by-share basis) either to tender such share at a
price of $25,000 per share or to continue to hold such share for the next 7-day
Dividend Period or, if applicable, the designated Special Dividend Period.
Holders of such RP who do not provide such notice shall be deemed to have
elected (i) to hold all their shares of such RP if the current Dividend Period
and succeeding Dividend Period is a 7-day Dividend Period or a Special Dividend
Period of 60 days or less, and (ii) to tender all their shares of such RP if the
current Dividend Period or succeeding Dividend Period is a Special Dividend
Period of more than 60 days. Any holder or prospective purchaser may informally
indicate to the Remarketing Agent its Applicable Dividend Rate preferences.
However, any notice given to the Remarketing Agent to tender or hold shares for
a particular Dividend Period is irrevocable and may not be conditioned upon the
level at which Applicable Dividend Rates are set. Accordingly, the Applicable
Dividend Rate with respect to a Dividend Period may be greater or less than such
rate preferences. Any notice of tender may not be revoked, except that the
Remarketing Agent may, in its sole discretion, (i) at the request of a tendering
holder that has tendered one or more shares of RP to the Remarketing Agent,
waive such holder's tender, and thereby enable such holder to continue to hold
such share or shares for a 7-day Dividend Period or a designated Special
Dividend Period, as agreed to by the holder and the Remarketing Agent at such
time, so long as such tendering holder has indicated to the Remarketing Agent
that it would accept the new Applicable Dividend Rate for such Dividend Period,
such waiver to be contingent upon the Remarketing Agent's being able to remarket
all shares tendered to it in such Remarketing, and (ii) at the request of a
holder that has elected to hold one or more of its shares of RP, waive such
holder's election with respect thereto, such waiver to be contingent upon the
Remarketing Agent's being able to remarket all shares tendered to it in such
Remarketing.
When shares of a series of RP are tendered in a Remarketing therefor, the
Remarketing Agent is required to use its best efforts to remarket such tendered
shares on behalf of the holders thereof, but there can be no assurance that the
Remarketing Agent will be able to remarket all shares of RP tendered. See
"Remarketing--Remarketing Procedures--Allocation of Shares; Failure to Remarket
at $25,000 Per Share" below. Each holder's right to tender shares of such RP in
a Remarketing therefor is limited to the extent that (i) the Remarketing Agent
conducts a Remarketing pursuant to the terms of the Remarketing Agreement, (ii)
shares tendered have not been called for redemption, and (iii) the Remarketing
Agent is able to find purchasers for such tendered RP at an Applicable Dividend
Rate for a 7-day Dividend Period or a designated Special Dividend Period, as the
case may be, not in excess of any applicable Maximum Dividend Rate. If the
Remarketing Agent is unable to find a purchaser or purchasers for all RP
tendered in a Remarketing therefor, the shares to be sold in such Remarketing
will be selected either pro rata or by lot from among all the tendered shares.
See "Remarketing--Remarketing Procedures--Allocation of Shares; Failure to
Remarket at $25,000 Per Share" below. Each purchase or sale in a Remarketing
will be made for settlement on the related Settlement Date. See
"Remarketing--Remarketing Procedures--Notification of Results; Settlement"
below and Appendix A.
There can be no assurance that the Remarketing Agent will be able to
remarket all shares of a series of RP tendered in a Remarketing therefor. If any
shares of such RP so tendered are not remarketed, a holder thereof may be
required to continue to hold some or all of its shares until at least the end of
the next Dividend Period therefor or to sell such shares outside a Remarketing.
See "Remarketing--Remarketing Procedures--Allocation of Shares; Failure to
Remarket at $25,000 Per Share" below, and "Remarketing--Restrictions on
Transfer" and "Remarketing--The Remarketing Agent" above.
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<PAGE>
Tendered shares of RP will also be subject to purchase in a Remarketing
therefor by the Remarketing Agent. If the Remarketing Agent holds shares of a
series of RP for its own account after a Remarketing, it is required to
establish an Applicable Dividend Rate in such Remarketing that is no higher than
the Applicable Dividend Rate that would have been set if the Remarketing Agent
did not hold or had not purchased such shares. The Remarketing Agent may
purchase shares of RP for its own account in a Remarketing only if the
Remarketing Agent purchases for its own account or the account of others all
tendered (or deemed tendered) shares of RP subject to Tender and Dividend Reset
but not sold to other purchasers in such Remarketing. The Remarketing Agent is
not obligated to purchase any shares of a series of RP that would otherwise
remain unsold in a Remarketing. If the Remarketing Agent holds any shares of a
series of RP immediately prior to a Remarketing therefor and if all other shares
of such RP subject to Tender and Dividend Reset and tendered for sale by other
owners have been sold in such Remarketing, then the Remarketing Agent may sell
in such Remarketing such number of its shares which are subject to Tender and
Dividend Reset as there are outstanding orders to purchase that have not been
filled by shares tendered for sale on behalf of accounts other than that of the
Remarketing Agent. See "Remarketing--Restrictions on Transfer--Secondary Market"
above. Neither the Fund, nor the Paying Agent or the Remarketing Agent will be
obligated in any case to provide funds to make payment to any holder upon such
holder's tender of its shares of RP in any Remarketing. If the Remarketing Agent
purchases shares of RP in the secondary market or in a Remarketing, it may be in
the position of holding for its own account or as nominee for others shares of
RP subject to Tender and Dividend Reset in a Remarketing at the time it
determines the Applicable Dividend Rate in such Remarketing and may tender such
shares in such Remarketing.
Applicable Dividend Rates. By 3:00 p.m., New York City time, on each
Remarketing Date for a series of RP, the Remarketing Agent will determine the
Applicable Dividend Rate to the nearest one-thousandth (0.001) of one percent
per annum for the next 7-day Dividend Period (or, if designated, a Special
Dividend Period, provided that, if the Remarketing Agent is unable to remarket
on such Remarketing Date all such tendered shares in a Remarketing at a price of
$25,000 per share, then the Remarketing Agent will assign no shares to any
Special Dividend Period).
The Applicable Dividend Rate for each Dividend Period for each series of
RP, except as otherwise described herein, will be the dividend rate per annum
that the Remarketing Agent determines to be the lowest rate that will enable it
to remarket on behalf of the holders thereof the shares of such series of RP
subject to Tender and Dividend Reset in such Remarketing and tendered to it on
such Remarketing Date at a price of $25,000 per share. The Applicable Dividend
Rate for shares of such series of RP will be determined as aforesaid by the
Remarketing Agent in its sole discretion and will be conclusive and binding on
the Fund and all holders of such shares of RP. In determining such Applicable
Dividend Rate, the Remarketing Agent will, after taking into account market
conditions as reflected in the prevailing dividend yields on fixed and variable
rate taxable and tax exempt debt securities and the prevailing dividend yields
of fixed and variable rate preferred stocks determined for the purpose of
providing non-binding indications of the Applicable Dividend Rates to holders
and potential purchasers of shares of such series of RP, (i) consider the number
of shares of such series of RP tendered in the applicable Remarketing and the
number of shares of such RP prospective purchasers are willing to purchase and
(ii) contact by telephone or otherwise current and prospective holders of the
such RP subject to Tender and Dividend Reset to ascertain the dividend rates at
which they would be willing to hold such shares. If no Applicable Dividend Rate
shall have been established on a Remarketing Date for the next 7-day Dividend
Period, or Special Dividend Period, if any, for any reason (other than because
there is no Remarketing Agent, the Remarketing Agent is not required to conduct
a Remarketing pursuant to the terms of the Remarketing Agreement or the
Remarketing Agent is unable to remarket on the Remarketing Date all shares of RP
tendered (or deemed tendered) to it at a price of $25,000 per share), then the
Remarketing Agent, in its sole discretion, shall, except during a Non-Payment
Period, after taking into account market conditions as reflected in the
prevailing yields on fixed and variable rate taxable and tax exempt debt
securities and the prevailing dividend yields of fixed and variable rate
preferred stock, determine the Applicable Dividend Rate that would be the rate
per annum that would be the initial dividend rate fixed in an offering on such
Remarketing Date, assuming in each case a comparable dividend period, issuer and
security. If a Remarketing for a series of RP does not take place because there
is no Remarketing Agent, the Remarketing Agent is not required to conduct a
Remarketing or the Remarketing Agent is unable to remarket in the Remarketing
all such shares of such series of RP tendered (or deemed tendered) to it at a
price of $25,000 per share, then, except during a Non- Payment Period, the
Applicable Dividend Rate for the subsequent Dividend Period for such shares of
such series will be the applicable Maximum Dividend Rate for a 7-day Dividend
Period and such subsequent Dividend Period shall be a 7-day Dividend Period.
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<PAGE>
Except during a Non-Payment Period, the Applicable Dividend Rate for any
Dividend Period for shares of RP will not be more than the Maximum Dividend Rate
applicable to such shares.
The Maximum Dividend Rate for shares of each series of RP will be the
"Applicable Percentage" (as described below) of the Reference Rate. The
Remarketing Agent will round each Maximum Dividend Rate to the nearest
one-thousandth (0.001) of one percent per annum, with any such number ending in
five ten-thousandths (0.0005) of one percent being rounded upwards to the
nearest one-thousandth (0.001) of one percent. The Remarketing Agent will not
round the applicable Reference Rate as part of its calculation of any Maximum
Dividend Rate.
"Reference Rate" means (i) with respect to a Dividend Period having 28 or
fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term Municipal Bond Rate, (ii) with
respect to any Short Term Dividend Period having more than 28 but fewer than 183
days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect to
any Short Term Dividend Period having 183 or more but fewer than 365 days, the
U.S. Treasury Bill Rate, and (iv) with respect to any Long Term Dividend Period,
the applicable U.S. Treasury Note Rate.
"`AA' Composite Commercial Paper Rate," on any date of determination,
means (i) the Interest Equivalent of the rate on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's
or the equivalent of such rating by another nationally-recognized rating agency,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York for the Business Day immediately preceding such date,
or (ii) in the event that the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the Interest Equivalent of
the rate on commercial paper placed on behalf of such issuers, as quoted on a
discount basis or otherwise by the Commercial Paper Dealers to the Remarketing
Agent for the close of business on the Business Day immediately preceding such
date. If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Fund to provide such rate or rates not
being supplied by the Commercial Paper Dealer. If the number of Dividend Period
days (in each case determined without regard to any adjustment in the length of
a Dividend Period or the remarketing schedule in respect of non-Business Days)
shall be (i) 7 or more days but fewer than 49 days, such rate shall be the
Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more
days but fewer than 70 days, such rate shall be the Interest Equivalent of the
60-day rate on such commercial paper; (iii) 70 or more days but fewer than 85
days, such rate shall be the arithmetic average of the Interest Equivalent of
the 60-day and 90-day rates on such commercial paper; (iv) 85 or more days but
fewer than 99 days, such rate shall be the Interest Equivalent of the 90-day
rate on such commercial paper; (v) 99 or more days but fewer than 120 days, such
rate shall be the arithmetic average of the Interest Equivalent of the 90-day
and 120-day rates on such commercial paper; (vi) 120 or more days but fewer than
141 days, such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on
such commercial paper.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an Interest
Equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
comparable index based upon 30-day yield evaluations at par of bonds the
interest on which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny Information Systems
Inc. or any successor thereto from time to time selected by the Fund in its
discretion, which component issuers shall include, without limitation, issuers
of general obligation bonds but shall exclude any bonds the interest on which
constitutes an item of tax preference under Section 57(a)(5) of the Code, or
successor provisions, for purposes of the "alternative minimum tax" (as defined
in the Code) (the "Kenny Index"), made available for the Business Day
immediately preceding such date but in any event not later than 8:30 a.m., New
York City time, on such date by Kenny Information Systems Inc. or any successor
thereto, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal); provided, however, that if the Kenny Index is not made so available by
8:30 a.m., New York City time, on such date by Kenny Information Systems Inc. or
any successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate
shall mean the quotient of (A) the per annum rate expressed on an Interest
Equivalent basis equal to the most recent Kenny Index so made available divided
by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
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"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise on the Business Day immediately
preceding such date by the Federal Reserve Bank of New York in its Composite
3:30 p.m. Quotations for U.S. Government Securities report for such Business
Day, or (ii) if such yield as so calculated is not available, the Alternate
Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on any date
means the Interest Equivalent of the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded Treasury
Bill with a maturity most nearly comparable to the length of the related
Dividend Period, as determined by bid price quotations as of any time on the
Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the
Remarketing Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Remarketing Agent.
The Maximum Dividend Rate for shares of each series of RP will depend on
the credit rating or ratings assigned to such series. The Applicable Percentage
for the shares of each series of RP on each Remarketing Date will be determined
based on (i) the lower of the credit rating or ratings assigned on such date to
such series of RP by Moody's and S&P (or if Moody's or S&P or both shall not
make such rating available, the equivalent of either or both of such ratings by
a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) and (ii) whether the
Fund has provided to the Remarketing Agent, prior to the Remarketing
establishing the Applicable Dividend Rate for any dividend, notification that
net capital gain or other income subject to regular Federal income tax will be
included in such dividend, as follows:
Applicable Applicable
Percentage Percentage
Ratings of Reference of Reference
- ------------------------------------ Rate- Rate-
Moody's S&P No Notification Notification
- ------------------ --------------- ----------------- -------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
Below "baa3" Below BBB- 200% 275%
There is no minimum Applicable Dividend Rate in respect of any Dividend
Period.
Allocation of Shares; Failure to Remarket at $25,000 Per Share. If, in a
Remarketing of RP, the Remarketing Agent is unable to remarket by 3:00 p.m., New
York City time, on the Remarketing Date all shares of such series of RP tendered
to it in such Remarketing (which are subject to Tender and Dividend Reset in
such Remarketing) at a price of $25,000 per share, (i) each holder that tendered
shares for sale will sell a number of shares of such RP on a pro rata basis, to
the extent practicable, or by lot, as determined by the Remarketing Agent in its
sole discretion, based on the number of orders to purchase such RP in such
Remarketing, and (ii) the next Dividend Period for such RP will be a 7-day
Dividend Period and the Applicable Dividend Rate for such Dividend Period will
be the Maximum Dividend Rate for a 7-day Dividend Period.
If the allocation procedures described above would result in the sale of a
fraction of a share of RP, the Remarketing Agent will, in its sole discretion,
round up or down the number of shares of RP sold by each holder on the
applicable Remarketing Date so that each share sold by each holder shall be a
whole share of RP, and the total number of shares sold equals the total number
of shares purchased on such Remarketing Date.
Notification of Results; Settlement. By telephone at approximately 3:30
p.m., New York City time, on each Remarketing Date with respect to shares of a
series of RP, the Remarketing Agent will advise each holder of tendered
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<PAGE>
shares of such RP and each purchaser thereof (or the Agent Member thereof who in
turn will advise such holder or purchaser) (i) of the number of shares such
holder or purchaser is to sell or purchase and (ii) to give instructions to its
Agent Member to deliver such shares against payment therefor or to pay the
purchase price against delivery as appropriate. The Remarketing Agent will also
advise each holder or purchaser that is to continue to hold, or to purchase,
shares with a Dividend Period beginning on the Business Day following such
Remarketing Date of the Applicable Dividend Rate.
The transactions described above will be executed on the Settlement Date
through the Securities Depository in accordance with the Securities Depository's
procedures, and the accounts of the respective Agent Members of the Securities
Depository will be debited and credited and shares delivered by book entry as
necessary to effect the purchases and sales of each series of RP, in each case
as determined in the related Remarketing. Purchasers of shares of RP will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery by book entry of RP through their Agent Members. The
Securities Depository will make payment in accordance with its procedures, which
currently provide for payment in same-day funds. If the certificates for shares
of RP are not held by the Securities Depository or its nominee, payment with
respect to such shares will be made in same-day funds to the Paying Agent
against delivery of such certificates.
If any holder selling shares of RP in a Remarketing fails to deliver such
shares, the Agent Member of such selling holder and of any other person that was
to have purchased shares of RP in such Remarketing may deliver to any such other
person a number of whole shares of RP that is less than the number of shares
that otherwise was to be purchased by such person. In such event, the number of
shares of RP to be so delivered will be determined by such Agent Member.
Delivery of such lesser number of shares of RP will constitute good delivery.
As long as the Securities Depository or Cede or any other nominee therefor
holds the certificate or certificates representing the shares of RP, no share
certificates will need to be delivered by any selling holder to reflect any
transfer of shares of RP effected in a Remarketing.
The Remarketing Agent may, in its sole discretion, modify the settlement
procedures set forth above with respect to any Remarketing of RP so long as any
such modification does not adversely affect any holders of such shares.
DESCRIPTION OF RP
The following is a brief description of the terms of the RP. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Fund's Bylaws. A copy of the Bylaws has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Glossary immediately preceding the Appendices
hereto, or in Appendix B.
General
The Agreement and Declaration of Trust currently authorizes the issuance of
an unlimited number of shares of beneficial interest in the Fund in such classes
and series as may be provided for in the Bylaws. The Agreement and Declaration
of Trust provides for the issuance of an unlimited number of Common Shares, and
currently the Bylaws provide for the issuance of up to 6,000 shares of Preferred
Shares. All RP will have a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
The shares of RP, when issued and sold through this offering, will, except
as described below under "Description of RP--Certain Provisions in the Agreement
and Declaration of Trust," be fully paid and nonassessable, will not be
convertible into Common Shares or other capital shares of the Fund and will have
no preemptive rights. The shares of RP will not be subject to any sinking fund
but will be redeemable under the circumstances described below under
"Description of RP--Redemption."
Dividends
General. The Bylaws provide generally that holders of shares of each series
of RP will be entitled to receive, when, as and if declared by the Fund, out of
funds legally available therefor, cumulative cash dividends, at the rate per
annum set forth on the cover page hereof for the respective Initial Dividend
Period of such series of RP, and
36
<PAGE>
thereafter at the Applicable Dividend Rate for the applicable Dividend Period of
such series of RP, payable on the respective dates set forth below and, except
as described below, set by the Remarketing Agent in accordance with the
remarketing procedures described under "Remarketing." See "Remarketing--
Remarketing Procedures--Applicable Dividend Rates" and Appendix A.
Initial Dividend Payment Dates and Dividend Period. The Initial Dividend
Period for both series of RP will commence on the Date of Original Issue and end
on July , 1997 for Series B RP and July , 1997 for Series C RP. Dividends
for the Initial Dividend Period for RP will be paid when, as and if declared, on
July , 1997 for Series B RP and July , 1997 for Series C RP (each, the
"Initial Dividend Payment Date"). Dividends for each Dividend Period for each
series of RP thereafter will be payable when, as and if declared, on each
Dividend Payment Date for such series, subject to certain exceptions.
Subsequent Dividend Periods for the RP. After the Initial Dividend Period
for each series of RP, a Dividend Period therefor will commence on each (but not
the final) Dividend Payment Date for such series; provided, however, that any
Dividend Payment Date, other than the last Dividend Payment Date during such
Dividend Period, occurring after commencement of and during a Special Dividend
Period of more than 35 days will not give rise to a new Dividend Period. Each
subsequent Dividend Period for a series of RP will comprise, beginning with and
including the date on which it commences, 7 consecutive days or, in the event
the Fund has designated such Dividend Period as a Special Dividend Period, such
number of consecutive days as specified by the Fund; provided that such number
of days to be specified shall be a multiple of seven and not more than 364 in
the case of a Short Term Dividend Period and shall consist of at least one full
year (but not more than five years) in the case of a Long Term Dividend Period.
Notwithstanding the foregoing, as provided in the Bylaws, the Dividend Periods
for the Series A RP, Series B RP and Series C RP will not be co-extensive.
