PROSPECTUS
4,200,000 Shares
[LOGO] Nuveen Logo
Nuveen Georgia
Dividend Advantage Municipal Fund 2
Common Shares
$15.00 per share
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Investment Objectives. The Fund is a newly organized, non-diversified,
closed-end management investment company. The Fund's investment objectives are:
. to provide current income exempt from regular federal and Georgia income
tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that the Fund's investment adviser
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued.
Portfolio Contents. Under normal circumstances, the Fund will invest its net
assets in a portfolio of municipal bonds that are exempt from regular federal
and Georgia income taxes. Under normal circumstances, the Fund expects to be
fully invested in such tax-exempt municipal bonds. Through September 30, 2003,
the Fund may invest in municipal bonds that are exempt from regular federal
income tax but not from Georgia income tax, provided that no more than 10% of
the Fund's investment income during that time may be derived from investments
in those bonds. The Fund will invest at least 80% of its net assets in
investment grade quality municipal bonds, which may include municipal bonds
that are rated investment grade by at least one nationally recognized
statistical rating
(continued on following page)
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Investing in common shares involves certain risks. See "Risks" beginning on
page 18.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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Per Share Total
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Public Offering Price $15.000 $63,000,000
Sales Load/(1)/ $ 0.675 $ 2,835,000
Estimated Offering Expenses/(2)/ $ 0.030 $ 126,000
Proceeds to the Fund $14.295 $60,039,000
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(1)Certain underwriters that may also participate in any future offering of
preferred shares of the Fund may receive additional compensation in that
offering based on their participation in this offering. See "Underwriting."
(2)Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $245,516. Nuveen has agreed
to reimburse offering expenses in excess of $0.03 per share.
The underwriters expect to deliver the common shares to purchasers on or
about September 30, 2002.
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Salomon Smith Barney Nuveen Investments
A.G. Edwards & Sons, Inc. Prudential Securities UBS Warburg
Deutsche Bank Securities Raymond James
SunTrust Robinson Humphrey Wachovia Securities
September 25, 2002
organization and lower by another. The Fund may invest up to 20% of its net
assets in municipal bonds that are rated Ba/BB or B or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. The Fund
cannot assure you that it will achieve its investment objectives.
No Prior History. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The common shares have been
approved for listing on the American Stock Exchange, subject to notice of
issuance. The trading or "ticker" symbol of the common shares is "NKG."
You should read this Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated September 25, 2002 and as it may
be supplemented, containing additional information about the Fund, has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. You may request a free copy of
the Statement of Additional Information, the table of contents of which is on
page 41 of this Prospectus, by calling (800) 257-8787 or by writing to the
Fund, or you may obtain a copy (and other information regarding the Fund) from
the Securities and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this Prospectus may purchase up to 630,000
additional common shares from the Fund under certain circumstances.
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You should rely only on the information contained or incorporated by
reference in this Prospectus. The Fund has not authorized anyone to provide you
with different information. The Fund is not making an offer of these securities
in any state where the offer is not permitted. You should not assume that the
information contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus.
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TABLE OF CONTENTS
Page
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Prospectus Summary........................................... 4
Summary of Fund Expenses..................................... 10
The Fund..................................................... 12
Use of Proceeds.............................................. 12
The Fund's Investments....................................... 12
MuniPreferred Shares and Leverage............................ 15
Risks........................................................ 18
How the Fund Manages Risk.................................... 24
Management of the Fund....................................... 25
Net Asset Value.............................................. 27
Distributions................................................ 27
Dividend Reinvestment Plan................................... 28
Description of Shares........................................ 29
Certain Provisions in the Declaration of Trust............... 31
Repurchase of Fund Shares; Conversion to Open-End Fund....... 32
Tax Matters.................................................. 33
Other Matters................................................ 35
Underwriting................................................. 37
Custodian and Transfer Agent................................. 40
Legal Opinions............................................... 40
Table of Contents for the Statement of Additional Information 41
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Until October 20, 2002 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a Prospectus. This is in addition
to the dealers' obligation to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this Prospectus and in the Statement of Additional
Information to understand the offering fully.