Further, any adjustment of the remarketing schedule or of the length of a
Dividend Period as provided herein shall cause an adjustment of the relevant
Settlement Date, if necessary, so that such Settlement Date will be the first
day of the next Dividend Period.
Except during a Non-Payment Period, by 12:00 noon, New York City time, on
the Remarketing Date at the end of the Initial Dividend Period applicable to a
share of each series of RP, and by 12:00 noon on the Remarketing Date at the end
of each subsequent Dividend Period applicable to such share of each series of
RP, the holder of such share may elect to tender such share or to hold such
share for the next Dividend Period (i.e., a 7-day Dividend Period or a Special
Dividend Period, as the case may be). If the holder of such share of RP elects
to hold such share for the next Dividend Period or fails to elect to tender or
hold such share on such Remarketing Date, such holder will continue to hold such
share at the Applicable Dividend Rate determined in such Remarketing for the
next Dividend Period; provided that, (i) if there is no Remarketing Agent, the
Remarketing Agent is not required to conduct a Remarketing or the Remarketing
Agent is unable to remarket in the Remarketing on such Remarketing Date all
shares of RP of such series tendered to it at a price of $25,000 per share, then
the next Dividend Period for such share and for all other shares of such series
of RP will be a 7-day Dividend Period and the Applicable Dividend Rate therefor
will be the Maximum Dividend Rate for a 7-day Dividend Period, and (ii) if such
current Dividend Period is a Special Dividend Period of more than 60 days or the
succeeding Dividend Period has been designated by the Fund as a Special Dividend
Period of more than 60 days, then a holder who fails to elect to tender or hold
a share of RP will be deemed to have elected to tender the share. If a share of
RP is tendered (or deemed tendered) but not sold in a Remarketing, the holder of
such share will hold such share for a 7-day Dividend Period at the Maximum
Dividend Rate therefor.
Special Dividend Periods for the RP. With respect to each Dividend Period
for a series of RP, the Fund may, at its sole option and to the extent permitted
by law, by telephonic or written notice (a "Request for Special Dividend
Period") to the Remarketing Agent, request that the next succeeding Dividend
Period for such series of RP will be a number of days (other than 7), evenly
divisible by seven, and not fewer than fourteen nor more than 364 in the case of
a Short Term Dividend Period or a period of not less than one whole year and not
greater than five years in the case of a Long Term Dividend Period, specified in
such notice, provided that the Fund may not give a Request for a Special
Dividend Period of greater than 7 days (and any such request shall be null and
void) unless the Fund has given written notice thereof to Moody's and S&P and
unless, with respect to such series of RP, full cumulative dividends, any
amounts due with respect to redemptions, and any Additional Dividends payable
prior to such date have been paid in full and, for any Remarketing occurring
after the initial Remarketing, all shares of such series tendered were
remarketed in the last occurring Remarketing. As provided in the Bylaws, the
Dividend Periods for the Series A RP, Series B RP and Series C RP will not be
co-extensive. Such Request for Special Dividend Period, in the case of a Short
Term Dividend Period, shall be given on or prior to the second Business Day but
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not more than seven Business Days prior to the relevant Remarketing Date for
such series of RP and, in the case of a Long Term Dividend Period, shall be
given on or prior to the 14th day but not more than 28 days prior to the
relevant Remarketing Date for RP. Upon receiving such a Request for Special
Dividend Period, the Remarketing Agent shall determine (i) whether given the
factors set forth below it is advisable that the Fund issue a Notice of Special
Dividend Period for such series of RP as contemplated by such Request for
Special Dividend Period, (ii) the Optional Redemption Price of such series of RP
during such Special Dividend Period and, (iii) the Specific Redemption
Provisions and shall give the Fund written notice (a "Response") of its
determination by no later than the third Business Day prior to such Remarketing
Date. In making such determination, the Remarketing Agent will consider (i)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (ii) existing market supply and demand for short-term and
long-term securities, (iii) existing yield curves for short-term and long-term
securities comparable to the such series of RP, (iv) industry and financial
conditions which may affect the RP, (v) the investment objective of the Fund,
and (vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of such series of RP would remain or become beneficial
holders. If the Remarketing Agent shall fail to give the Fund a Response by such
third Business Day or if the Response states that given the factors set forth
above it is not advisable that the Fund give a Notice of Special Dividend Period
for such series of RP, the Fund may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Fund give a Notice of Special
Dividend Period for such series of RP, the Fund may by no later than the second
Business Day prior to such Remarketing Date give a notice (a "Notice of Special
Dividend Period") to the Remarketing Agent and to the Securities Depository,
which notice will specify (i) the duration of the Special Dividend Period, (ii)
the Optional Redemption Price as specified in the related Response, and (iii)
the Specific Redemption Provisions, if any, as specified in the related
Response. The Fund shall not give a Notice of Special Dividend Period, or, if
such Notice of Special Dividend Period shall have already been given, shall give
telephonic or written notice of its revocation (a "Notice of Revocation") to the
Remarketing Agent (in the case of clauses (x) and (y)) and the Securities
Depository (in the case of clauses (x), (y) and (z)) on or prior to the Business
Day prior to the relevant Remarketing Date if (x) either the 1940 Act RP Asset
Coverage is not satisfied or the Fund shall fail to maintain S&P Eligible Assets
and Moody's Eligible Assets each with an aggregate Discounted Value at least
equal to the RP Basic Maintenance Amount, in each case on each of the two
Valuation Dates immediately preceding the Business Day prior to the relevant
Remarketing Date on an actual basis and on a pro forma basis giving effect to
the proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the Remarketing
Agent shall advise the Fund is an approximately equal rate for securities
similar to such series of RP with an equal dividend period), provided that
(unless Moody's advises the Fund to the contrary), in calculating the aggregate
Discounted Value of Moody's Eligible Assets for this purpose, the Moody's
Exposure Period shall be deemed to be one week longer than the Moody's Exposure
Period that would otherwise apply as of the date of the Notice, (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date for such series of RP have not been irrevocably deposited
with the Paying Agent by the close of business on the third Business Day
preceding the Remarketing Date or (z) the Remarketing Agent advises the Fund
that after consideration of the factors listed above it has concluded that it is
advisable to give a Notice of Revocation. If the Fund is prohibited from giving
a Notice of Special Dividend Period as a result of the factors enumerated in
clause (x), (y), or (z) of the preceding sentence or if the Fund gives a Notice
of Revocation with respect to a Notice of Special Dividend Period for RP, the
next succeeding Dividend Period for such series of RP will be a 7-day Dividend
Period.
In the event all shares of RP for which the Fund has given a Notice of
Special Dividend Period tendered are not remarketed or a Remarketing is not held
for any reason, the Fund may not again give a Notice of Special Dividend Period
for such series of RP (and any such attempted notice shall be null and void)
until all shares of such series of RP tendered in any subsequent Remarketing
with respect to a 7-day Dividend Period have been remarketed.
Dividend Payment Dates. Dividends on each share of each series of RP will
accumulate from its Date of Original Issue and will be payable, when, as and if
declared by the Trustees, on the applicable Dividend Payment Dates. The Dividend
Payment Dates will be: (i) with respect to the Initial Dividend Period for such
series of RP, the Initial Dividend Payment Date, (ii) with respect to any 7-day
Dividend Period and any Short Term Dividend Period of 35 or fewer days, the day
next succeeding the last day thereof; and (iii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, the first Business Day of each calendar month during such Short Term
Dividend Period or Long Term Dividend Period and the day next
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<PAGE>
succeeding the last day of such period (each such date referred to in clause
(i), (ii) or (iii) being herein referred to as a "Normal Dividend Payment
Date"), except that if such Normal Dividend Payment Date is not a Business Day,
then (i) the Dividend Payment Date shall be the first Business Day next
succeeding such Normal Dividend Payment Date if such Normal Dividend Payment
Date is a Monday, Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment
Date shall be the first Business Day next preceding such Normal Dividend Payment
Date if such Normal Dividend Payment Date is a Friday, and in each case the
length of the current Dividend Period will be adjusted accordingly. If, however,
in the case of clause (ii) in the preceding sentence the Securities Depository
shall make available to its participants and members in funds immediately
available in New York City on Dividend Payment Dates the amount due as dividends
on such Dividend Payment Dates (and the Securities Depository shall have so
advised the Fund), and if the Normal Dividend Payment Date is not a Business
Day, then the Dividend Payment Date shall be the next succeeding Business Day
and the length of the current Dividend Period will be adjusted accordingly.
Although any particular Dividend Payment Date may not occur on the originally
scheduled date because of the exceptions discussed above, the next succeeding
Dividend Payment Date, subject to such exceptions, will occur on the next
following originally scheduled date. If for any reason a Dividend Payment Date
cannot be fixed as described above, then the Fund shall fix the Dividend Payment
Date and the length of the current Dividend Period will be adjusted accordingly,
if necessary. The Initial Dividend Period, 7-day Dividend Periods and Special
Dividend Periods are hereinafter sometimes referred to as "Dividend Periods."
Each dividend payment date determined as provided above is hereinafter referred
to as a "Dividend Payment Date."
Dividend Payments. So long as there is a Securities Depository with respect
to the RP, each dividend on shares of RP will be paid to the Securities
Depository or its nominee as the record holder of all such shares, and such
payment shall for all purposes discharge the Fund's obligations in respect of
such payment. The Securities Depository is responsible for crediting the
accounts of the Agent Members of the beneficial owners of shares of RP in
accordance with the Securities Depository's procedures. Each Agent Member will
be responsible for holding or disbursing such payments to the holders of the RP
for which it is acting in accordance with the instructions of such holders. If,
and as long as, neither the Securities Depository nor its nominee is the record
holder of a share of RP, dividends thereon will be paid in same-day funds
directly to the record holder thereof in accordance with the instructions of
such holder.
Dividends on any share in arrears with respect to any past Dividend Payment
Date may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the holders thereof as of a date not exceeding five
Business Days preceding the date of payment thereof as may be fixed by the
Trustees. Any dividend payment made on shares of RP will be first credited
against the dividends accumulated but unpaid (whether or not earned or declared)
with respect to the earliest Dividend Payment Date on which dividends were not
paid. Holders of shares of RP will not be entitled to any dividends, whether
payable in cash, property or shares, in excess of full cumulative dividends
thereon. Except for the late charge described under "Description of
RP--Dividends--Non-Payment Period; Late Charge" below and Additional Dividends
described under "Description of RP--Dividends--Additional Dividends" below,
holders of shares of RP will not be entitled to any additional amount in respect
of any dividend payment on any shares of RP which may be in arrears.
The amount of cash dividends per share of any series of RP payable (if
declared) on the Initial Dividend Payment Date, the Dividend Payment Date for
each 7-day Dividend Period and the Dividend Payment Date or Dates for each
Short-Term Dividend Period shall be computed by the Fund by multiplying the
Applicable Dividend Rate for such Dividend Period by a fraction, the numerator
of which will be the number of days in such Dividend Period such shares were
outstanding from and including the Date of Original Issue or the preceding
Dividend Payment Date, as the case may be, to and including the day preceding
such Dividend Payment Date and the denominator of which will be 365, multiplying
the amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent. During any Long Term Dividend Period, the amount of cash dividends
per share payable on any Dividend Payment Date shall be computed by dividing the
Applicable Dividend Rate for such Dividend Period by twelve, multiplying the
amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent; provided, however, that, if the number of days from and including
the Date of Original Issue or the preceding Dividend Payment Date, as the case
may be, to and including the day preceding such Dividend Payment Date is less
than 30 and such days do not constitute a full calendar month, then the amount
of dividends per share payable on such Dividend Payment Date shall be computed
by multiplying the Applicable Dividend Rate for such Dividend Period by a
fraction, the numerator of which will be such number of days and the denominator
of which will be 360, multiplying the amount so obtained by $25,000, and
rounding the amount so obtained to the nearest cent.
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<PAGE>
In the event that the Remarketing Agent, the Paying Agent, the Securities
Depository, any Agent Member, and any beneficial owner fails for any reason to
perform any of its obligations in respect of a remarketing or otherwise, no
holder of record of, or of any beneficial interest in, any shares of RP shall
have any right in respect thereof against the Fund or any Trustee or officer of
the Fund, and the sole obligation of the Fund in respect of the determination of
the amount and the payment of any dividend shall be to pay to the Paying Agent,
for the benefit of the holders of record of the RP, dividends when due at the
Applicable Dividend Rate notified to it from time to time.
Non-Payment Period; Late Charge. A Non-Payment Period will commence on and
include the day on which the Fund fails to (i) declare, prior to 12:00 noon, New
York City time, on any Dividend Payment Date for a share of RP, for payment on
or (to the extent permitted below) within three Business Days after such
Dividend Payment Date to the person who held such share as of 12:00 noon, New
York City time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on such share of RP payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the Paying
Agent by 12:00 noon, New York City time, (A) on or (to the extent permitted
below) within three Business Days after any Dividend Payment Date for a share of
RP the full amount of any dividend on such share (whether or not earned or
declared) payable on such Dividend Payment Date or (B) on or (to the extent
permitted below) within three Business Days after any redemption date for a
share of RP called for redemption, the redemption price of $25,000 per share
plus the full amount of any dividends thereon (whether or not earned or
declared) accumulated but unpaid to such redemption date plus, in the case of an
optional redemption, the premium, if any, payable as the result of the
designation of a Premium Call Period. Such Non-Payment Period will end on and
include the Business Day on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption prices shall have been so deposited or shall
have otherwise been made available to the applicable holders in same-day funds;
provided that a Non-Payment Period will not end during the first seven days
thereof unless the Fund shall have given at least three days' written notice to
the Paying Agent, the Remarketing Agent and the Securities Depository and
thereafter will not end unless the Fund shall have given at least fourteen days'
written notice to the Paying Agent, the Remarketing Agent, the Securities
Depository and all holders of shares. The Applicable Dividend Rate for each
Dividend Period for shares of a series of RP commencing during a Non-Payment
Period will be equal to the Non- Payment Period Rate and any share of such RP
for which a Special Dividend Period would otherwise have commenced on the first
day of or during a Non-Payment Period will have a 7-day Dividend Period. The
"Non- Payment Period Rate" initially will be 200% of the applicable Reference
Rate (or 275% of such rate if the Fund has provided notification to the
Remarketing Agent prior to the Remarketing Date establishing the Applicable
Dividend Rate for any dividend that net capital gain or other taxable income
will be included in such dividend on shares of that series of RP). The initial
Non-Payment Period Rate may be changed from time to time by the Fund without
shareholder approval, but only in the event the Fund receives written
confirmation from Moody's and S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to shares of RP. Any dividend on RP due
on any Dividend Payment Date for such shares (if, prior to 12:00 noon, New York
City time, on such Dividend Payment Date, the Fund has declared such dividend
payable on or within three Business Days after such Dividend Payment Date to the
persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may (if such
non-payment occurs because the Fund is prevented from doing so by the Bylaws or
applicable law) be paid pro rata to such persons in the same form of funds by
12:00 noon, New York City time, on any of the first three Business Days after
such Dividend Payment Date or due date, as the case may be, and will incur a
late charge to be paid therewith to such persons and calculated for such period
of non-payment at the Non-Payment Period Rate applied to the amount of such
non-payment based on the actual number of days comprising such period divided by
365. Such late charge will be taxable as interest. If the Fund fails to pay a
dividend on a Dividend Payment Date or to redeem any shares of RP on the date
set for such redemption (otherwise than because it is prevented from doing so by
the Bylaws or by applicable law), the preceding sentence shall not apply and the
Applicable Dividend Rate for the Dividend Period commencing during such
Non-Payment Period resulting from such failure shall be the Non-Payment Period
Rate. During a Non-Call Period, shares of RP subject to such Non-Call Period
will not be subject to redemption at the option of the Fund, but may be subject
to mandatory redemption as provided below. See "Description of RP--Redemption"
below.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends or make other distributions on the Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage (as
defined in the 1940 Act)
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with respect to the outstanding Preferred Shares would be less than 200% (or
such other percentage as may in the future be required by law). Based on the
composition of the Fund's portfolio at April 30, 1997, asset coverage with
respect to Preferred Shares would have been approximately 281% after issuance of
the shares of RP offered hereby.
In addition, for so long as any shares of RP are outstanding, the Fund will
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Shares or other shares, if any,
ranking junior to the shares of RP as to dividends and upon liquidation) in
respect of Common Shares or any other shares of the Fund ranking junior to or on
a parity with the shares of RP as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares or parity shares (except by conversion
into or exchange for shares of the Fund ranking junior to the RP as to dividends
and upon liquidation), unless (1) full cumulative dividends on Preferred Shares
through their most recent Dividend Payment Date shall have been paid or shall
have been declared and sufficient funds for the payment thereof deposited with
the Paying Agent, (2) the Fund has redeemed the full number of shares of
Preferred Shares required to be redeemed by any provision for mandatory
redemption contained in the Bylaws, (3) immediately after such transaction the
aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible Assets
would be at least equal to the RP Basic Maintenance Amount and (4) the Fund
meets the requirements imposed by the 1940 Act. See "Investment Objective and
Policies--Asset Maintenance," "Description of RP--Redemption" and Appendix B.
Under the Code the Fund must, among other things, distribute each year at
least 90% of the sum of its investment company taxable income and net tax-exempt
income in order to maintain its qualification for tax treatment as a regulated
investment company. The foregoing limitations on dividends, distributions and
purchases may under certain circumstances impair the Fund's ability to maintain
such qualification. See "Taxation."
Upon any failure by the Fund to pay dividends on the RP for two years or
more, the holders of the shares of RP will acquire certain additional voting
rights. See "Description of RP--Voting Rights" below. Such rights shall be the
exclusive remedy of the holders of shares of RP upon any failure to pay
dividends on shares of the Fund.
Additional Dividends. In the event of a redemption of all or a portion of
the outstanding shares of a series of RP or the liquidation of the Fund, the
Fund may, after the close of its fiscal year, be required, in order to comply
with the published position of the Internal Revenue Service described earlier in
this Prospectus concerning the allocation of various types of income between a
fund's classes and series of shares, to characterize all or a portion of a
dividend paid to holders of RP during such fiscal year as net capital gain or
other income subject to regular Federal income tax, without having either given
advance notice of the inclusion of such income in such dividend prior to the
setting of the Applicable Dividend Rate for such dividend or included an
additional amount in the dividend to offset the tax effect of the inclusion
therein of such taxable income. Accordingly, if the Fund characterizes
retroactively all or a portion of a dividend already paid on shares of a series
of RP as consisting of net capital gain or other income subject to regular
Federal income tax solely because (i) the Fund has redeemed all or a portion of
the outstanding shares of such series of RP or has liquidated and (ii) the Fund,
in its judgment, believes it is required, in order to comply with the published
position of the Internal Revenue Service described above, to allocate such
taxable income to the series of RP (the amount so characterized referred to
herein as a "Retroactive Taxable Allocation"), the Fund will, within 90 days
after the end of such fiscal year, provide notice of the Retroactive Taxable
Allocation made with respect to the dividend to the Paying Agent and to each
holder who received such dividend (initially Cede as nominee of the Securities
Depository) at such holder's address as the same appears or last appeared on the
share books of the Fund. The Fund will, within 30 days after such notice is
given to the Paying Agent, pay to the Paying Agent (who will then distribute to
such holders), out of funds legally available therefor, an amount equal to the
aggregate of the Additional Dividends (as defined below) payable to holders of
shares of that series of RP in respect of such dividend. See "Taxation."
An "Additional Dividend" in respect of any dividend means payment to a
present or former holder of a share of a series of RP of an amount which, giving
effect to the Retroactive Taxable Allocation made with respect to such dividend,
would cause such holder's after-tax return (taking into account both the
dividend and the Additional Dividend and assuming such holder is taxable at the
Gross-Up Tax Rate) to be equal to the after-tax return which the holder would
have realized if such retroactive allocation of taxable income had not been
made. Such Additional Dividend shall be calculated (i) without consideration
being given to the time value of money, (ii) assuming that no holder of shares
of such series of RP is subject to the Federal alternative minimum tax with
respect to dividends received from the Fund, and (iii) assuming that the holder
of the share of such series of RP in respect of which
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<PAGE>
a Retroactive Taxable Allocation was made is taxable at the Gross-Up Tax Rate.
An Additional Dividend will not include any amount to compensate for the
fact that either the Additional Dividend or the Retroactive Taxable Allocation
may be subject to state and local taxes. (For a description of the Gross-Up Tax
Rate, see "Remarketing-- Remarketing Schedule; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividend.") Except as provided in
this "Description of RP--Dividends--Additional Dividends," the Fund will not
distribute any additional amounts with respect to dividends previously paid to
holders of shares of RP. See "Taxation." Special Dividends. The Fund may declare
"special dividends" on shares of any series of RP in order to comply with any
distribution requirements or the Code, provided that the declaration of a
special dividend shall not cause the Fund to fail to maintain the RP Basic
Maintenance Amount or the 1940 Act RP Asset Coverage. See "Taxation."
Redemption
Optional Redemption. The Fund may at its option after giving the requisite
Notice of Redemption, redeem shares of a series of RP, in whole or in part, on
any succeeding scheduled Dividend Payment Date applicable to those shares of RP
called for redemption, out of funds legally available therefor, at a redemption
price (the "Optional Redemption Price") of $25,000 per share plus an amount
equal to dividends thereon accumulated but unpaid to the date fixed for
redemption (whether or not earned or declared) plus the premium, if any,
resulting from the designation of a Premium Call Period; provided that no share
of RP may be redeemed at the option of the Fund during (A) the Initial Dividend
Period with respect to such share or (B) a Non-Call Period to which such share
is subject; provided further that optional redemptions pursuant to this
paragraph shall not cause the Fund to fail to maintain the RP Basic Maintenance
Amount or the 1940 Act RP Asset Coverage. In addition, holders of RP may be
entitled to receive Additional Dividends in the event of the redemption of such
RP to the extent provided above under "Description of RP--Dividends--Additional
Dividends."
Mandatory Redemption. The Fund will be required to redeem, at a redemption
price (the "Mandatory Redemption Price") equal to $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to the date fixed by the Trustees for redemption, certain of the
shares of RP to the extent permitted under the 1940 Act and Massachusetts law,
if the Fund fails to maintain the RP Basic Maintenance Amount or the 1940 Act RP
Asset Coverage and such failure is not cured on or before the RP Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein referred to as a "Cure
Date"), as the case may be. In addition, holders of RP may be entitled to
receive Additional Dividends in the event of the redemption of such RP to the
extent provided above under "Description of RP--Dividends--Additional
Dividends." The number of shares of RP to be redeemed will be equal to the
lesser of (a) the minimum number of shares of RP the redemption of which, if
deemed to have occurred immediately prior to the opening of business on such
Cure Date, would, together with all other shares of beneficial interest of the
Fund having preference rights subject to redemption or retirement, result in the
satisfaction of the RP Basic Maintenance Amount or the 1940 Act RP Asset
Coverage, as the case may be, on such Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have such result,
all shares of RP then outstanding will be redeemed), and (b) the maximum number
of shares of RP, together with all other shares of beneficial interest of the
Fund having preference rights subject to redemption and retirement, that can be
redeemed out of funds expected to be legally available therefor.
The Fund is required to effect such a Mandatory Redemption not later than
35 days after such Cure Date, except that if the Fund does not have funds
legally available for the redemption of all of the required number of shares of
RP which are subject to Mandatory Redemption or the Fund otherwise is unable to
effect such redemption on or prior to 35 days after such Cure Date, the Fund
will redeem those shares of RP which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.
Any share of RP will be subject to Mandatory Redemption regardless of
whether such share is subject to a Non-Call Period, provided that shares of RP
subject to a Non-Call Period will only be subject to redemption to the extent
that the other shares of RP (not subject to a Non-Call Period) are not available
to satisfy the number of shares required to be redeemed. In such event, such
shares subject to a Non-Call Period will be selected for redemption in an
ascending order of outstanding Non-Call Period (with shares with the lowest
number of days remaining in the Non-Call Period to be called first) and by lot
in the event of shares having equal outstanding Non-Call Periods.
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Allocation. If fewer than all the outstanding shares of any series of RP
are to be redeemed, the number of such shares of RP to be so redeemed will be a
whole number of shares and will be determined by the Trustees (subject to
the provisions described above under "Description of RP--Redemption--Mandatory
Redemption"), provided that (i) no such share of RP will be subject to optional
redemption on any Dividend Payment Date during a Non-Call Period to which it is
subject and (ii) shares of RP subject to a Non-Call Period will be subject to
Mandatory Redemption only on the basis described above under "Description of
RP--Redemption--Mandatory Redemption." Unless certificates representing shares
of RP are held by persons other than the Securities Depository or its nominee,
the Securities Depository, upon receipt of such Notice of Redemption, will
determine by lot (or otherwise in accordance with procedures in effect at that
time) the number of shares of RP to be redeemed from the account of each Agent
Member (which may include an Agent Member, including the Remarketing Agent,
holding shares for its own account) and notify the Paying Agent of such
determination. The Paying Agent, upon receipt of such notice, will in turn
determine by lot the number of shares to be redeemed from the accounts of the
holders of the shares whose Agent Members have been selected by the Securities
Depository. In doing so, the Paying Agent may determine that shares will be
redeemed from the accounts of some holders, which may include the Remarketing
Agent, without shares being redeemed from the accounts of other holders.
Notwithstanding the foregoing, if any certificates for shares of RP are not held
by the Securities Depository or its nominee, the shares of RP to be redeemed
will be selected by the Paying Agent by lot.
Notice of Redemption. Any Notice of Redemption with respect to shares of a
series of RP will be given by the Fund via telephone to the Paying Agent, the
Securities Depository (and any other registered holder of such shares) and the
Remarketing Agent not later than 1:00 p.m., New York City time (and later
confirmed in writing), on a day not less than 20 nor more than 30 days prior to
the earliest date upon which any such redemption is scheduled to occur and, in
the case of a Mandatory Redemption, not less than 20 nor more than 30 days prior
to the redemption date established by the Trustees and specified in such notice.
In the case of a partial redemption, the Paying Agent will use its reasonable
efforts to provide telephonic notice to each beneficial holder (as shown on the
records of such ownership maintained by it) of shares of such series of RP
called for redemption not later than the close of business on the Business Day
on which the Paying Agent determines the shares to be redeemed (as described
above) (or, during a Non-Payment Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Paying Agent receives Notice of Redemption from the Fund). Such
telephonic notice will be confirmed promptly in writing to each such beneficial
holder of shares of RP called for redemption, the Remarketing Agent and the
Securities Depository not later than the close of business on the Business Day
immediately following the day on which the Paying Agent determines the shares to
be redeemed. In the case of a redemption in whole, the Paying Agent will use its
reasonable efforts to provide telephonic notice to each holder of shares of RP
called for redemption not later than the close of business on the Business Day
immediately following the day on which the Paying Agent receives a Notice of
Redemption from the Fund. Such telephonic notice will be confirmed promptly in
writing to each holder of shares of RP called for redemption, the Remarketing
Agent and the Securities Depository not later than the close of business on the
second Business Day following the day on which the Paying Agent receives notice
of redemption.
Every Notice of Redemption and other redemption notice with respect to the
shares of a series of RP will state: (a) the redemption date, (b) the number of
shares of RP to be redeemed, (c) the redemption price, (d) that dividends on the
shares of RP to be redeemed will cease to accumulate as of such redemption date
and (e) the provision of the Agreement and Declaration of Trust or the Bylaws
pursuant to which such shares are being redeemed. No defect in the Notice of
Redemption or other redemption notice or in the transmittal or the mailing
thereof will affect the validity of the redemption proceedings, except as
required by applicable law. The Paying Agent will use its reasonable efforts to
cause the publication of a redemption notice in an Authorized Newspaper within
two Business Days of the date of the Notice of Redemption, but failure so to
publish such notification will not affect the validity or effectiveness of any
such redemption proceedings.
Other Redemption Procedures. To the extent that any redemption for which
Notice of Redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of RP will be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any
reason whatsoever, to deposit with the Paying Agent funds with respect to any
shares for which such Notice of Redemption has been given.
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Upon the deposit of funds sufficient to redeem shares of RP with the Paying
Agent and the giving of Notice of Redemption, all rights of the holders of the
shares so called for redemption will cease and terminate, except the right of
the holders thereof to receive the Optional Redemption Price or Mandatory
Redemption Price, as the case may be, but without any interest or other
additional amount (except for Additional Dividends described above under
"Description of RP--Dividends--Additional Dividends"), and such shares will no
longer be deemed outstanding for any purpose. The Fund will be entitled to
receive from the Paying Agent, promptly after the date fixed for redemption, any
cash deposited with the Paying Agent in excess of (i) the aggregate redemption
price of the shares of RP called for redemption on such date and (ii) all other
amounts to which holders of RP called for redemption may be entitled. The Fund
will be entitled to receive, from time to time after the date fixed for
redemption, any interest on the funds so deposited. Any funds that are unclaimed
at the end of 90 days from such redemption date will, to the extent permitted by
law, be repaid to the Fund, after which time the holders of RP so called for
redemption will look only to the Fund for payment of the redemption price and
all other amounts to which they may be entitled. If any such unclaimed funds are
repaid to the Fund, the Fund shall invest such unclaimed funds in Deposit
Securities with a maturity of no more than one Business Day.
Except as described above with respect to redemptions, nothing contained in
the Bylaws limits any legal right of the Fund or any affiliate of the Fund to
purchase or otherwise acquire any shares of RP at any price.
The Fund has the right in certain circumstances to arrange for others to
purchase from the holders thereof shares of RP which are to be redeemed as
described above.
The Remarketing Agent may, in its sole discretion, modify the procedures
concerning notification of redemption described above with respect to shares of
RP so long as any such modification does not adversely affect the holders of the
shares of RP or materially alter the obligation of the Paying Agent without
obtaining its consent and so long as the Fund receives written confirmation from
S&P that any such modifications would not impair the ratings then assigned by
S&P to the shares of RP.
Liquidation/Bankruptcy
Upon a liquidation, dissolution or winding up of the affairs of the Fund,
whether voluntary or involuntary, the holders of Preferred Shares including RP
then outstanding will be entitled, whether from capital or surplus, before any
assets of the Fund will be distributed among or paid over to the holders of the
Common Shares or any other class or series of shares of the Fund ranking junior
to the Preferred Shares as to liquidation payments, to be paid an amount equal
to the liquidation preference with respect to such shares. The liquidation
preference for the shares of RP is $25,000 per share plus an amount equal to all
dividends thereon (whether or not earned or declared) accumulated but unpaid to
but excluding the date of final distribution in same-day funds. After any such
payment, the holders of shares of RP will not be entitled to any further
participation in any distribution of assets of the Fund, except to the extent
that they may be entitled to Additional Dividends to the extent provided above
in "Description of RP--Dividends--Additional Dividends." If, upon any such
liquidation, dissolution or winding up of the Fund, the assets of the Fund shall
be insufficient to make such full payment to the holders of Preferred Shares
including RP and to the holders of any shares of beneficial interest of the Fund
having preference rights ranking as to liquidation, dissolution or winding up on
a parity with the Preferred Shares, then such assets will be distributed among
the holders of Preferred Shares and such parity holders ratably in accordance
with the respective amounts which would by payable on such shares of RP and any
other such Preferred Shares if all amounts thereof were paid in full.
Neither the consolidation nor the merger of the Fund with or into any
entity or entities nor a reorganization of the Fund alone nor the sale, lease or
transfer by the Fund of all or substantially all of its assets shall be deemed
to be a dissolution or liquidation of the Fund.
The Fund has no intention to file a voluntary petition in bankruptcy so
long as the value of its assets is, and is reasonably foreseen as being, greater
than its liabilities.
Voting Rights
Except as indicated below and as set forth below under "Description of
RP--Certain Provisions in the Agreement and Declaration of Trust" or except as
expressly required by applicable law or expressly set forth in the Agreement and
Declaration of Trust or Bylaws, each holder of Preferred Shares and each holder
of Common
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Shares shall be entitled to one vote for each share held on each matter
submitted to a vote of shareholders of the Trust, and the holders of outstanding
Preferred Shares and Common Shares shall vote together as a single class.
Holders of Preferred Shares including RP (along with the holders of any
other preferred shares of the Fund), voting as a class, will be entitled to
elect two of the Fund's Trustees and the remaining Trustees will be elected by
holders of the Common Shares and the Preferred Shares (along with the holders of
any other preferred shares of the Fund) voting together as a single class. If at
any time dividends on the Fund's Preferred Shares shall be unpaid in an amount
equal to two full years' dividends thereon or if at any time holders of any
preferred shares of the Fund other than the Preferred Shares are entitled to
elect a majority of the Trustees of the Fund, then the number of Trustees shall
automatically be increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of Preferred Shares as described
above, would constitute a majority of the Trustees as so increased and at a
special meeting of shareholders which will be called and held as soon as
practicable, and at all subsequent meetings at which Trustees are to be elected,
the holders of Preferred Shares (along with the holders of any other preferred
shares of the Fund), voting as a separate class, will be entitled to elect the
smallest number of additional Trustees that, together with the two Trustees
which such holders will be in any event entitled to elect, constitutes a
majority of the total number of Trustees of the Fund as so increased. The terms
of office of the persons who are Trustees at the time of that election will
continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full all dividends payable on all outstanding Preferred Shares for
all past Dividend Periods, the voting rights stated in the preceding sentence
shall cease (subject always to revesting in the event of the further occurrence
of the circumstances described above), and the terms of office of all the
additional Trustees elected by the holders of Preferred Shares (but not of the
Trustees with respect to whose election the holders of Common Shares were
entitled to vote or the two Trustees the holders of Preferred Shares have the
right to elect in any event) will terminate automatically.
The affirmative vote of the holders of a majority of the outstanding shares
of each series of Preferred Shares, voting separately as series, would be
required to amend, alter or repeal any of the preferences, rights or powers of
such series of Preferred Shares so as to affect materially and adversely such
preferences, rights or powers of such series of RP, or increase or decrease the
number of shares of RP authorized to be issued. Unless a higher percentage is
provided for as described below under "Description of RP--Certain Provisions in
the Agreement and Declaration of Trust," the affirmative vote of the holders of
a majority of the outstanding Preferred Shares, voting as a class, will be
required to approve any plan of reorganization adversely affecting such shares
or any action requiring a vote of security holders under Section 13(a) of the
1940 Act including, among other things, changes in the investment restrictions
described under "Investment Restrictions."
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of RP shall have been redeemed or shall no
longer be deemed to be outstanding.
Certain Provisions in the Agreement and Declaration of Trust
The Agreement and Declaration of Trust and Bylaws include provisions that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, or to cause it to engage in certain transactions or
to modify its structure. The affirmative vote of at least two-thirds of the
outstanding Common Shares and Preferred Shares, each voting separately as a
class, is required to authorize any of the following actions: (1) merger or
consolidation of the Fund, (2) sale of all or substantially all of the assets of
the Fund, (3) liquidation or dissolution of the Fund, (4) conversion of the Fund
to an open-end investment company, or (5) amendment of the Agreement and
Declaration of Trust to reduce the two-thirds vote required to authorize the
actions in (1) through (5), unless with respect to any of the foregoing such
action has been authorized by the affirmative vote of two-thirds of the total
number of Trustees then in office, in which case the affirmative vote of a
majority of the outstanding shares of each class is required.
The Trustees have determined that the two-thirds voting requirements
described above, which are greater than the minimum requirements under the 1940
Act, are in the best interests of the Fund and its shareholders generally.
Under Massachusetts law, shareholders of the Fund could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each note, bond, contract, instrument, certificate, or undertaking
entered into or executed by the Fund or the Trustees. The Agreement
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and Declaration of Trust provides for indemnification out of Fund property for
all loss and expense of any shareholder held personally liable solely by reason
of being or having been a shareholder. Thus, the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
likelihood of such circumstances is remote.
Holders of Record; Holders of Beneficial Interest
The Fund shall have no obligation, including without limitation any
obligation to provide notice or to make any payment (in respect of any dividend
or otherwise), to any person (including without limitation any holder of any
beneficial interest in shares of RP, whether or not such interest is reflected
on the share transfer books of the Paying Agent) other than the holders of
record of the shares of RP shown on the share records of the Paying Agent from
time to time. The record books of the Fund as kept by the Paying Agent shall be
conclusive as to who is the holder of record of any share of RP at any time and
as to the number of shares of RP held from time to time by any such holder. No
Remarketing Agent, Paying Agent, Securities Depository, or Agent Member will
have any obligation to any person having any interest in any share of RP other
than the holder of record and the beneficial owner thereof as shown from time to
time on the share transfer books kept by the Paying Agent. The Paying Agent
shall have no obligation to record any transfer of record or beneficial
ownership in any share unless and until it shall have received proper notice and
evidence of such transfer and the right of the transferee in accordance with the
Paying Agent's procedures in effect from time to time.
DESCRIPTION OF SHARES
Preferred Shares
The Fund has 6,000 authorized preferred shares. There are 800 outstanding
shares of Series A RP, which have terms substantially similar to those of the
RP, except that their Dividend Period is generally a 28-day Dividend Period and
their liquidation preference is $50,000 per share. Redemptions and issuance of
series of the preferred shares may be made periodically in response to changing
market conditions.
Common Shares
The Trustees of the Fund have authority to issue an unlimited number of
Common Shares. The Common Shares outstanding are fully paid and nonassessable by
the Fund, except as set forth under "Description of RP--Certain Provisions in
the Agreement and Declaration of Trust." The Fund's Common Shares have no
preemptive, conversion, exchange or redemption rights. Each Common Share has one
vote, with fractional shares voting proportionately. Common Shares are freely
transferable.
The Fund has no present intention of offering additional Common Shares in
addition to the shares already issued. Any offerings of its Common Shares, if
made, will require approval of the Fund's Trustees. Any additional offering will
not be sold at a price per Common Share below the then current net asset value
per share (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing Common shareholders or with the consent
of a majority of the Fund's outstanding Common Shares.
------------
The following table shows the amount of (i) shares authorized, (ii) shares
held by the Fund for its own account and (iii) shares outstanding for each class
of authorized securities of the Fund as of the date of this Prospectus.
Amount
Outstanding
Amount Held (Exclusive Of
By Fund For Amount Held
Amount Its Own By Fund For
Title of Class Authorized Account Its Own Account)
-------------- ---------- ----------- ---------------
Common Shares ............ Unlimited -0- 16,157,092
Remarketed Preferred Shares,
Series A ............... 6,000 -0- 800
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TAXATION
The following Federal tax discussion is based on the advice of Ropes &
Gray, counsel to the Fund, and reflects provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing Treasury regulations, rulings
published by the Internal Revenue Service, and other applicable authority, as of
the date of this Prospectus. These authorities are subject to change by
legislative or administrative action. The following discussion is only a summary
of some of the important tax considerations generally applicable to investments
in the Fund. There may be other tax considerations applicable to particular
investors. In addition, income earned through an investment in the Fund may be
subject to state and local taxes. Prospective shareholders are therefore urged
to consult their tax advisers with respect to the tax consequences to them of an
investment in the Fund.
Federal Taxation of the Fund
The Fund intends to qualify each year for taxation as a regulated
investment company under Subchapter M of the Code. If the Fund so qualifies, the
Fund will not be subject to Federal income tax on income distributed in a timely
manner to Fund shareholders ("shareholders") in the form of dividends or capital
gain distributions.