The Fund.............. Nuveen Georgia Dividend Advantage Municipal Fund 2
(the "Fund") is a newly organized, non-diversified,
closed-end management investment company. The Fund
is designed to provide tax benefits to investors who
are residents of Georgia. See "The Fund."
The Offering.......... The Fund is offering 4,200,000 common shares of
beneficial interest at $15.00 per share through a
group of underwriters (the "Underwriters") led by
Salomon Smith Barney Inc., Nuveen Investments
("Nuveen"), A.G. Edwards & Sons, Inc., Prudential
Securities Incorporated, UBS Warburg LLC, Deutsche
Bank Securities Inc., Raymond James & Associates,
Inc., SunTrust Capital Markets, Inc. and Wachovia
Securities, Inc. The common shares of beneficial
interest are called "Common Shares" in the rest of
this Prospectus. You must purchase at least 100
Common Shares in this offering. The Fund has given
the Underwriters an option to purchase up to 630,000
additional Common Shares to cover orders in excess
of 4,200,000 Common Shares. See "Underwriting."
Nuveen has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales
load) that exceed $0.03 per Common Share.
Investment Objectives. The Fund's investment objectives are to provide
current income exempt from regular federal and
Georgia income tax and enhance portfolio value
relative to the municipal bond market by investing
in tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or
undervalued or that represent municipal market
sectors that are undervalued. Under normal
circumstances, the Fund will invest its net assets
in a portfolio of municipal bonds that are exempt
from regular federal and Georgia income taxes. Under
normal circumstances, the Fund expects to be fully
invested in such tax-exempt municipal bonds. Through
September 30, 2003, the Fund may invest in municipal
bonds that are exempt from regular federal income
tax but not from Georgia income tax ("Out of State
Bonds"), provided that no more than 10% of the
Fund's investment income during that time may be
derived from Out of State Bonds. The Fund will
invest at least 80% of its net assets in municipal
bonds that at the time of investment are investment
grade quality. Investment grade quality bonds are
bonds rated by at least one nationally recognized
statistical rating organization ("NRSRO") within the
four highest grades (Baa or BBB or better by Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation, a division of The McGraw-Hill
Companies ("S&P") or Fitch Ratings ("Fitch")), or
bonds that are unrated but judged to be of comparable
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quality by the Fund's investment adviser. Investment
grade bonds may include bonds that, at the time of
investment, are rated below investment grade by
Moody's, S & P or Fitch, so long as at least one
NRSRO rates such bonds within the four highest
grades (such bonds are called "split-rated bonds").
The Fund may invest up to 20% of its net assets in
municipal bonds that, at the time of investment, are
rated Ba/BB or B by Moody's, S&P or Fitch or that
are unrated but judged to be of comparable quality
by the Fund's investment adviser. Bonds of below
investment grade quality are regarded as having
predominately speculative characteristics with
respect to capacity to pay interest and repay
principal, and are commonly referred to as junk
bonds. The Fund cannot assure you that it will
attain its investment objectives. See "The Fund's
Investments."
Special Considerations If the Fund invests in Out of State Bonds, a portion
of your dividends will be subject to Georgia income
tax. The Fund expects that a substantial portion of
its investments will pay interest that is taxable
under the federal alternative minimum tax. If you
are, or as a result of investment in the Fund would
become, subject to the federal alternative minimum
tax, the Fund may not be a suitable investment for
you. In addition, distributions of ordinary taxable
income (including any net short-term capital gain)
will be taxable to shareholders as ordinary income,
and capital gain dividends will be subject to
capital gains taxes. See "Tax Matters."