Qualification for taxation as a regulated investment company under the Code
requires, among other things, that the Fund distribute to its shareholders with
respect to each year at least 90% of the sum of its net tax exempt interest
income, its taxable net investment income (including, generally, taxable
interest, dividends and certain other income, less certain expenses), and the
excess, if any, of net short-term capital gains over net long-term capital
losses (the "Distribution Requirement"). If the Fund does not qualify for
taxation as a regulated investment company for any taxable year, the Fund's
income will be taxed at the Fund level, and all distributions from earnings and
profits, including distributions of net exempt-interest income and net long-term
capital gains, will be taxable to shareholders as ordinary income. In addition,
in order to requalify for taxation as a regulated investment company, the Fund
may be required to recognize unrealized gains, pay substantial taxes and
interest, and make certain distributions.
To satisfy the Distribution Requirement described above, amounts paid as
dividends by the Fund to its shareholders, including shareholders of the two
series of RP, must qualify for the dividends-paid deduction. In certain
circumstances, the Internal Revenue Service could take the position that
dividends paid on the different series of RP constitute preferential dividends
under section 562(c) of the Code, and thus do not qualify for the dividends-
paid deduction. The Fund has received an opinion from Ropes & Gray that
dividends paid on its different series of RP will qualify for the dividends-paid
deduction. Such opinion represents only counsel's best legal judgment and is not
binding on the Internal Revenue Service.
If at any time when shares of RP are outstanding the Fund does not meet
applicable asset coverage requirements, the Fund will be required to suspend
distributions to holders of Common Shares until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% Federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year substantially all of their taxable net investment income for such
year and substantially all of their capital gain net income for the one-year
period ending October 31 of such year) and may prevent the Fund from satisfying
the Distribution Requirement. The Fund may redeem shares of RP or, subject to
certain limitations, pay "special dividends" to the holders of the shares of RP
in an effort to avoid the excise tax and to comply with the Distribution
Requirement. See "Description of RP."
The Fund's investments and hedging activities are subject to certain
special Federal tax rules. One such rule provides that, in order to qualify for
taxation as a regulated investment company, less than 30% of the Fund's gross
income must be derived from the sale or other disposition of certain assets
(including Municipal Bonds, financial futures contracts, and options) held for
less than three months. Accordingly, the Fund will be restricted in selling
assets held, or considered under Code rules to have been held, for less than
three months, and in engaging in certain hedging transactions (including hedging
transactions in futures and options) that in certain circumstances could cause
certain Fund assets to be treated as having been held for less than three
months. Code rules governing the Fund's hedging transactions may also alter the
character of distributions to holders of shares of RP. Income earned as a result
of the Fund's hedging transactions will not be eligible to be treated as
"exempt-interest dividends" when distributed to shareholders. The Fund's
investment in securities issued at a discount will (and investments in
securities purchased at a discount may) require the Fund to accrue and
distribute income not yet received. Therefore, in order to generate sufficient
cash to make the requisite distributions, the Fund may be required to sell
securities in its portfolio that it otherwise would have continued to hold.
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Federal Taxation of Shareholders
Dividends and Other Distributions. Assuming that the Fund qualifies for
taxation as a regulated investment company under Subchapter M of the Code and
that, at the close of each quarter of the Fund's taxable year, at least 50% of
the value of the Fund's total assets consists of obligations the interest on
which is exempt from Federal income tax under Code section 103(a), the Fund will
qualify to pay "exempt-interest dividends" to its shareholders to the extent of
its tax exempt interest income (less applicable expenses). Distributions of net
tax exempt interest income the Fund properly designates as exempt-interest
dividends are treated by shareholders as interest excludable from their gross
income for Federal income tax purposes but may be taxable for Federal
alternative minimum tax purposes (discussed below) and for state and local tax
purposes.
In order for any distributions to holders of shares of RP to be eligible to
be treated as exempt-interest dividends, the shares of RP must be treated as
equity for Federal income tax purposes. Based in part on certain representations
made by the Fund to Ropes & Gray relating to the lack of any present intention
to redeem or purchase shares of RP at any time in the future, it is the opinion
of Ropes & Gray that the shares of RP will constitute equity for Federal income
tax purposes. This opinion relies in part on a published ruling of the Internal
Revenue Service stating that certain auction rate preferred stock similar in
many material respects to the RP represents equity. The opinion of Ropes & Gray
represents only its best legal judgment and is not binding on the Internal
Revenue Service or the courts. If the Internal Revenue Service were successfully
to assert that variable rate preferred stock such as the RP should be treated as
debt for Federal income tax purposes, dividends on shares of RP would be treated
as taxable interest for Federal income tax purposes. In such event, dividends on
shares of RP would not be increased by the Fund and holders of shares of RP
would not be entitled to any additional distributions from the Fund (including
any Additional Dividends) to offset the effect of paying Federal income tax on
Fund distributions so recharacterized as interest. Ropes & Gray has advised the
Fund that, should the Internal Revenue Service pursue in court the position that
the shares of RP should be treated as debt for Federal income tax purposes, the
Internal Revenue Service would be unlikely to prevail.
Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in the Federal alternative minimum taxable income
of both individuals and corporations. The Fund will furnish to shareholders
annually a report indicating the percentage of Fund income treated as a
preference item for alternative minimum tax purposes. In addition, for
corporations, alternative minimum taxable income is increased by a percentage of
the amount by which an alternative measure of income that includes interest on
all tax exempt securities exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax exempt to shareholders may cause certain
shareholders to be subject to the Federal alternative minimum tax or may
increase the tax liability of a shareholder who is subject to such tax.
Investors should thus consider the possible effect of an investment in the Fund
on their Federal alternative minimum tax liability.
Legislation has been introduced that would reinstate a deductible tax (the
"Environmental Tax") imposed through tax years beginning before 1996, at a rate
of 0.12% on a corporation's alternative minimum taxable income (computed without
regard to the alternative minimum tax net operating loss deduction) in excess of
$2,000,000. If the Environmental Tax is reinstated, exempt-interest dividends
paid by the Fund that are included in a corporate shareholder's alternative
minimum taxable income may subject such shareholder to the Environmental Tax.
Exempt-interest dividends attributable to interest received on certain
private activity bonds and certain industrial development bonds will not be tax-
exempt to any shareholders who are, within the meaning of Section 147(a) of the
Code, "substantial users" of the facilities financed by such obligations or
bonds or who are "related persons" of such substantial users.
The receipt of exempt-interest dividends may affect the portion, if any, of
an individual shareholder's Social Security and Railroad Retirement benefits
that will be includable in gross income subject to Federal income tax. Up to 85
percent of Social Security and Railroad Retirement benefits may be included in
gross income in cases where the recipient's combined income, consisting of
adjusted gross income (with certain adjustments), tax exempt interest income and
one-half of any Social Security and Railroad Retirement benefits, exceeds a base
amount ($25,000 for a single individual and $32,000 for individuals filing a
joint return). Individual shareholders receiving Social Security or Railroad
Retirement benefits should consult their tax advisers.
All or a portion of interest on indebtedness incurred or continued by a
shareholder to purchase or carry Fund shares will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total
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interest paid or accrued on the indebtedness multiplied by the percentage of the
Fund's total distributions (not including distributions of the excess of net
long-term capital gains over net short-term capital losses) paid to the
shareholder that are exempt-interest dividends. Under rules used by the Internal
Revenue Service for determining when borrowed funds are considered to have been
used for the purpose of purchasing or carrying particular assets, the purchase
of shares of RP may be considered to have been made with borrowed funds even
though such funds are not directly traceable to the purchase of shares.
Under Federal tax law in effect at the date of this Prospectus, a
shareholder's interest deduction generally will not be disallowed if the average
adjusted basis of the shareholder's tax-exempt obligations (including shares of
RP) does not exceed two percent of the average adjusted basis of the
shareholder's trade or business assets (in the case of most corporations) or
portfolio investments (in the case of individuals). Currently proposed
legislation would further limit or repeal this two-percent de minimis exception,
which could reduce the total after-tax yield of the RP to investors to whom the
de minimis exception would otherwise apply.
Distributions of net investment income that do not qualify as
exempt-interest dividends, distributions of certain other ordinary income, and
the excess, if any, of net short-term capital gains over net long-term capital
losses, will be taxable to shareholders as ordinary income, and will not qualify
for the corporate dividends-received deduction. Distributions of the excess, if
any, of net long-term capital gains over net short-term capital losses will be
taxable to shareholders as long-term capital gains, without regard to how long a
shareholder has held shares of the Fund, and will not qualify for the corporate
dividends-received deduction.
Due to certain of the Fund's hedging and other investment activities, the
net investment income calculated for accounting purposes and distributed to
shareholders may in certain circumstances exceed or be less than the Fund's net
tax exempt and taxable income. If the Fund distributes amounts in excess of the
Fund's "earnings and profits" (which provides the measure of the Fund's
dividend-paying capacity for tax purposes), such distributions to shareholders
will be treated as a return of capital to the extent of a shareholder's basis in
his or her shares or RP, and thereafter as gain from the sale or exchange of a
capital asset. A return of capital is not taxable to a shareholder and has the
effect of reducing a shareholder's basis in the relevant shares, which basis
reduction would cause shareholders of RP to realize gain if their shares of RP
were sold for an amount equal to the liquidation price. Conversely, because Fund
expenses attributable to earning tax exempt income do not reduce the Fund's
current earnings and profits, a portion of any distribution in excess of the
Fund's net tax exempt and taxable income may be considered paid out of the
Fund's earnings and profits and may therefore be treated as a taxable dividend
(even though that portion economically represents a return of the Fund's
capital).
The Internal Revenue Service has taken the position in a published revenue
ruling indicating that the Fund is required to designate distributions paid with
respect to its Common Shares and each series of Preferred Shares as consisting
of a portion of each type of income distributed by the Fund. The portion of each
type of income deemed received by the holders of each class of shares will be
equal to the portion of total Fund distributions received by such class. Thus,
the Fund will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends among the holders of the Common Shares, the Series
A RP, Series B RP and the Series C RP, in proportion to the total dividends paid
to each such class during or with respect to the taxable year, or otherwise as
required by applicable law. Long-term capital gain distributions and other
income subject to regular Federal income tax will similarly be allocated among
the four classes. In the opinion of Ropes & Gray, under current law, the manner
in which the Fund intends to allocate items of its tax exempt interest income,
net capital gain, and other income subject to regular Federal income tax, if
any, among its four classes of shares will be respected for Federal income tax
purposes. No dividend that the Fund pays will be increased to compensate for the
fact that it may be subject to state and local taxes.
If for any reason it is determined after the payment of any dividend that a
portion of that dividend was subject to Federal income tax, the Fund will not be
required to pay any additional amount to compensate for any tax payable on the
dividend (other than Additional Dividends (see Description of RP--Dividends--
Additional Dividends) payable under the circumstances described in this
Prospectus). The federal income tax consequences of Additional Dividends under
existing law are uncertain. For example, it is unclear how Additional Dividends
will be treated under the rules in Subchapter M applicable to dividends paid
following the close of a taxable year in respect of a prior year's income. The
Fund intends to treat such Additional Dividends as paid during such prior
taxable year for purposes of the rules governing the Fund's treatment of such
dividends, and to treat a holder as receiving a dividend distribution in the
amount of any Additional Dividend only as and when such Additional Dividend is
paid.
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<PAGE>
The Fund will generally designate Additional Dividends as exempt-interest
dividends to the extent it determines such designation is consistent with the
allocation principles set forth above. However, the IRS may assert that all or
part of an Additional Dividend is a taxable dividend either in the taxable year
in which the dividend or dividends to which the Additional Dividend relates, was
paid, or in the taxable year in which the Additional Dividend is paid. The Fund
will not be required to pay any additional amount if it is determined that its
treatment of Additional Dividends was improper. Additional Dividends will not
include any amount to compensate for the fact that the Additional Dividends or
the Retroactive Taxable Allocations (see Description of RP--Dividends--
Additional Dividends) may themselves be subject to state and local taxes. No
provision will be made to compensate holders of shares of a series of RP for any
alternative minumum tax liability in respect of distributions on shares of such
series of RP.
Existing authorities, including the revenue ruling discussed in the above
paragraph, do not specifically address whether dividends (including possibly
Additional Dividends) that are paid following the close of a taxable year, but
that are treated for tax purposes as derived from the income of such prior
taxable year, are treated as dividends "paid" during such prior taxable year for
purposes of determining each class's proportionate share of a particular type of
income. The Fund currently intends to treat such dividends as having been "paid"
in the prior taxable year for purposes of determining each class's proportionate
share of a particular type of income with respect to such prior taxable year.
Existing authorities also do not specifically address the allocation of taxable
income among the dividends paid to holders of a class of shares during or with
respect to a taxable year. It is possible that the Internal Revenue Service
could disagree with the Fund's position concerning the treatment of dividends
paid after the close of a taxable year or with the Fund's method of allocation,
in which case the Internal Revenue Service could attempt to recharacterize a
portion of the dividends paid to the holders of RP and designated by the Fund as
exempt-interest dividends as consisting instead of capital gains or other
taxable income. If the Internal Revenue Service were to prevail with respect to
any such attempted recharacterization, holders of RP could be subject to tax on
amounts so recharacterized and the Fund could be subject to Federal income and
excise tax. In such event, no additional amounts (including Additional
Dividends) would be paid by the Fund with respect to dividends so
recharacterized to compensate for any additional tax owed by holders of RP.
Ropes & Gray has advised the Fund that, should the Internal Revenue Service
attempt to so recharacterize amounts allocated by the Fund to shares of RP, the
Internal Revenue Service would be unlikely to prevail. However, such advice
represents only Ropes & Gray's best legal judgment and is not binding on the
Internal Revenue Service or the courts.
Any dividend paid by the Fund during January of a given year generally is
deemed to have been received by shareholders on December 31 of the preceding
year, provided that the dividend actually was declared by the Fund in October,
November or December of such preceding year and payable to shareholders of
record on a date in such a month.
The Fund will notify shareholders each year of the amount and tax status of
dividends and other distributions, including the amount of any distribution of
net long-term capital gains.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.
Sale or Redemption of Shares. In certain circumstances, the sale or
exchange of shares of RP may give rise to gain or loss. In general, any gain or
loss realized upon a taxable disposition of shares of RP by a shareholder will
be treated as long-term capital gain or loss if the shares have been held for
more than twelve months, and otherwise as short-term capital gain or loss.
However, if a shareholder buys shares of RP and sells them at a loss within six
months, any loss will be disallowed for Federal income tax purposes to the
extent of any exempt-interest dividends received on such shares. In addition,
any loss (not already disallowed as provided in the preceding sentence) realized
upon a taxable disposition of shares of RP held for six months or less will be
treated as long-term, rather than short-term, capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect to
those shares. All or a portion of any loss realized upon a taxable disposition
of shares of RP will be disallowed if other shares of RP are purchased within 30
days before or after the disposition. In such a case, the basis of the newly
purchased shares of RP will be adjusted to reflect the disallowed loss.
Gain or loss, if any, resulting from a redemption of RP will generally be
treated as gain or loss from the sale or exchange of a capital asset under Code
section 302, but in certain circumstances the amount distributed in
50
<PAGE>
redemption may be treated instead as a distribution of cash which is taxable to
the extent of Fund earnings and profits as an ordinary dividend.
From time to time the Fund may make a tender or repurchase offer for its
Common Shares. It is expected that the terms of any such offer will require a
tendering shareholder to tender all Common Shares, and dispose of all shares of
RP, held or considered under Code rules to be held by such shareholder.
Shareholders who tender all Common Shares and dispose of all shares of RP held,
or considered held, by them will be treated as having sold such shares and
generally will realize a capital gain or loss. If, however, a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its RP, such shareholder may be treated as having received a taxable dividend
upon the tender of its Common Shares. In such a case, there is a remote risk
that non-tendering shareholders (including holders of RP) will be treated as
having received taxable distributions from the Fund. Likewise, if the Fund
redeems some but not all of the RP held by a holder of RP and such holder of RP
is treated as having received a taxable dividend upon such redemption, there is
a remote risk that holders of Common Shares and non-redeeming holders of RP will
be treated as having received taxable distributions from the Fund.
If, in connection with the selection of a Long-Term Dividend Period, the
Fund provides that a Premium Call Period will follow a Non-Call Period, and the
premium to be paid upon redemption during the Premium Call Period exceeds a
reasonable penalty for early redemption, it is possible that the holders of RP
will be required to accrue such premium as a dividend (to the extent of Fund
earnings and profits) over the term of the Non-Call Period under regulations to
be issued by the Treasury Department.
Backup Withholding. The Fund generally is required to withhold and remit to
the U.S. Treasury 31% of the taxable dividends and other distributions paid to
non-corporate shareholders who fail to furnish the Fund with a correct taxpayer
identification number, who have underreported dividends or interest income, or
who fail to certify to the Fund they are not subject to such withholding. An
individual's taxpayer identification number is his or her social security
number.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter" or
"Merrill Lynch"), Merrill Lynch World Headquarters, World Financial Center,
North Tower, New York, New York 10281-1201 has agreed, subject to the terms and
conditions of the Purchase Agreement with the Fund and Putnam, to purchase from
the Fund all of the shares of RP of each series offered hereby. The Underwriter
is committed to purchase all such shares if any are purchased.
The Underwriter has advised the Fund that it proposes initially to offer
the shares of RP to the public at the public offering price set forth on the
cover page of the Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow, and such
dealers may reallow, a discount not in excess of $ per share on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed. The sales load of $ per
share is equal to % of the initial public offering price. Investors must pay
for any shares of RP purchased in the initial public offering on or before
July , 1997.
The Fund and Putnam have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933.
The Fund anticipates that Merrill Lynch may from time to time act as a
broker or dealer in connection with portfolio transactions after it has ceased
to be the Underwriter and, subject to certain restrictions, may act as a broker
while it is the Underwriter. See "Portfolio Transactions."
Merrill Lynch is also the Remarketing Agent and a Commercial Paper Dealer.
See "Remarketing--The Remarketing Agent" and "Remarketing--Remarketing
Procedures--Applicable Dividend Rates."
Princeton Administrators L.P., an affiliate of Merrill Lynch, has entered
into an agreement with Putnam to provide various services to Putnam. See
"Administrative Services Contract."
51
<PAGE>
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Fund's custodian is Putnam Fiduciary Trust Company, an affiliate of
Putnam (the "Custodian"). The transfer agent, dividend disbursing agent, and
registrar for the Common Shares is Putnam Investor Services, a division of
Putnam Fiduciary Trust Company. The principal business address of the Custodian
and Putnam Investor Services is One Post Office Square, Boston, Massachusetts
02109. During the 1997 fiscal year, the Fund incurred $201,918 in fees and
out-of-pocket expenses for investor servicing and custody services provided by
Putnam Fiduciary Trust Company. The transfer agent, dividend disbursing agent
and registrar for the shares of RP will be Bankers Trust Company.
LEGAL MATTERS
Certain legal matters in connection with the shares of RP offered hereby
will be passed upon for the Fund by Ropes & Gray, Boston, Massachusetts and for
the Underwriter by Brown & Wood LLP, New York, New York.
EXPERTS
The audited financial statements of the Fund included in this Prospectus
have been so included in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
INITIAL SETTLEMENT
Payment by each initial purchaser of shares of RP through an Agent Member
will be made by such Agent Member in same-day funds on the Date of Original
Issue of such shares to the Underwriter. On the Date of Original Issue, the
Underwriter will accept delivery of the shares of RP offered hereby and will
thereafter deposit such shares in the Underwriter's account at DTC. Immediately
thereafter on such Date of Original Issue, the Securities Depository will
deliver (by book entry) the shares of RP purchased by each purchaser through an
Agent Member from the Underwriter's account to the account of such purchaser's
Agent Member against payment for such shares of RP to the account of the
Underwriter of an amount equal to the purchase price from the account of such
Agent Member.