Proposed Offering of
MuniPreferred(R) Shares Subject to market conditions, approximately one to
three months after completion of this offering, the
Fund intends to offer preferred shares of beneficial
interest ("MuniPreferred Shares") representing
approximately 35% of the Fund's capital after their
issuance. The issuance of MuniPreferred Shares will
leverage your investment in Common Shares. Leverage
involves special risks. There is no assurance that
the Fund will issue MuniPreferred Shares or that, if
issued, the Fund's leveraging strategy will be
successful. See "Risks--Leverage Risk." The money
the Fund obtains by selling the MuniPreferred Shares
will be invested in long-term municipal bonds, which
generally will pay fixed rates of interest over the
life of the bond. The MuniPreferred Shares will pay
dividends based on shorter-term rates, which will be
reset frequently. So long as the rate of return, net
of applicable Fund expenses, on the long-term bonds
purchased by the Fund exceeds MuniPreferred Share
dividend rates as reset periodically, the investment
of the proceeds of the MuniPreferred Shares will
generate more income than will be needed to pay
dividends on the MuniPreferred Shares. If so, the
excess will be used to pay higher dividends to
holders of Common Shares ("Common Shareholders").
However, the Fund cannot assure you that the
issuance of MuniPreferred Shares will result in a
higher yield on your Common Shares. Once
MuniPreferred Shares are issued, the
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net asset value and market price of the Common
Shares and the yield to Common Shareholders will be
more volatile. See "MuniPreferred Shares and
Leverage" and "Description of Shares--MuniPreferred
Shares."
Investment Adviser.... Nuveen Advisory Corp. ("Nuveen Advisory") will be the
Fund's investment adviser. Nuveen Advisory will
receive an annual fee, payable monthly, in a maximum
amount equal to .65% of the Fund's average daily net
assets (including assets attributable to any
MuniPreferred Shares that may be outstanding
(sometimes referred to herein as "Managed Assets")),
with lower fee levels for assets that exceed $125
million. Nuveen Advisory has contractually agreed to
reimburse the Fund for fees and expenses in the
amount of .32% of average daily Managed Assets of
the Fund for the first five full years of the Fund's
operations (through September 30, 2007), and for a
declining amount for an additional three years
(through September 30, 2010). Nuveen Advisory is a
wholly owned subsidiary of The John Nuveen
Company. See "Management of the Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to Common Shareholders at a level rate (stated in
terms of a fixed cents per Common Share dividend
rate) based on the projected performance of the
Fund. The Fund's ability to maintain a level Common
Share dividend rate will depend on a number of
factors, including dividends payable on the
MuniPreferred Shares. As portfolio and market
conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of
its net investment income (after it pays accrued
dividends on any outstanding MuniPreferred Shares).
In addition, at least annually, the Fund intends to
distribute net capital gain and taxable ordinary
income, if any, to you so long as the net capital
gain and taxable ordinary income are not necessary
to pay accrued dividends on, or redeem or liquidate,
any MuniPreferred Shares. Your initial distribution
is expected to be declared approximately 45 days,
and paid approximately 60 to 90 days, from the
completion of this offering, depending on market
conditions. You may elect to automatically reinvest
some or all of your distributions in additional
Common Shares under the Fund's Dividend Reinvestment
Plan. See "Distributions" and "Dividend Reinvestment
Plan."
Listing............... The Common Shares have been approved for listing on
the American Stock Exchange, subject to notice of
issuance. See "Description of Shares--Common
Shares." The trading or "ticker" symbol of the
Common Shares is "NKG." Because of this exchange
listing, the Fund may sometimes be referred to in
public communications as a "closed-end
exchange-traded fund" or "exchange-traded fund."
Custodian............. State Street Bank and Trust Company will serve as
custodian of the Fund's assets. See "Custodian and
Transfer Agent."
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Market Price of Shares Shares of closed-end investment companies frequently
trade at prices lower than net asset value. Shares
of closed-end investment companies like the Fund
that invest predominately in investment grade
municipal bonds have during some periods traded at
prices higher than net asset value and have during
other periods traded at prices lower than net asset
value. The Fund cannot assure you that Common Shares
will trade at a price higher than net asset value in
the future. Net asset value will be reduced
immediately following the offering by the sales load
and the amount of organization and offering expenses
paid by the Fund. See "Use of Proceeds." In addition
to net asset value, market price may be affected by
such factors as dividend levels (which are in turn
affected by expenses), call protection, dividend
stability, portfolio credit quality and liquidity
and market supply and demand. See "MuniPreferred
Shares and Leverage," "Risks," "Description of
Shares," "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Statement of Additional
Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund." The Common Shares are
designed primarily for long-term investors, and you
should not view the Fund as a vehicle for trading
purposes.