ADDITIONAL INFORMATION
Further information concerning these securities may be found in the
Registration Statement, of which this Prospectus constitutes a part, on file
with the Securities and Exchange Commission.
52
<PAGE>
Report of independent accountants
For the fiscal year ended April 30, 1997
To the Trustees and Shareholders of
Putnam Municipal Opportunities Trust
We have audited the accompanying statement of assets and liabilities of Putnam
Municipal Opportunities Trust, including the portfolio of investments owned, as
of April 30, 1997, and the related statement of operations for the year then
ended and the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Putnam
Municipal Opportunities Trust as of April 30, 1997, the results of its
operations for the year then ended and the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 11, 1997
53
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
April 30, 1997
Key to Abbreviations
AMBAC - AMBAC Indemnity Corporation
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
GNMA Coll. - Government National Mortgage Association Collateralized
IFB - Inverse Floating Rate Bonds
IF COP - Inverse Floating Rate Certificate of Participation
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Notes
<TABLE>
<CAPTION>
Municipal Bonds and Notes (98.2%)*
Principal Amount Ratings** Value
- -------------------------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Alabama (2.2%)
- --------------------------------------------------------------------------------------------------
$5,000,000 Butler, Indl. Dev. Board Rev. Bonds (Solid Waste
Disp. James River Corp.), 8s, 9/1/28 BBB $5,600,000
Arizona (1.2%)
- --------------------------------------------------------------------------------------------------
2,860,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(Westminster Village), 7 7/8s, 6/1/09 BB/P 3,113,825
California (10.8%)
- --------------------------------------------------------------------------------------------------
5,000,000 Foothill/Eastern Trans. Corridor Agcy. Rev. Bonds
(CA Toll Roads), Ser. A, 5s, 1/1/35 BBB 4,100,000
3,000,000 Metropolitan Wtr. Dist. IFB (Southern CA
Waterwks.), 7.551s, 8/10/18 Aa 3,037,500
2,000,000 Orange Cnty., Pub. Fac. Corp. COP (Solid Waste
Management), 7 7/8s, 12/1/13 BBB 2,092,500
5,000,000 San Bernardino Cnty. COP (Med. Ctr. Fin.), Ser. A,
MBIA, 6 1/2s, 8/1/17 AAA 5,487,500
6,000,000 San Diego Cnty., COP, AMBAC, 5 5/8s, 9/1/12 AAA 6,000,000
3,000,000 San Diego, IF COP, AMBAC, 7.27s, 9/1/07 AAA 3,195,000
1,500,000 San Francisco, Bldg. Auth. Lease Rev. Bonds (San
Francisco Civic Ctr. Complex), Ser. A, AMBAC,
5 1/4s, 12/1/16 AAA 1,415,625
3,000,000 Southern CA Pub. Pwr. Auth. IFB, FGIC, 6.72s,
7/1/17 AAA 2,685,000
-----------
28,013,125
Colorado (6.5%)
- --------------------------------------------------------------------------------------------------
Denver, City & Cnty. Arpt. Rev. Bonds
9,440,000 Ser. A, 8 3/4s, 11/15/23 BBB 11,033,000
3,160,000 MBIA, 8 1/2s, 11/15/23 AAA 3,602,400
2,000,000 Ser. D, 7 3/4s, 11/15/21 BBB 2,195,000
-----------
16,830,400
Florida (1.2%)
- --------------------------------------------------------------------------------------------------
2,890,000 Broward Cnty., Resource Recvy. Rev. Bonds (SES
Broward Cnty. LP South), 7.95s, 12/1/08 A 3,142,875
54
<PAGE>
Municipal Bonds and Notes
Principal Amount Ratings** Value
- ---------------------------------------------------------------------- ----------- -------------
Illinois (14.0%)
- ------------------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.)
$10,695,000 Ser. 84A, 8.85s, 5/1/18 BBB $11,965,031
8,755,000 Ser. C, 8.2s, 5/1/18 Baa 9,400,681
10,000,000 IL Hsg. Dev. Auth. Multi-Fam. Rev. Bonds, Ser.
91A, 8 1/4s, 7/1/16 A 10,800,000
1,500,000 IL Hsg. Dev. Auth. Res. Mtge. IFB, 10.166s,
2/1/20(acquired 5/28/93, cost $2,152,225)++ Aa 1,640,625
8,330,000 Metropolitan Pier & Exposition Auth. Rev. Bonds
(McCormick), Ser. A, MBIA, zero %,12/15/16 AAA 2,592,713
------------
36,399,050
Indiana (0.8%)
- ------------------------------------------------------------------------------------------------------
2,000,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev.
Bonds (Federal Express Corp.), 7.1s, 1/15/17 BBB 2,145,000
Kentucky (1.9%)
- ------------------------------------------------------------------------------------------------------
Kenton Cnty., Arpt. Board Special Fac. Rev. Bonds
(Delta Air Lines, Inc.)
3,400,000 Ser. A, 7 1/2s, 2/1/20 BBB 3,646,500
1,300,000 Ser. B, 7 1/4s, 2/1/22 Baa 1,387,750
------------
5,034,250
Louisiana (4.9%)
- ------------------------------------------------------------------------------------------------------
5,500,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 5,905,625
2,850,000 St. Charles Parish, Poll. Control, Rev. Bonds (LA
Pwr. & Lt. Co.), 8s, 12/1/14 BBB 3,081,563
3,800,000 West Feliciana Parish Poll. Ctrl. VRDN, 4s, 4/1/16 VMIGI 3,800,000
------------
12,787,188
Massachusetts (5.0%)
- ------------------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,135,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 3,264,319
3,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s,
8/15/24 BB/P 3,187,500
MA State Indl. Fin. Agcy. Resource Recvy. Rev. Bonds
3,000,000 (Southeastern MA), Ser. A, 9s, 7/1/15 BB/P 3,378,750
1,000,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB/P 1,038,750
2,500,000 MA State Wtr. Resource Auth. Rev. Bonds, Ser. B,
MBIA, 4 3/4s, 12/1/21 AAA 2,125,000
------------
12,994,319
Michigan (1.0%)
- ------------------------------------------------------------------------------------------------------
2,500,000 MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds,
Ser. A, FSA, 7.55s, 4/1/23 Aaa 2,671,875
Mississippi (1.6%)
- ------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Control Rev. Bonds
2,500,000 (Middle South Energy, Inc.), Ser. B, 8 1/4s, 6/1/14 BB/P 2,681,250
1,350,000 (Syst. Energy Resources, Inc.), 7.3s, 5/1/25 BBB 1,412,438
------------
4,093,688
55
<PAGE>
Municipal Bonds and Notes
Principal Amount Ratings** Value
- -------------------------------------------------------------------- ----------- ------------
Nebraska (1.0%)
- ---------------------------------------------------------------------------------------------------
$ 2,300,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB,
Ser. 2, GNMA Coll., 11.278s, 9/10/30 AAA $2,567,375
Nevada (2.3%)
- ---------------------------------------------------------------------------------------------------
Clark Cnty., Indl. Dev. Rev. Bonds (Southwest Gas Corp.)
2,750,000 Ser. B, 7 1/2s, 9/1/32 Baa 2,928,750
3,000,000 Ser. A, 6 1/2s, 12/1/33 BBB 3,015,000
-----------
5,943,750
New Jersey (9.7%)
- ---------------------------------------------------------------------------------------------------
9,000,000 NJ Econ. Dev. Auth. Elec. Energy Fac. Rev. Bonds
(Vineland Cogeneration L.P.), 7 7/8s, 6/1/19 BB 9,697,500
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
1,500,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 BBB 1,599,375
2,590,000 (Raritan Bay Med. Ctr.), 7 1/4s, 7/1/14 BB/P 2,725,975
10,000,000 Salem Cnty. Indl. Poll. Control Fin. Auth. IFB,
MBIA, 8.707s, 10/1/29(acquired 10/28/94, cost
$9,750,000)++ AAA 11,275,000
-----------
25,297,850
New York (2.8%)
- ---------------------------------------------------------------------------------------------------
4,600,000 NY City, Indl. Dev. Agcy. Special Fac. Rev. Bonds
(American Airlines, Inc.), 8s, 7/1/20 BBB 4,864,500
2,500,000 NY State Dorm. Auth. Rev. Bonds (U. Syst.
Construction), Ser. A, 5 5/8s, 7/1/16 BBB 2,406,250
-----------
7,270,750
North Carolina (0.8%)
- ---------------------------------------------------------------------------------------------------
2,000,000 NC Eastern Muni. Pwr. Agcy. Pwr. Syst. Rev.
Bonds, Ser. B, 6s, 1/1/22 BBB 1,977,500
Ohio (1.1%)
- ---------------------------------------------------------------------------------------------------
2,663,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. IFB, Ser.
A-2, GNMA Coll., 9.567s, 3/24/31 AAA 2,905,999
Pennsylvania (8.6%)
- ---------------------------------------------------------------------------------------------------
5,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Pittsburgh Mercy Hlth. Syst.), AMBAC, 5 5/8s,
8/15/26 AAA 4,818,750
7,000,000 Montgomery Cnty., Higher Edl. & Hlth. Auth.
Hosp. Rev. Bonds (UTD Hosp.), Ser. B, 8 3/8s,
11/1/11 AAA 7,735,000
3,000,000 PA Econ. Dev. Fin. Auth. Wastewtr. Treatment Rev.
Bonds (Sun Co., Inc.), Ser. A, 7.6s, 12/1/24 BBB 3,330,000
1,000,000 PA State Econ. Dev. Fin. Auth. Res. Recvy. Rev.
Bonds (Colver), Ser. D, 7.15s, 12/1/18 BBB 1,045,000
5,000,000 PA State Higher Edl. Assistance Agcy. Student Loan
IFB, AMBAC, 9.652s, 9/3/26 AAA 5,587,500
-----------
22,516,250
South Carolina (1.9%)
- ---------------------------------------------------------------------------------------------------
4,500,000 Spartanburg Cnty. Solid Waste Disp. Rev. Bonds
(Bayerische Motoren Werke), 7.55s, 11/1/24 A/P 4,848,750
56
<PAGE>
Municipal Bonds and Notes
Principal Amount Ratings** Value
- -------------------------------------------------------------------- ----------- -------------
Texas (11.7%)
- ----------------------------------------------------------------------------------------------------
$5,500,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 BBB $ 5,878,125
Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
4,800,000 (St. Luke's Lutheran Hosp.), 7.9s, 5/1/18 AAA/P 5,514,000
2,000,000 (St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 2,297,500
4,500,000 Brazos River, Poll. Control Auth. Rev. Bonds (TX
Utils. Elec. Co.), Ser. A, 7 7/8s, 3/1/21 BBB 4,910,625
2,420,000 Jefferson Cnty., Hlth. Fac. Dev. Corp. Hosp. Rev.
Bonds (Baptist Healthcare Syst.), 8 7/8s, 6/1/21 BB 2,528,900
3,535,000 Port Corpus Christi, Indl. Dev. Corp. Rev. Bonds
(Valero Refining & Marketing Co.), Ser. A,
10 1/4s, 6/1/17 BBB 3,656,321
5,000,000 Titus Cnty., Fresh Wtr. Supply Dist. No. 1 Poll.
Rev. Bonds (Southwestern Elec. Pwr. Co.),
Ser. A, 8.2s, 8/1/11 AA 5,668,750
-------------
30,454,221
Utah (2.0%)
- ----------------------------------------------------------------------------------------------------
5,000,000 Intermountain Pwr. Agcy. Rev. Bonds, Ser. D,
AMBAC, 7 3/4s, 7/1/20 A 5,262,500
Virginia (1.4%)
- ----------------------------------------------------------------------------------------------------
3,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp.
Syst.), Ser. C, 9.917s, 8/29/23 AAA 3,588,750
Washington (2.6%)
- ----------------------------------------------------------------------------------------------------
7,150,000 Pierce Cnty., Econ. Dev. Corp. Rev. Bonds (Solid
Waste-Occidental Petroleum), 5.8s, 9/1/29 Baa 6,667,375
Wyoming (1.2%)
- ----------------------------------------------------------------------------------------------------
2,925,000 Sweetwater Cnty., Solid Waste Disp. Rev. Bonds
(FMC Corp.), Ser. A, 7s, 6/1/24 BBB 3,085,874
-------------
Total Investments (cost $251,970,042)*** $255,212,539
</TABLE>
- ------------
* Percentages indicated are based on net assets of $260,007,830.
**The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at April 30, 1997 for the securities listed.
Ratings are generally ascribed to securities at the time of issuance. While
the agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings do not necessarily represent what the
agencies would ascribe to these securities at April 30, 1997. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are
not covered by the Report of independent accountants.
***The aggregate identified cost on a tax basis is $251,970,042 resulting in
gross unrealized appreciation and depreciation of $7,404,463 and $4,161,966,
respectively, or net unrealized appreciation of $3,242,497.
++ Restricted, excluding 144A securities, as to public resale. The total
market value of restricted securities held at April 30, 1997 was $12,915,625
or 5.0% of net assets.
The rates shown on IFB and IF COP, which are securities paying interest
rates that vary inversely to changes in the market interest rates, and VRDN's
are the current interest rates at April 30, 1997.
57
<PAGE>
The fund had the following industry group concentrations greater than 10%
at April 30, 1997 (as a percentage of net assets):
Transportation 25.0%
Utilities 23.7
Healthcare 18.0
The fund had the following insurance concentration greater than 10% at
April 30, 1997 (as a percentage of net assets):
AMBAC 10.1%
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
April 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (identified cost $251,970,042) (Note 1) ......... $255,212,539
Cash .............................................................................. 47,229
Interest receivable ............................................................... 5,906,226
Receivable for securities sold ...................................................... 580,000
Unamortized organization expenses (Note 1) .......................................... 6,888
Other assets ........................................................................ 16,284
------------
TOTAL ASSETS ..................................................................... 261,769,166
============
LIABILITIES
Distributions payable to shareholders ............................................. 1,252,132
Payable for compensation of Manager (Note 2) ....................................... 441,524
Payable for investor servicing and custodian fees (Note 2) ........................ 22,857
Payable for compensation of Trustees (Note 2) ....................................... 5,949
Payable for administrative services (Note 2) ....................................... 609
Payable for organization expenses (Note 1) .......................................... 31,878
Other accrued expenses ............................................................ 6,387
------------
TOTAL LIABILITIES ............................................................... 1,761,336
------------
NET ASSETS ..................................................................... $260,007,830
============
REPRESENTED BY
Series A remarketed preferred shares (800 shares issued and outstanding at $50,000
per share) (Note 4) ............................................................... $ 40,000,000
Paid-in capital--common shares (Unlimited shares authorized) (Note 1) ............ 226,378,565
Distributions in excess of net investment income (Note 1) ........................ (415,009)
Accumulated net realized loss on investments (Note 1) .............................. (9,198,223)
Net unrealized appreciation of investments ....................................... 3,242,497
------------
TOTAL--REPRESENTING NET ASSETS APPLICABLE
TO CAPITAL SHARES OUTSTANDING ................................................... $260,007,830
============
NET ASSETS AVAILABLE TO:
Series A remarketed preferred shares ............................................. $ 40,000,000
Cumulative undeclared dividends on remarketed preferred shares .................. 74,751
------------
Net assets allocated to remarketed preferred shares--liquidation preference ...... $ 40,074,751
------------
Net assets available to common shares ............................................. $219,933,079
============
Net asset value per common share ($219,933,079 divided by 16,157,092 shares) ...... $ 13.61
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
STATEMENT OF OPERATIONS
Year ended April 30, 1997
<TABLE>
<S> <C>
TAX EXEMPT INTEREST INCOME: ................................................... $18,275,869
Expenses:
Compensation of Manager (Note 2) ................................................ 1,824,503
Investor servicing and custodian fees (Note 2) ................................. 207,918
Compensation of Trustees (Note 2) ............................................. 19,828
Administrative services (Note 2) ................................................ 7,384
Amortization of organization expenses (Note 1) ................................. 6,370
Reports to shareholders ...................................................... 26,195
Auditing ........................................................................ 53,269
Legal ........................................................................... 18,930
Postage ........................................................................ 49,504
Exchange listing fees ......................................................... 24,150
Preferred share remarketing agent fees ....................................... 109,391
Other ........................................................................ 40,625
-----------
TOTAL EXPENSES ............................................................... 2,388,067
===========
Expense reduction (Note 2) ...................................................... (68,042)
NET EXPENSES .................................................................. 2,320,025
NET INVESTMENT INCOME ......................................................... 15,955,844
Net realized gain on investments (Notes 1 and 3) ................................. 375,642
Net realized gain on futures contracts (Note 1) ................................. 440,942
Net unrealized appreciation of investments and futures contracts during the year 2,427,269
NET GAIN ON INVESTMENTS ......................................................... 3,243,853
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................... $19,199,697
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended April 30
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income .......................................... $ 15,955,844 $ 16,028,262
Net realized gain on investments .............................. 816,584 2,139,601
Net unrealized appreciation of investments ..................... 2,427,269 3,617,324
Net increase in net assets resulting from operations ......... 19,199,697 21,785,187
Distributions to remarketed preferred shareholders:
From net investment income .................................... (1,397,016) (1,455,352)
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS applicable to common shareholders (excluding
cumulative undeclared dividends on remarketed preferred shares
of $74,751 and $71,506, respectively) ........................ 17,802,681 20,329,835
Distributions to common shareholders:
From net investment income .................................... (15,499,239) (15,995,243)
In excess of net investment income ........................... (415,009) --
------------ ------------
TOTAL INCREASE IN NET ASSETS ................................. 1,888,433 4,334,592
============ ============
Net assets
Beginning of year ............................................. 258,119,397 253,784,805
END OF YEAR (including distributions in excess of net investment
income and undistributed net investment income of $415,009 and
$940,417, respectively) ....................................... $260,007,830 $258,119,397
NUMBER OF FUND SHARES
Common shares outstanding at beginning and end of year ......... 16,157,092 16,157,092
Remarketed preferred shares outstanding
at beginning and end of year ................................. 800 800
</TABLE>
The accompanying notes are an integral part of these financial statements.
61
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
Year Ended April 30 May 28, 1993+
PER-SHARE OPERATING PERFORMANCE 1997 1996 1995 to April 30, 1994
- --------------------------------------------------------- ----------- ----------- ---------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period
(common shares) ....................................... $ 13.50 $ 13.23 $ 13.57 $ 14.07(e)
Investment operations:
Net investment income ................................. .99 .99 1.02 .94(a)
Net realized and unrealized gain (loss) on
investments .......................................... .20 .36 (.16) (.59)
-------- -------- -------- ---------
Total from investment operations ..................... 1.19 1.35 .86 .35
======== ======== ======== =========
Less distributions:
From net investment income:
To preferred shareholders ........................... (.09) (.09) (.08) (.05)(f)
To common shareholders .............................. (.96) (.99) (.99) (.70)
In excess of net investment income:
To common shareholders .............................. (.03) -- -- --
From net realized gains on investments:
To common shareholders .............................. -- -- (.09) (.05)
In excess of capital gains:
To common shareholders .............................. -- -- (.03) --
-------- -------- -------- ---------
Total distributions: ................................. (1.08) (1.08) (1.19) (.80)
======== ======== ======== =========
Preferred share offering costs ........................ -- -- -- (.05)
Common share offering costs ........................... -- -- (.01)(g) --
Net asset value, end of period (common shares) ......... $ 13.61 $ 13.50 $ 13.23 $ 13.57
Market value, end of period (common shares) ............ $ 13.875 $ 13.625 $ 12.250 $ 12.625
RATIOS AND SUPPLEMENTAL DATA
Total investment return, at market value (common
shares) (%)(b) ....................................... 9.24 19.64 5.82 (11.22)*
Net assets, end of period (in thousands) ............... $260,008 $258,119 $253,785 $259,295
Ratio of expenses to average net assets (%)(c)(d) ...... 1.08 1.05 .95 .94*
Ratio of net investment income to average net
assets (%) (c) ....................................... 6.60 6.54 6.04 6.14*
Portfolio turnover rate (%) ........................... 20.52 49.97 59.13 60.52*
</TABLE>
- ------------
+ Commencement of operations.
* Not annualized.
(a) Reflects a waiver of the management fee for the period May 28, 1993 to June
13, 1993. As a result of the waiver, expenses of the fund for the period
ended April 30, 1994 reflect a reduction of less than $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Ratios reflect net assets available to common shares only: net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(d) The ratio of expenses to average net assets for the year ended April 30,
1996 and thereafter, include amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (Note 2)
(e) Represents initial net asset value of $14.10 less offering expenses of
$0.03.
(f) Preferred shares were issued on August 3, 1993.
(g) Adjustments of the original offering costs to reflect actual costs
incurred.
62
<PAGE>
NOTES TO FINANCIAL STATEMENTS
April 30, 1997
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end management investment company. The
fund's investment objective is to seek a high level of current income exempt
from federal income tax, consistent with preservation of capital. The fund
intends to achieve its objective by investing in a portfolio of investment grade
municipal bonds that Putnam Investment Management, Inc. ("Putnam Management"),
the Fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.,
believes to be consistent with preservation of capital.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities. Actual results could
differ from those estimates.
A) SECURITY VALUATION Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. The fair value of restricted securities is
determined by Putnam Management following procedures approved by the Trustees,
and such valuations and procedures are reviewed periodically by the Trustees.
B) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security
transactions are accounted for on the trade date (date the order to buy or sell
is executed). Interest income is recorded on the accrual basis.
C) FUTURES AND OPTIONS CONTRACTS The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns or
expects to purchase. The fund may also write options on securities it owns or in
which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options are
valued at the last sale price, or if no sales are reported, the last bid price
for purchased options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D) FEDERAL TAXES It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions of
the Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code of
1986, as amended. Therefore, no provision has been made for federal taxes on
income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At April 30, 1997, the fund had a capital loss carryover of approximately
$8,475,000 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------- ---------------
$3,894,000 April 30, 2003
$4,581,000 April 30, 2004
E) DISTRIBUTIONS TO SHAREHOLDERS Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. Dividends on
remarketed preferred shares become payable when, as and if declared by the
Trustees. Each dividend period for the remarketed preferred shares is generally
a 28 day period. The applicable dividend rate for the remarketed preferred
shares on April 30, 1997 was 3.59%. The amount and character of income and gains
to be distributed are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences
include treatment of organization expenses.
63
<PAGE>
Reclassifications are made to the fund's capital accounts to reflect income and
gains available for distribution (or available capital loss carryovers) under
income tax regulations. For the year ended April 30, 1997, the fund reclassified
$6 to increase distributions in excess of net investment income and $6 to
increase paid-in-capital. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
F) DETERMINATION OF NET ASSET VALUE Net asset value of the common shares is
determined by dividing the value of all assets of the fund (including accrued
interest and dividends), less all liabilities (including accrued expenses) and
the liquidation preference of any outstanding remarketed preferred shares, by
the total number of common shares outstanding.
G) AMORTIZATION OF BOND PREMIUM AND ACCRETION OF BOND DISCOUNT Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount bonds are accreted according to the effective yield
method.
H) UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in
connection with its organization, its registration with the Securities and
Exchange Commission and with various states and the initial public offering of
its shares were $31,878. These expenses are being amortized on straight-line
basis over a five-year period.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management, for management and investment advisory
services and administrative services is paid quarterly based on the average net
assets of the fund, including amounts attributable to any preferred shares that
may be outstanding. Such fees in the aggregate are based on the annual rate of
0.70% of the first $500 million of the average net asset value of the fund,
0.60% of the next $500 million, 0.55% of the next $500 million, and 0.50% of any
amount over $1.5 billion.
If dividends payable on remarketed preferred shares during any dividend
payment period plus any expenses attributable to remarketed preferred shares for
that period exceed the fund's net income attributable to the proceeds of the
remarketed preferred shares during that period, then the fee payable to Putnam
Management for that period will be reduced by the amount of the excess (but not
more than .70% of the liquidation preference of the remarketed preferred shares
outstanding during the period).
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended April 30, 1997, fund expenses were reduced by $68,042
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested a portion of the assets utilized in connection with the
expense offset arrangements in an income producing asset if it had not entered
into such arrangements.
Trustees of the fund receive an annual Trustees fee of $580 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees payable
on or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan covering all Trustees of the Fund who have served as Trustee for at least
five years. Benefits under the plan are equal to 50% of the Trustee's average
total retainer and meeting fees for the three years preceding retirement.
Pension expense for the fund is included in Trustee fees in the Statement of
operations for the year ended April 30, 1997. Accrued pension liability is
included in Payable for compensation of Trustees in the Statement of assets and
liabilities.
64
<PAGE>
Note 3
Purchase and sales of securities
During the year ended April 30, 1997, purchases and sales of investment
securities other than U.S. government and agency obligations and short-term
investments aggregated $51,549,344 and $53,998,854, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Note 4
Remarketed preferred shares
The Series A shares are redeemable at the option of the fund on any
dividend payment date at a redemption price of $50,000 per share, plus an amount
equal to any dividends accumulated on a daily basis but unpaid through the
redemption date (whether or not such dividends have been declared) and, in
certain circumstances, a call premium.
It is anticipated that dividends paid to holders of remarketed preferred
shares will be considered tax-exempt dividends under the Internal Revenue Code
of 1986, as amended. To the extent that the fund earns taxable income and
capital gains by the conclusion of a fiscal year, it will be required to
apportion to the holders of the remarketed preferred shares throughout that year
additional dividends as necessary to result in an after-tax equivalent to the
applicable dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to maintain
asset coverage of at least 200% with respect to the remarketed preferred shares
as of the last business day of each month in which any such shares are
outstanding. Additionally, the fund is required to meet more stringent asset
coverage requirements under terms of the remarketed preferred shares and the
shares' rating agencies. Should these requirements not be met, or should
dividends accrued on the remarketed preferred shares not be paid, the fund may
be restricted in its ability to declare dividends to common shareholders or may
be required to redeem certain of the remarketed preferred shares. At April 30,
1997, no such restrictions have been placed on the fund.
Note 5
Remarketed preferred shares
The Trustees have approved the proposal to offer 1,620 of Series B and
1,620 of Series C remarketed preferred shares, both with a liquidation
preference of $25,000 per share plus accumulated and unpaid dividends.
Underwriting expenses and offering expenses will be charged to net assets
available to common shareholders.
Federal tax information (Unaudited)
The fund has designated 99.55% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
65
<PAGE>
GLOSSARY
"`AA' Composite Commercial Paper Rate" has the meaning specified on page
34 of this Prospectus.
"Additional Dividend" has the meaning specified on page 41 of this
Prospectus.
"Agent Member" means a designated member of the Securities Depository that
will maintain records for a beneficial owner of one or more shares of RP.
"Applicable Dividend Rate" means, with respect to the Initial Dividend
Period, the rate of dividend per annum established by the Trustees, by a duly
authorized committee thereof or by any of the President, the Vice Chairman, any
Executive Vice President or the Treasurer of the Fund and, for each subsequent
Dividend Period, means the rate of dividend per annum that (i) except for a
Dividend Period commencing during a Non-Payment Period, will be equal to the
lower of the rate of dividend per annum that the Remarketing Agent advises
results on the Remarketing Date preceding the first day of such Dividend Period
from implementation of the remarketing procedures set forth in the Bylaws and
the Maximum Dividend Rate or (ii) for each Dividend Period commencing during a
Non-Payment Period, will be equal to the Non-Payment Period Rate.
"Applicable Percentage" has the meaning described on page 34 of this
Prospectus.
"Authorized Newspaper" means a newspaper of general circulation in the
English language generally published on Business Days in The City of New York.
"Business Day" means a day on which the New York Stock Exchange, Inc. is
open for trading, and is not a day on which banks in The City of New York are
authorized or obligated by law to close.
"Bylaws" means the Amended and Restated Bylaws of the Fund.
"Cede" means Cede & Co., the nominee of DTC in whose name the RP initially
will be registered.
"Closing Transaction" means the termination of a futures contract or option
position by taking a position opposite thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other dealers as the Fund may from time to time appoint,
or in lieu of any thereof, their respective affiliates or successors.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest of the Fund.
"Date of Original Issue" means, with respect to any share of RP, the date
on which the Fund originally issues such share.
"Deposit Securities" has the meaning set forth on page B-1 of this
Prospectus.
"Discount Factor" means a Moody's Discount Factor or a S&P Discount Factor,
as the case may be.
"Discounted Value" has the meaning set forth on page B-1 of this
Prospectus.
"Dividend Payment Date" has the meaning set forth on page 39 of this
Prospectus.
"Dividend Period" has the meaning set forth on page 37 of this Prospectus.
"DTC" means The Depository Trust Company.
"Exempt-Interest Dividend" has the meaning set forth on page 48 of this
Prospectus.
"Forward Commitment" has the meaning set forth on page 18 of this
Prospectus.
"Fund" means Putnam Municipal Opportunities Trust, a Massachusetts business
trust, which is the issuer of the RP.
"Gross-Up Tax Rate" has the meaning set forth on page 29 of this
Prospectus.
66
<PAGE>
A "holder" of RP means, unless the context otherwise requires, a person who
is listed in the records of the Paying Agent as the beneficial owner of one or
more shares of RP.
"Initial Dividend Payment Date" has the meaning set forth on page 37 of
this Prospectus.
"Initial Dividend Period" means the period commencing on and including the
Date of Original Issue thereof and ending on either August 30, 1993, in the case
of Series A RP, or on the date set forth on the front cover of this Prospectus,
in the case of Series B RP and Series C RP.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures contract
or an option hereon.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
"IRS" means the Internal Revenue Service.
"Long Term Dividend Period" has the meaning set forth on page 5 of this
Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 42 of this
Prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate, whichever is greater.
"Maximum Dividend Rate" has the meaning set forth on page 34 of this
Prospectus.
"Maximum Potential Additional Dividend Liability" has the meaning set forth
on page B-1 of this Prospectus.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" has the meaning set forth on page B-2 of this
Prospectus.
"Moody's Eligible Asset" has the meaning set forth on page B-2 of this
Prospectus.
"Moody's Exposure Period" has the meaning set forth on page B-3 of this
Prospectus.
"Moody's Hedging Transaction" has the meaning set forth on page B-8 of this
Prospectus.
"Moody's Volatility Factor" has the meaning set forth on page B-3 of this
Prospectus.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"Municipal Bonds" has the meaning described on page 15 of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1940 Act Cure Date" has the meaning set forth on page 17 of this
Prospectus.
"1940 Act RP Asset Coverage" has the meaning set forth on page 17 of this
Prospectus.
"Non-Call Period" has the meaning described under "Specific Redemption
Provisions" below.
"Non-Payment Period" has the meaning set forth on page 40 of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page 40 of this
Prospectus.
"Notice of Redemption" has the meaning set forth on page 43 of this
Prospectus.
"Notice of Revocation" has the meaning set forth on page 38 of this
Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 38 of
this Prospectus.
"Optional Redemption Price" has the meaning set forth on page 42 of this
Prospectus.
"Paying Agent" means Bankers Trust Company, or any successor company or
entity, which has entered into a Paying Agent Agreement with the Fund to act,
among other things, as the transfer agent, registrar, dividend and redemption
price disbursing agent, settlement agent and agent for certain notifications for
the Fund in connection with the RP of each series in accordance with such
agreement.
67
<PAGE>
"Paying Agent Agreement" has the meaning set forth on page 28 of this
Prospectus.
"Preferred Shares" means the Series A RP, Series B RP and Series C RP,
collectively.
"Premium Call Period" has the meaning specified in "Specific Redemption
Provisions" below.
"RP" means collectively, the Remarketed Preferred Shares, Series B and
Remarketed Preferred Shares, Series C.
"RP Basic Maintenance Amount" has the meaning set forth on page 17 of this
Prospectus.
"Receivables for Municipal Bonds Sold," for purposes of determining Moody's
Eligible Assets and, for purposes of determining S&P Eligible Assets, has the
meaning set forth on pages B-2 and B-5, respectively, of this Prospectus.
A "record holder" of RP shall mean the Securities Depository or its nominee
or such other person or persons listed in the share transfer books of the Fund
as the registered holder of one or more shares of RP.
"Reference Rate" has the meaning set forth on page 34 of this Prospectus.
"Remarketing" means each periodic operation of the process for remarketing
RP, as described in this Prospectus.
"Remarketing Agent" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any additional or successor companies or entities which have
entered into an agreement with the Fund to follow the remarketing procedures for
the purposes of determining the Applicable Dividend Rate.
"Remarketing Agreement" has the meaning set forth on page 30 of this
Prospectus.
"Remarketing Date" means any date on which (i) each holder of shares of RP
must provide to the Remarketing Agent irrevocable telephonic notice of intent to
tender shares in a Remarketing, and (ii) the Remarketing Agent (a) determines
the Applicable Dividend Rate for the ensuing Dividend Period, (b) notifies
holders, purchasers and tendering holders of shares of RP by telephone, telex or
otherwise of the results of the Remarketing and (c) announces the Applicable
Dividend Rate.
"Request for Special Dividend Period" has the meaning set forth on page 37
of this Prospectus.
"Response" has the meaning set forth on page 38 of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 41 of
this Prospectus.
"S&P" means Standard & Poor's Ratings Services.
"S&P Discount Factor" has the meaning set forth on page B-4 of this
Prospectus.
"S&P Eligible Asset" has the meaning set forth on page B-5 of this
Prospectus.
"S&P Exposure Period" has the meaning set forth on page B-5 of this
Prospectus.
"S&P Hedging Transaction" has the meaning set forth on page B-5 of this
Prospectus.
"S&P Volatility Factor" has the meaning set forth on page B-5 of this
Prospectus.
"Securities Depository" means DTC or any successor company or other entity
selected by the Fund as securities depository for RP that agrees to follow the
procedures required to be followed by such securities depository in connection
with the shares of such series of RP.
"Series A RP" means the Remarketed Preferred Shares, Series A, of the Fund.
"Series B RP" means the Remarketed Preferred Shares, Series B, of the Fund
offered hereby.
"Series C RP" means the Remarketed Preferred Shares, Series C, of the Fund
offered hereby.
"Settlement Date" means the first Business Day after a Remarketing Date
applicable to a share of RP.
"7-day Dividend Period" has the meaning set forth on page 5 of this
Prospectus.
"Short Term Dividend Period" has the meaning set forth on page 5 of this
Prospectus.
68
<PAGE>
"Special Dividend Period" means a Dividend Period established by the
Trustees for RP as described on page 5 of this Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend
Period of 365 or more days, either, or any combination of, the designation of
(i) a period (a "Non-Call Period") determined by the Trustees, after
consultation with the Remarketing Agent, during which the shares of RP subject
to such Dividend Period shall not be subject to redemption at the option of the
Fund and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Trustees, after consultation with the
Remarketing Agent, during each year of which the shares of RP subject to such
Dividend Period shall be redeemable at the Trust's option at a price per share
equal to $50,000 (in the case of Series A RP) or $25,000 (in the case of Series
B RP or Series C RP) plus accumulated but unpaid dividends plus an applicable
premium, as determined by the Trustees after consultation with the Remarketing
Agent.
"Substitute Commercial Paper Dealers" means such substitute commercial
paper dealers as the Trust may from time to time appoint or, in lieu of any
thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations selected by the Fund to act as the
substitute rating agency or substitute rating agencies, as the case may be, to
determine the credit ratings of the RP.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page 34 of this Prospectus.
"Tender and Dividend Reset" means the process pursuant to which RP may be
tendered in a Remarketing or held and become subject to the new Applicable
Dividend Rate determined by the Remarketing Agents in such Remarketing.
"Treasury Bonds" means United States Treasury Bonds with remaining
maturities of ten years or more.
"Trustees" means the Trustees of the Fund.
"U.S. Treasury Bill Rate" has the meaning set forth on page 35 of this
Prospectus.
"U.S. Treasury Note Rate" has the meaning set forth on page 35 of this
Prospectus.
"Valuation Date" has the meaning set forth on page B-5 of this Prospectus.
"Variation Margin" has the meaning set forth on page B-6 of this
Prospectus.
69
<PAGE>
APPENDIX A
NORMAL SCHEDULE FOR REMARKETING RP
The normal schedule for remarketing shares of RP subject to Tender and
Dividend Reset is described below. As described in this Prospectus, the events
occurring on each day of a normal remarketing schedule are subject to change in
the event that certain days are not Business Days. All references herein to a
particular time of day shall be to New York City time.
<TABLE>
<S> <C>
Remarketing Date
9:00 a.m. Deadline for the Remarketing Agent to make available to holders of shares of RP
subject to Tender and Dividend Reset non-binding indications of Applicable Dividend
Rate for the next succeeding 7-Day Dividend Period or, if applicable, Special
Dividend Period.
12:00 noon Deadline for each holder of shares of RP subject to Tender and Dividend Reset to
provide to the Remarketing Agent irrevocable telephonic notice of intent to tender
RP for sale in the current Remarketing. Remarketing of tendered shares of RP formally
commences.
3:00 p.m. Deadline for completion of Remarketing. The Remarketing Agent determines the
Applicable Dividend Rate for the Dividend Period.
3:30 p.m. The Remarketing Agent notifies holders, purchasers and tendering holders of RP by
telephone, telex or otherwise of the results of the Remarketing. Applicable
Dividend Rate is announced.
Settlement Date New Dividend Period begins. In addition, shares of RP which have been tendered and
(next following sold in a Remarketing are delivered against payment through the Securities
Business Day) Depository.
</TABLE>
A-1
<PAGE>
APPENDIX B
RATING AGENCY REQUIREMENTS
This Appendix sets out certain procedures from the Bylaws of the Fund
containing conditions determined by S&P and Moody's which the Fund must meet in
order to maintain its AAA/"aaa" rating. Generally, these requirements, among
other things, impose limitations on the securities in which the Fund may invest
(and the amount of its portfolio which may be invested in various types of
securities and securities of various issuers), limit the Fund's use of futures,
options and forward commitments and may require the Fund to redeem RP as
described generally in the Prospectus under "Description of RP--Redemption." Any
capitalized terms used in this Appendix but not defined herein are defined
elsewhere in the Prospectus.
DEFINITIONS
"Anticipation Notes" shall mean the following Municipal Bonds: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"Deposit Securities" means cash and Municipal Bonds rated at least AAA,
A-1+ or SP-1+ by S&P.
"Discounted Value" means (i) with respect to an S&P Eligible Asset, the
quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the lower of par and
the quotient of the Market Value thereof divided by the applicable Moody's
Discount Factor.
"Independent Accountant" means a nationally recognized accountant, or firm
of accountants, that is, with respect to the Fund, an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended.
"Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures contract
or an option thereon.
"Market Value" of any asset of the Fund means the market value thereof
determined by the Pricing Service. The Market Value of any asset shall include
any interest accrued thereon. The Pricing Service shall value portfolio
securities at the mean between the quoted bid and asked price or the yield
equivalent when quotations are readily available. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the Pricing Service using methods which include consideration of: yields or
prices of Municipal Bonds of comparable quality, type of issue, coupon, maturity
and rating; indications as to value from dealers; and general market conditions.
The Pricing Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. In the event the Pricing Service is
unable to value a security, the security shall be valued at the lower of two
dealer bids obtained by the Fund from dealers who are members of the National
Association of Securities Dealers, Inc. and make a market in the security, at
least one of which shall be in writing. Futures contracts and options are valued
at closing prices for such instruments established by the exchange or board of
trade on which they are traded, or if market quotations are not readily
available, are valued at fair value on a consistent basis using methods
determined in good faith by the Trustees.
"Maximum Potential Additional Dividend Liability," as of any Valuation
Date, means the aggregate amount of Additional Dividends that would be payable
with respect to the RP if the Fund were to make Retroactive Taxable Allocations,
with respect to any fiscal year, estimated based upon dividends paid and the
amount of undistributed realized net capital gain and other income subject to
regular Federal income tax earned by the Fund, as of the end of the calendar
month immediately preceding such Valuation Date and assuming such Additional
Dividends are fully taxable.
B-1
<PAGE>
"Moody's Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes a Moody's Eligible Asset, the
percentage determined by reference to (a) the rating by Moody's or S&P on such
Bond and (b) the Moody's Exposure Period, in accordance with the table set forth
below:
<TABLE>
<CAPTION>
Rating Category
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG-1*** SP-1+****
------ ------ ------ ------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
--
7 weeks or less 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than seven weeks 154 164 173 205 235 137 149
9 weeks or less but greater than eight weeks 158 169 179 209 242 138 150
</TABLE>
* Moody's rating.
** Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
*** Municipal Bonds rated MIG-1, VMIG-1 or P-1 by Moody's, which do not mature
or have a demand feature at par exercisable within the Moody's Exposure
Period and which do not have a long-term rating. For the purpose of the
definition of Moody's Eligible Assets, these securities will have an
assumed rating of "A" by Moody's.
**** Municipal Bonds rated SP-1+ or A-1+ S&P which do not mature or have a
demand feature at par exercisable within the Moody's Exposure Period and
which do not have a long-term rating. For the purpose of the definition of
Moody's Eligible Assets, these securities will have an assumed rating of
"A" by Moody's.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Bonds, so long as such Municipal Bonds are rated
at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at
par exercisable within the Moody's Exposure Period, and the Moody's Discount
Factor for such Bonds will be 125% if such Bonds are not rated by Moody's but
are rated A-1+ or SP-1+ or AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period, and (ii) no Moody's Discount
Factor will be applied to cash or to Receivables for Municipal Bonds Sold.
"Receivables for Municipal Bonds Sold," for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, means the aggregate of the following:
(i) the book value of receivables for Municipal Bonds sold as of or prior to
such Valuation Date if such receivables are due within five Business Days of
such Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Fund has received
prior written authorization from Moody's or (y) with counterparties having a
Moody's long-term debt rating of at least Baa3; and (ii) the Discounted Value of
Municipal Bonds sold (applying the relevant Moody's Discount Factor to such
Bonds) as of or prior to such Valuation Date which generated such receivables,
if such receivables are due within five Business Days of such Valuation Date but
do not comply with either of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means cash, Receivables for Municipal Bonds Sold,
a short-term Municipal Bond rated VMIG-1, MIG-1 or P-1 by Moody's or SP-1+ or
A-1+ by S&P or a Municipal Bond that (i) pays interest in cash; (ii) is publicly
rated Baa or higher by Moody's or, if not rated by Moody's but rated by S&P, is
rated at least BBB- by S&P (provided that, for purposes of determining the
Moody's Discount Factor applicable to any such S&P-rated Municipal Bond, such
Municipal Bond (excluding any short-term Municipal Bond and any Municipal Bond
rated BBB-, BBB or BBB+) will be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating); (iii) does not have its Moody's
rating suspended by Moody's; and (iv) is part of an issue of Municipal Bonds of
at least $10,000,000. In addition, Municipal Bonds in the Fund's portfolio will
be included as Moody's Eligible Assets only to the extent they meet the
following diversification requirements:
B-2
<PAGE>
Maximum State
Minimum Maximum or Territory
Issue Size Underlying Concentration
Rating ($ Millions) Obligor (%)(1) (%)(1)(3)
- ----------- -------------- ---------------- ---------------
Aaa 10 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Other (2) 10 4 12
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) of any territory are limited to 10% of Moody's Eligible
Assets. For purposes of the maximum underlying obligor requirement described
above, any such Bond backed by a guaranty, letter of credit or insurance
issued by a third party will be deemed to be issued by such third party if
the issuance of such third party credit is the sole determinant of the
rating on such Bond.
When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, such Bond will constitute a Moody's Eligible Asset and the amount
the Fund is required to pay upon repurchase of such Bond will count as a
liability for purposes of calculating the RP Basic Maintenance Amount. When the
Fund purchases a Municipal Bond and agrees to sell it at a future date to
another party, cash receivable by the Fund in connection therewith will
constitute a Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise such Bond will constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset if it is (i) held in a margin account, (ii) subject to any
material lien, mortgage, pledge, security interest or security agreement of any
kind, (iii) held for the purchase of a security pursuant to a Forward Commitment
or (iv) irrevocably deposited by the Fund for the payment of dividends or
redemption.
"Moody's Exposure Period" means the period commencing on and including a
given Valuation Date and ending 48 days thereafter.
"Moody's Hedging Transaction" has the meaning described on page B-8 of this
Prospectus.
"Moody's Volatility Factor" means 272% as long as there has not been
enacted an increase to the Marginal Tax Rate. If an increase is enacted to the
Marginal Tax Rate but not yet implemented, the Moody's Volatility Factor shall
be as follows:
% Change in Moody's Volatility
Marginal Tax Rate Factor
----------------- ------
5% 292%
5% but 10% 313%
10% but 15% 338%
15% but 20% 364%
20% but 25% 396%
25% but 30% 432%
30% but 35% 472%
35% but 40% 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Fund in
writing is applicable.
"Other RP" means all Remarketed Preferred Shares of the Fund other than the
RP offered hereby.
B-3
<PAGE>
"Pricing Service" means Muller Investdata Corp., or any successor company
or entity, or any other entity designated from time to time by the Trustees.
Notwithstanding the foregoing, the Trustees will not designate a new Pricing
Service unless the Fund has received a written confirmation from Moody's and S&P
that such action would not impair the ratings then assigned by Moody's and S&P
to shares of RP.
"Quarterly Valuation Date" means the last Business Day of each fiscal
quarter of the Fund in each fiscal year of the Fund, commencing July 31, 1997.
"RP Basic Maintenance Amount," as of any Valuation Date, means the dollar
amount equal to (i) the sum of (A) the product of the number of shares of Series
A RP outstanding on such Valuation Date multiplied by the sum of (a) $50,000 and
(b) any applicable redemption premium per share attributable to the designation
of a Premium Call Period; (B) the product of the number of shares of Series B RP
and Series C RP outstanding on such Valuation Date multiplied by the sum of (a)
$25,000 and (b) any applicable redemption premium per share attributable to the
designation of a Premium Call Period; (C) the aggregate amount of cash dividends
(whether or not earned or declared) that will have accumulated for each series
of RP and Other RP outstanding, in each case, to (but not including) the end of
the current Dividend Period for such series of RP that follows such Valuation
Date or to (but not including) the 49th day after such Valuation Date, whichever
is sooner; (D) the aggregate amount of cash dividends that would accumulate at
the Maximum Dividend Rate applicable to a Dividend Period of 28 days (in the
case of shares of Series A RP) and 7 days (in the case of shares of Series B RP
and Series C RP) outstanding from the end of such Dividend Period through the
49th day after such Valuation Date, multiplied by the larger of the Moody's
Volatility Factor and the S&P Volatility Factor, determined from time to time by
Moody's and S&P, respectively (except that if such Valuation Date occurs during
a Non-Payment Period, the cash dividend for purposes of calculation would
accumulate at the then current Non-Payment Period Rate); (E) the amount of
anticipated expenses of the Fund for the 90 days subsequent to such Valuation
Date; (F) the amount of the Fund's Maximum Potential Additional Dividend
Liability as of such Valuation Date; and (G) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i)(A) through (i)(F)
(including, without limitation, any amounts due and payable by the Fund pursuant
to repurchase agreements and any payables for Municipal Bonds purchased as of
such Valuation Date) less (ii) either (A) the Discounted Value of any of the
Fund's assets, or (B) the face value of any of the Fund's assets if such assets
mature prior to or on the date of redemption of any shares of RP or payment of a
liability and are either securities issued or guaranteed by the U.S. Government
or, with respect to Moody's, have a rating assigned by Moody's of at least Aaa,
P-1, VMIG-1 or MIG-1 and, with respect to S&P, have a rating assigned by S&P of
at least AAA, SP-1+ or A-1+, in both cases irrevocably deposited by the Fund for
the payment of the amount needed to redeem shares of RP subject to redemption or
any of (i)(C) through (i)(G).
"RP Basic Maintenance Cure Date," with respect to the failure by the Fund
to satisfy the RP Basic Maintenance Amount as of a given Valuation Date, means
the sixth Business Day following such Valuation Date.
"RP Basic Maintenance Report" means a report signed by the President,
Treasurer or any Executive Vice President or Vice President of the Fund which
sets forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in the aggregate), and the
RP Basic Maintenance Amount.
"S&P Discount Factor" means, for purposes of determining the Discounted
Value of any Municipal Bond which constitutes an S&P Eligible Asset, the
percentage determined by reference to (a) the rating by S&P or Moody's on such
Bond and (b) the S&P Exposure Period, in accordance with the table set forth
below:
S&P Rating Category
S&P Exposure Period AAA AA A BBB
------ ------ ------ -----
40 Business Days 190% 195% 210% 250%
22 Business Days 170 175 190 230
10 Business Days 155 160 175 215
7 Business Days 150 155 170 210
3 Business Days 130 135 150 190
B-4
<PAGE>
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Bonds will be 115%, so long as such Municipal Bonds are rated A-1+ or
SP-1+ by S&P and mature or have a demand feature exercisable in 30 days or less,
or 125% if such Municipal Bonds are not rated by S&P but are rated VMIG-1, P-1
or MIG-1 by Moody's and such short-term Municipal Bonds referred to in this
clause (i) shall qualify as S&P Eligible Assets; provided, however, such
short-term Municipal Bonds rated by Moody's but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further provided that
such short-term Municipal Bonds rated by Moody's but not rated by S&P may
comprise no more than 50% of short-term Municipal Bonds that qualify as S&P
Eligible Assets and (ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Bonds Sold. "Receivables for Municipal Bonds Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of receivables for Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within five Business Days of such
Valuation Date. For purposes of the foregoing, Anticipation Notes rated SP-1+
or, if not rated by S&P, rated VMIG-1 by Moody's, whether or not they mature or
have a demand feature exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal Bonds and shall qualify
as S&P Eligible Assets.
"S&P Eligible Asset" means cash, Receivables for Municipal Bonds Sold or a
Municipal Bond that (i) is issued by any of the 50 states, any territory or
possession of the United States, the District of Columbia, and any political
subdivision, instrumentality, county, city, town, village, school district or
agency (such as authorities and special districts created by the states) of any
of the foregoing and certain federally sponsored agencies such as local housing
authorities; (ii) is interest bearing and pays interest at least semi-annually;
(iii) is payable with respect to principal and interest in United States
Dollars; (iv) is publicly rated BBB or higher by S&P or, except in the case of
Anticipation Notes that are grant anticipation notes or bond anticipation notes
which must be rated by S&P to be included in S&P Eligible Assets, if not rated
by S&P but rated by Moody's, is rated at least A by Moody's (provided that such
Moody's-rated Municipal Bonds will be included in S&P Eligible Assets only to
the extent the Market Value of such Municipal Bonds does not exceed 50% of the
aggregate Market Value of the S&P Eligible Assets; and further provided that,
for purposes of determining the S&P Discount Factor applicable to any such
Moody's-rated Municipal Bond, such Municipal Bond will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating); (v) is
not subject to a covered call or covered put option written by the Fund; (vi) is
not part of a private placement of Municipal Bonds; and (vii) is part of an
issue of Municipal Bonds with an original issue size of at least $20 million or,
if of an issue with an original issue size below $20 million (but in no event
below $10 million), is issued by an issuer with a total of at least $50 million
of securities outstanding. Notwithstanding the foregoing: (1) Municipal Bonds of
any one issuer will be considered S&P Eligible Assets only to the extent the
Market Value of such Municipal Bonds does not exceed 10% of the aggregate Market
Value of the S&P Eligible Assets, provided that 2% is added to the applicable
S&P Discount Factor for every 1% by which the Market Value of such Municipal
Bonds exceeds 5% of the aggregate Market Value of the S&P Eligible Assets; and
(2) Municipal Bonds issued by issuers in any one state or territory will be
considered S&P Eligible Assets only to the extent the Market Value of such
Municipal Bonds does not exceed 20% of the aggregate Market Value of S&P
Eligible Assets.
"S&P Exposure Period" means the maximum period of time following a
Valuation Date, including the Valuation Date and the RP Basic Maintenance Cure
Date, that the Fund has to cure any failure to maintain, as of such Valuation
Date, a Discounted Value of its portfolio at least equal to the RP Basic
Maintenance Amount.
"S&P Hedging Transactions" has the meaning described below.
"S&P Volatility Factor" means 277% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"Valuation Date" means, for purposes of determining whether the Fund is
maintaining the RP Basic Maintenance Amount, each Business Day commencing with
the Date of Original Issue.
B-5
<PAGE>
"Variation Margin" means, in connection with an outstanding futures
contract or option thereon owned or sold by the Fund, the amount of cash or
securities paid to or received from a broker (subsequent to the Initial Margin
payment) from time to time as the price of such futures contract or option
fluctuates.
Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of RP, from time to time amend, alter or repeal certain
of the foregoing definitions (or definitions of other terms contained in the
Fund's Bylaws) and any such amendment, alteration or repeal will be deemed not
to affect the preferences, rights or powers of shares of RP or the Holders
thereof, provided the Trustees receive written confirmation from both Moody's
and S&P, that any such amendment, alteration or repeal would not impair the
ratings then assigned to shares of RP by the rating agency providing such
confirmation.
RP BASIC MAINTENANCE AMOUNT
Basic Requirement. The Fund shall maintain, on each Valuation Date, and
shall verify to its satisfaction that it is maintaining on such Valuation Date,
S&P Eligible Assets having an aggregate Discounted Value equal to or greater
than the RP Basic Maintenance Amount and Moody's Eligible Assets having an
aggregate Discounted Value equal to or greater than the RP Basic Maintenance
Amount. Upon any failure to maintain the required Discounted Value, the Fund
will use its best efforts to alter the composition of its portfolio to reattain
the RP Basic Maintenance Amount on or prior to the RP Basic Maintenance Cure
Date. If, on any Valuation Date, the Fund shall have Moody's Eligible Assets
with a Discounted Value which exceeds the RP Basic Maintenance Amount by not
more than 5%, the Adviser shall not alter the composition of the Fund's
portfolio unless it determines that such action will not cause the Fund to have
Moody's Eligible Assets with a Discounted Value less than the RP Basic
Maintenance Amount.
Reporting Requirements. The Fund will deliver an RP Basic Maintenance
Report to the Remarketing Agent, the Paying Agent, Moody's and S&P as of (i)
each Quarterly Valuation Date, (ii) the first day of a Special Dividend Period,
and (iii) any other time when specifically requested by either Moody's or S&P,
in each case at or before 5:00 p.m., New York City time, on the third Business
Day after such day.
At or before 5:00 p.m., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to maintain Moody's Eligible Assets or
S&P Eligible Assets, as the case may be, with an aggregate Discounted Value
which exceeds the RP Basic Maintenance Amount by 5% or more or to satisfy the RP
Basic Maintenance Amount, the Fund shall complete and deliver to the Remarketing
Agent, the Paying Agent, Moody's and S&P an RP Basic Maintenance Report as of
the date of such failure. At or before 5:00 p.m., New York City time, on the
third Business Day after a Valuation Date on which the Fund cures any failure to
satisfy the RP Basic Maintenance Amount, the Fund shall complete and deliver to
the Remarketing Agent, the Paying Agent, Moody's and S&P an RP Basic Maintenance
Report as of the date of such cure.
An RP Basic Maintenance Report or Accountant's Confirmation will be deemed
to have been delivered to the Remarketing Agents, the Paying Agent, Moody's and
S&P if the Remarketing Agent, the Paying Agent, Moody's and S&P receive a copy
or telecopy, telex or other electronic transcription thereof and on the same day
the Fund mails to the Remarketing Agent, the Paying Agent, Moody's and S&P for
delivery on the next Business Day the full RP Basic Maintenance Report. A
failure by the Fund to deliver an RP Basic Maintenance Report shall be deemed to
be delivery of an RP Basic Maintenance Report indicating that the Discounted
Value for all assets of the Fund is less than the RP Basic Maintenance Amount,
as of the relevant Valuation Date.
Within ten Business Days after the date of delivery to the Remarketing
Agents, the Paying Agent, S&P and Moody's of an RP Basic Maintenance Report
relating to a Quarterly Valuation Date, the Independent Accountant will confirm
in writing to the Remarketing Agent, the Paying Agent, S&P and Moody's (i) the
mathematical accuracy of the calculations reflected in such Report (and in any
other RP Basic Maintenance Report, randomly selected by the Independent
Accountant, that was delivered by the Fund during the quarter ending on such
Quarterly Valuation Date); (ii) that, in such Report (and in such randomly
selected Report), (a) the Fund determined in accordance with the Bylaws whether
the Fund had, at such Quarterly Valuation Date (and at the Valuation Date
addressed in such randomly selected Report), S&P Eligible Assets of an aggregate
Discounted Value at least equal to the RP Basic Maintenance Amount and Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the RP Basic
Maintenance Amount, (b) the aggregate amount of Dividend Coverage Assets equals
or exceeds the Dividend Coverage Amount, and (c) it has obtained confirmation
from the Pricing Service that the Market Value
B-6
<PAGE>
of portfolio securities as determined by the Pricing Service equals the mean
between the quoted bid and asked prices or the yield equivalent (when quotations
are readily available); (iii) that the Fund has excluded from the RP Basic
Maintenance Report assets not qualifying as Eligible Assets; and (iv) with
respect to such confirmation to Moody's, that the Fund has satisfied the
requirements described below imposed by Moody's with respect to transactions in
options, futures and forward commitments as of the Quarterly Valuation Date (and
at the Valuation Date addressed in such randomly selected Report) (such
confirmation is herein called the "Accountant's Confirmation"). In preparing the
Accountant's Confirmation, the Independent Accountant shall be entitled to rely,
without further investigation, on such interpretations of law by the Fund as may
have been necessary for the Fund to perform the computations contained in the RP
Basic Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of an RP Basic Maintenance Report
relating to any Valuation Date on which the Fund failed to satisfy the RP Basic
Maintenance Amount, the Independent Accountant will provide to the Remarketing
Agents, the Paying Agent, S&P and Moody's an Accountant's Confirmation as to
such RP Basic Maintenance Report.
Within ten Business Days after the date of delivery to the Remarketing
Agent, the Paying Agent, S&P and Moody's of an RP Basic Maintenance Report
relating to any Valuation Date on which the Fund cured any failure to satisfy
the RP Basic Maintenance Amount, the Independent Accountant will provide to the
Remarketing Agents, the Paying Agent, S&P and Moody's an Accountant's
Confirmation as to such RP Basic Maintenance Report. If any Accountant's
Confirmation delivered as required above shows that an error was made in the RP
Basic Maintenance Report for a particular Valuation Date for which such
Accountant's Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, of the Fund was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Fund, and the Fund shall accordingly amend and deliver the RP Basic Maintenance
Report to the Remarketing Agents, the Paying Agent, S&P and Moody's promptly
following receipt by the Fund of such Accountant's Confirmation.
At or before 5:00 p.m., New York City time, on the first Business Day after
the Date of Original Issue of the shares of RP, the Fund will complete and
deliver to Moody's and S&P an RP Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Independent Accountant will provide to Moody's and S&P an
Accountant's Confirmation as to such RP Basic Maintenance Report.
At or before 5:00 p.m., New York City time, on the first Business Day
following any date on which the Fund repurchases any outstanding Common Shares,
the Fund will complete and deliver to Moody's and S&P an RP Basic Maintenance
Report as of the close of business on the date of the repurchase.
FUTURES AND OPTIONS TRANSACTIONS; FORWARD CONTRACTS
S&P Guidelines. For so long as any shares of RP are rated by S&P, the Fund
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions will not impair
the rating then assigned to the shares of RP by S&P, except that the Fund may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds with remaining
maturities of ten years or more ("Treasury Bonds") and write, purchase or sell
put and call options on such contracts (collectively "S&P Hedging
Transactions"), subject to the following limitations:
(A) the Fund will not engage in any S&P Hedging Transaction based on the
Municipal Index (other than transactions which terminate a futures
contract or option held by the Fund by the Fund's taking an opposite
position thereto ("Closing Transactions")), which would cause the Fund at
the time of such transaction to own or have sold (1) 1,001 or more
outstanding futures contracts based on the Municipal Index, (2)
outstanding futures contracts based on the Municipal Index and on
Treasury Bonds exceeding in number 25% of the quotient of the Market
Value of the Fund's total assets divided by $100,000 or (3) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of
the average number of daily traded futures contracts based on the
Municipal Index in the thirty days preceding the time of effecting such
transaction as reported by The Wall Street Journal;
B-7
<PAGE>
(B) the Fund will not engage in any S&P Hedging Transaction based on Treasury
Bonds (other than Closing Transactions) which would cause the Fund at the
time of such transaction to own or have sold (1) outstanding futures
contracts based on Treasury Bonds and on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Fund's total assets
divided by $100,000 or (2) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily
traded futures contracts based on Treasury Bonds in the thirty days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(C) the Fund will engage in Closing Transactions to close out any outstanding
futures contract which the Fund owns or has sold or any outstanding
option thereon owned by the Fund in the event (i) the Fund does not have
S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the RP Basic Maintenance Amount on two consecutive Valuation
Dates and (ii) the Fund is required to pay Variation Margin on the second
such Valuation Date;
(D) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Fund holds the securities deliverable under such terms; and
(E) when the Fund writes a futures contract or option thereon (including a
futures contract or option thereon which requires delivery of an
underlying security), it will either maintain an amount of cash, cash
equivalents or short-term, fixed-income securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus
the amount of Initial Margin and Variation Margin held in the account of
or on behalf of the Fund's broker with respect to such futures contract
or option equals the Market Value of the futures contract or option, or,
in the event the Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such
underlying security in its portfolio. For purposes of determining whether
the Fund has S&P Eligible Assets with a Discounted Value that equals or
exceeds the RP Basic Maintenance Amount, such Discounted Value shall,
unless the Fund receives written confirmation from S&P to the contrary,
be reduced by an amount equal to (i) 30% of the aggregate settlement
value, as marked to market, of any outstanding futures contracts based on
the Municipal Index which are owned by the Fund plus (ii) 25% of the
aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by
the Fund.
Moody's Guidelines. For so long as any shares of RP are rated by Moody's,
the Fund will not buy or sell futures contracts, write, purchase or sell put or
call options on futures contracts or write put or call options (except covered
call or put options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the rating then assigned to the shares of RP by Moody's, except that the Fund
may purchase or sell exchange-traded futures contracts based on the Municipal
Index or Treasury Bonds and purchase, write or sell exchange-traded put options
on such futures contracts and purchase, write or sell exchange-traded call
options on such futures contracts (collectively "Moody's Hedging Transactions"),
subject to the following limitations:
(A) the Fund will not engage in any Moody's Hedging Transaction based on the
Municipal Index (other than Closing Transactions) which would cause the
Fund at the time of such transaction to own or have sold (1) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of
the average number of daily traded futures contracts based on the
Municipal Index in the thirty days preceding the time of effecting such
transaction as reported by The Wall Street Journal or (2) outstanding
futures contracts based on the Municipal Index having a Market Value
exceeding the Market Value of Municipal Bonds constituting Moody's
Eligible Assets owned by the Fund;
(B) the Fund will not engage in any Moody's Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the
Fund at the time of such transaction to own or have sold in the aggregate
(1) outstanding futures contracts based on Treasury Bonds having an
aggregate Market Value exceeding 10% of the aggregate Market Value of all
Moody's Eligible Assets owned by the Fund and rated Aaa by Moody's, (2)
outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 50% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by
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S&P) or (3) outstanding futures contracts based on Treasury Bonds having
an aggregate Market Value exceeding 90% of the aggregate Market Value of
Moody's Eligible Assets owned by the Fund and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by S&P) (for
purposes of the foregoing clauses (A) and (B), the Fund shall be deemed
to own the number of futures contracts that underlie any outstanding
options written by the Fund);
(C) the Fund will engage in Closing Transactions to close out any outstanding
futures contract based on the Municipal Index if the amount of open
interest in the Municipal Index as reported by The Wall Street Journal is
less than 5,000;
(D) the Fund will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of
the month in which such contract expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by
no later than the first Business Day of the month in which such option
expires;
(E) the Fund will engage in Moody's Hedging Transactions only with respect to
futures contracts or options thereon having the next settlement date for
such type of futures contract or option, or the settlement date
immediately thereafter;
(F) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes unless Moody's shall advise the Fund
that to do so would not adversely affect Moody's' then current rating of
the shares of RP; provided, however, that the Fund will not be deemed to
have engaged in a futures or options transaction for leveraging or
speculative purposes so long as it has done so otherwise in accordance
with the foregoing; and
(G) the Fund will not enter into an option or futures transaction unless,
after giving effect thereto, the Fund would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater
than the RP Basic Maintenance Amount. For purposes of determining whether
the Fund has Moody's Eligible Assets with an aggregate Discounted Value
that equals or exceeds the RP Basic Maintenance Amount, the Discounted
Value of Moody's Eligible Assets which the Fund is obligated to deliver
or receive pursuant to an outstanding futures contract or option shall be
as follows (unless the Fund receives written confirmation to the contrary
from Moody's): (i) assets subject to call options written by the Fund
which are either exchange-traded and "readily reversible" or which expire
within 48 days after the date as of which such valuation is made shall be
valued at the lesser of (a) Discounted Value and (b) the exercise price
of the call option written by the Fund; (ii) assets subject to call
options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options
written by the Fund shall be valued at the lesser of (a) the exercise
price and (b) the Discounted Value of such security; and (iv) futures
contracts shall be valued at the lesser of (a) settlement price and (b)
the Discounted Value of the subject security, provided that, if a
contract matures within 48 days after the date as of which such valuation
is made, where the Fund is the seller the contract may be valued at the
settlement price and where the Fund is the buyer the contract may be
valued at the Discounted Value of the subject securities.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the RP Basic
Maintenance Amount, the following amounts shall be added to the RP Basic
Maintenance Amount required to be maintained by the Fund (unless the Fund
receives written confirmation to the contrary from Moody's): (i) 10% of the
exercise price of a written call option; (ii) the exercise price of any written
put option; (iii) where the Fund is the seller under a futures contract, 10% of
the settlement price of the futures contract; (iv) where the Fund is the
purchaser under a futures contract, the settlement price of assets to be
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Fund writes call options on futures contracts and does not own the
underlying contract.
For so long as any shares of RP are rated by Moody's, the Fund will not
enter into any contract to purchase securities for a fixed price at a future
date beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted above) unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the rating then assigned to the shares of RP by Moody's except
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<PAGE>
that the Fund may enter into such contracts to purchase newly-issued securities
on the date such securities are issued ("Forward Commitments"), subject to the
following limitations:
(A) the Fund will maintain in a segregated account with its custodian cash,
cash equivalents or short- term, fixed income securities rated P-1, MIG-1
or VMIG-1 by Moody's and maturing prior to the date of the Forward
Commitment with a face value that equals or exceeds the amount of the
Fund's obligations under any Forward Commitments to which it is from time
to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Fund's obligations under
any Forward Commitments to which it is from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the RP Basic
Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the RP Basic
Maintenance Amount, the Discounted Value of all Forward Commitments to which the
Fund is a party and of all securities deliverable to the Fund pursuant to such
Forward Commitments shall be zero.
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APPENDIX C
DESCRIPTION OF MUNICIPAL BOND RATINGS
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Standard & Poor's Ratings Services describes classifications of bonds as
follows:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from the AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the higher rated categories.
BB--Bonds rated BB are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
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Fitch Investors Service, Inc. describes classifications of bonds as
follows:
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on the bonds, and therefore,
impair timely payment.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified that could assist
the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. Bonds in this class are lightly
protected as to the obligor's ability to pay interest over the life of the issue
and repay principal when due.
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APPENDIX D
OPTIONS AND FUTURES
OPTIONS ON SECURITIES
Writing Covered Options
Subject to the limitations imposed on the Fund's use of futures and options
transactions by Moody's and S&P for so long as shares of RP are rated by such
rating agencies, the Fund may write covered call options and covered put options
on optionable securities held in its portfolio when, in the opinion of Putnam,
such transactions are consistent with the Fund's investment objective and
policies. Call options written by the Fund give the purchaser the right to buy
the underlying securities from the Fund at a stated exercise price; put options
give the purchaser the right to sell the underlying securities to the Fund at a
stated price.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates, and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.
The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction, in which it
purchases an offsetting option. The Fund realizes a profit or loss from a
closing transaction if the cost of the transaction (option premium plus
transaction costs) is less or more than the premium received from writing the
option. If the Fund writes a call option but does not own the underlying
security, and when it writes a put option, the Fund may be required to deposit
cash or securities with its broker as "margin," or collateral, for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Fund may have to deposit additional margin with
the broker. Margin requirements are complex and are fixed by individual brokers,
subject to minimum requirements currently imposed by the Federal Reserve Board
and by stock exchanges and other self-regulatory organizations.
Purchasing Put Options
Subject to the limitations imposed on the Fund's use of futures and options
transactions by Moody's and S&P for so long as shares of RP are rated by such
rating agencies, the Fund may purchase put options to protect its portfolio
holdings in an underlying security against a decline in market value. Such
protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.
Purchasing Call Options
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder
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of the call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs.
Risk Factors in Options Transactions
The successful use of the Fund's options strategies depends on the ability
of Putnam to forecast correctly interest rate and market movements. For example,
if the Fund were to write a call option based on Putnam's expectation that the
price of the underlying security would fall, but the price were to rise instead,
the Fund could be required to sell the security upon exercise at a price below
the current market price. Similarly, if the Fund were to write a put option
based on Putnam's expectation that the price of the underlying security would
rise, but the price were to fall instead, the Fund could be required to purchase
the security upon exercise at a price higher than the current market price.
When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.
The effective use of options also depends on the Fund's ability to
terminate option positions at times when Putnam deems it desirable to do so.
There is no assurance that the Fund will be able to effect closing transactions
at any particular time or at an acceptable price.
If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events--such as volume in excess of trading or clearing capability--were to
interrupt its normal operations.
A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration. Over-the-counter ("OTC") options purchased by the Fund and
assets held to cover OTC options written by the Fund may, under certain
circumstances, be considered illiquid securities for purposes of any limitation
on the Fund's ability to invest in illiquid securities.
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FUTURES CONTRACTS AND RELATED OPTIONS
General Characteristics of Futures Contracts
Subject to applicable law, and the restrictions imposed on the Fund's use
of futures and options transactions by Moody's and S&P for so long as shares of
RP are rated by such rating agencies, the Fund may invest without limit in the
types of futures contracts and related options identified in the prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a specified delivery month
for a stated price. A financial futures contract purchase creates an obligation
by the purchaser to take delivery of the type of financial instrument called for
in the contract in a specified delivery month at a stated price. The specific
instruments delivered or taken, respectively, at settlement date are not
determined until on or near that date. The determination is made in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made. Futures contracts are traded in the United States only on commodity
exchanges or boards of trade--known as "contract markets"--approved for such
trading by the Commodity Futures Trading Commission (the "CFTC"), and must be
executed through a futures commission merchant or brokerage firm which is a
member of the relevant contract market.
Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, he realizes a loss. In general, 40% of the gain or loss
arising from the closing out of a futures contract traded on an exchange
approved by the CFTC is treated as short-term gain or loss, and 60% is treated
as long-term gain or loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
Funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a hedge position
then currently held by the Fund. The Fund may close its positions by taking
opposite positions which will operate to terminate the Fund's position in the
futures contracts. Final determinations of variation margin are then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or a gain. Such closing transactions involve additional
commission costs.
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Options on Futures Contracts
Subject to the limitations imposed on the Fund's use of futures and options
transactions by Moody's and S&P for so long as shares of RP are rated by such
rating agencies, the Fund may purchase and write call and put options on futures
contracts it may buy or sell and enter into closing transactions with respect to
such options to terminate existing positions. Options on future contracts give
the purchaser the right in return for the premium paid to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. The Fund may use options on futures contracts in lieu of
writing or buying options directly on the underlying securities or purchasing
and selling the underlying futures contracts. For example, to hedge against a
possible decrease in the value of its portfolio securities, the Fund may
purchase put options or write call options on futures contracts rather than
selling futures contracts. Similarly, the Fund may purchase call options or
write put options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Fund expects to purchase. Such options generally operate in
the same manner as options purchased or written directly on the underlying
investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements similar to those described above in connection with the
discussion of futures contracts.
Risks of Transactions in Futures Contracts and Related Options
Successful use of futures contracts by the Fund is subject to Putnam's
ability to predict movements in various factors affecting securities markets,
including interest rates. Compared to the purchase or sale of futures contracts,
the purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Fund, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge. The successful use of these
strategies further depends on the ability of Putnam Management to forecast
interest rates and market movements correctly.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
To reduce or eliminate a position held by the Fund, the Fund may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options; (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both; (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
D-4
<PAGE>
U.S. Treasury Security Futures Contracts and Options
U.S. Treasury security futures contracts require the seller to deliver, or
the purchaser to take delivery of, the type of U.S. Treasury security called for
in the contract at a specified date and price. Options on U.S. Treasury security
futures contracts give the purchaser the right in return for the premium paid to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to Putnam's ability to predict movements in the direction of interest
rates and other factors affecting markets for debt securities. For example, if
the Fund has sold U.S. Treasury security futures contracts in order to hedge
against the possibility of an increase in interest rates which would adversely
affect securities held in its portfolio, and the prices of the Fund's securities
increase instead as a result of a decline in interest rates, the Fund will lose
part or all of the benefit of the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily maintenance margin requirements at a time when it
may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Fund has hedged against a
decline in the values of tax-exempt securities held by it by selling Treasury
security futures and the values of Treasury securities subsequently increase
while the values of its tax-exempt securities decrease, the Fund would incur
losses on both the Treasury security futures contracts written by it and the
tax-exempt securities held in its portfolio.
Index Futures Contracts
An index futures contract is a contract to buy or sell units of an index at
a specified future date at a price agreed upon when the contract is made.
Entering into a contract to buy units of an index is commonly referred to as
buying or purchasing a contract or holding a long position in the index.
Entering into a contract to sell units of an index is commonly referred to as
selling a contract or holding a short position. A unit is the current value of
the index. The Fund may enter into stock index futures contracts, debt index
futures contracts, or other index futures contracts appropriate to its
objective. The Fund may also purchase and sell options on index futures
contracts.
For example, the Municipal Index futures contract currently traded on the
Chicago Board of Trade is based on The Bond Buyer Long-Term Municipal Bond
Index. This Index is composed of 40 high-quality tax exempt municipal
securities. The Index assigns relative weightings to the tax exempt municipal
securities included in the Index, and the Index fluctuates with changes in the
market values of those bonds. The Municipal Index futures contract trades in
units equal to $1,000 times the value of the Index. Unlike U.S. Treasury
securities futures contracts which require the actual delivery of the underlying
Treasury security at a future date, no delivery of the actual bonds making up
the index will take place under an index futures contract. Instead, settlement
in cash must occur upon the termination of the contract, with the settlement
being based on the difference between the contract price and the actual level of
the Index at the expiration of the contract. For example, if the Fund enters
into a futures contract to buy 50 units of the Index at a specified future date
at a value of 90 and the value of the Index is 95 on that future date, the Fund
will gain $250,000 (50 units times a gain of 5 times $1,000). If the Fund enters
into a futures contract to sell 50 units of the Index at a specified future date
at a value of 90 and the value of the Index is 95 on that future date, the Fund
will lose $250,000 (50 units times a loss of 5 times $1,000).
There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. Putnam will, however, attempt to reduce this
risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.
Successful use of index futures by the Fund is also subject to Putnam's
ability to predict movements in the direction of the market. For example, it is
possible that, where the Fund has sold futures to hedge its portfolio against a
decline in the market, the index on which the futures are written may advance
and the value of securities held in the Fund's portfolio may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities. It is also possible that, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
securities held in its portfolio and securities prices increase instead, the
Fund will lose part or all of the benefit of the increased value of those
securities it has hedged because it will
D-5
<PAGE>
have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when it is disadvantageous to
do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by Putnam may still not result in a profitable
position over a short time period.
Options on Index Futures
Options on index futures are similar to options on securities except that
options on index futures give the purchaser the right, in return for the premium
paid, to assume a position in an index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the index futures contract, at exercise, exceeds (in the case of
a call) or is less than (in the case of a put) the exercise price of the option
on the index future. If an option is exercised on the last trading day prior to
its expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
Options on Indices
As an alternative to purchasing call and put options on index futures, the
Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.
D-6
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Fund, Putnam or any of the Underwriters. This Prospectus does
not constitute an offer to sell or the solicitation of any offer to buy any
security other than the shares of RP offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
RP by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that the
information provided herein is correct at any time subsequent to the date
hereof. However, if any material change occurs while this Prospectus is required
by law to be delivered, this Prospectus will be amended or supplemented
accordingly.
------------------------------
TABLE OF CONTENTS
Page Nos.
----------
Prospectus Summary ........................... 3
Risk Factors and Special Considerations ...... 10
Financial Highlights ........................ 12
The Fund .................................... 13
Investment Manager ........................... 13
Use of Proceeds .............................. 13
Capitalization .............................. 14
Investment Objective and Policies ............ 14
Other Investment Practices .................. 18
Investment Restrictions ..................... 19
Trustees and Officers ........................ 20
Principal Holders of Securities ............... 24
Investment Management Contract ............... 24
Administrative Services Contract ............ 25
Portfolio Transactions ........................ 26
Determination of Net Asset Value ............ 27
Remarketing ................................. 28
Description of RP ........................... 36
Description of Shares ........................ 46
Taxation .................................... 47
Underwriting ................................. 51
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar ............ 52
Legal Matters ................................. 52
Experts ....................................... 52
Initial Settlement ........................... 52
Additional Information ........................ 52
Report of Independent Accountants ............ 53
Portfolio of Investments Owned ................. 54
Audited Financial Statements .................. 59
Glossary .................................... 66
Appendix A .................................... A-1
Appendix B .................................... B-1
Appendix C .................................... C-1
Appendix D .................................... D-1
$81,000,00
Putnam Municipal
Opportunities Trust
Remarketed Preferred[RegTM] Shares
RP[RegTM]
1620 Shares, Series B
1620 Shares, Series C
--------------------------------------
P R O S P E C T U S
--------------------------------------
Merrill Lynch & Co.
July , 1997
[RegTM] Registered Trademark of Merrill Lynch & Co., Inc.
================================================================================