Special Risk
Considerations........ No Operating History. The Fund is a newly organized,
non-diversified, closed-end management investment
company with no history of operations.
Interest Rate Risk. Generally, when market interest
rates fall, bond prices rise, and vice versa.
Interest rate risk is the risk that the municipal
bonds in the Fund's portfolio will decline in value
because of increases in market interest rates. The
prices of longer-term bonds fluctuate more than
prices of shorter-term bonds as interest rates
change. Conversely, the values of lower-rated and
comparable unrated debt securities are less likely
than those of investment grade and comparable
unrated debt securities to fluctuate inversely with
changes in interest rates. Because the Fund will
invest primarily in long-term bonds, the Common
Share net asset value and market price per share
will fluctuate more in response to changes in market
interest rates than if the Fund invested primarily
in shorter-term bonds. The Fund's use of leverage,
as described below, will tend to increase Common
Share interest rate risk. See "Risks--Interest Rate
Risk."
Credit Risk. Credit risk is the risk that one or more
municipal bonds in the Fund's portfolio will decline
in price, or fail to pay interest or principal when
due, because the issuer of the bond experiences a
decline in its financial status. The Fund may invest
up to 20% (measured at the time of investment) of
its net assets in municipal bonds that are rated
Ba/BB or B or that are unrated but judged to be
7
of comparable quality by Nuveen Advisory. The prices
of these lower grade bonds are more sensitive to
negative developments, such as a decline in the
issuer's revenues or a general economic downturn,
than are the prices of higher grade securities.
Municipal bonds of below investment grade quality
are predominately speculative with respect to the
issuer's capacity to pay interest and repay
principal when due, and therefore involve a greater
risk of default. See "Risks--Credit Risk."
Concentration in Georgia Issuers. The Fund's policy
of investing primarily in municipal obligations of
issuers located in Georgia makes the Fund more
susceptible to adverse economic, political or
regulatory occurrences affecting such issuers. See
"Risks--Concentration Risk."
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an
opportunity for increased Common Share net income
and returns, but also creates special risks for
Common Shareholders. There is no assurance that the
Fund's leveraging strategy will be successful. It is
anticipated that MuniPreferred dividends will be
based on shorter-term municipal bond rates of return
(which would be redetermined periodically, pursuant
to an auction process), and that the Fund will
invest the proceeds of the MuniPreferred Shares
offering in long-term, typically fixed rate,
municipal bonds. So long as the Fund's municipal
bond portfolio provides a higher rate of return (net
of Fund expenses) than the MuniPreferred dividend
rate, as reset periodically, the leverage will cause
Common Shareholders to receive a higher current rate
of return than if the Fund were not leveraged. If,
however, long and/or short-term rates rise, the
MuniPreferred dividend rate could exceed the rate of
return on long-term bonds held by the Fund that were
acquired during periods of generally lower interest
rates, reducing return to Common Shareholders. In
addition, the Fund will pay (and Common Shareholders
will bear) any costs and expenses relating to the
issuance and ongoing maintenance of MuniPreferred
Shares (for example, distribution related expenses
such as a participation fee paid at what the Fund
expects will be an annual rate of 0.25% of
MuniPreferred Share liquidation preference to
broker-dealers participating in MuniPreferred Share
auctions).
Leverage creates two major types of risks for Common
Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares,
because changes in the value of the Fund's bond
portfolio (including bonds bought with the
proceeds of the MuniPreferred Shares offering)
are borne entirely by the Common Shareholders;
and
8
. the possibility either that Common Share income
will fall if the MuniPreferred dividend rate
rises, or that Common Share income will
fluctuate because the MuniPreferred dividend
rate varies.
See "Risks--Leverage Risk."
Municipal Bond Market Risk. The amount of public
information available about the municipal bonds in
the Fund's portfolio is generally less than that for
corporate equities or bonds, and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of Nuveen
Advisory than if the Fund were a stock fund or
taxable bond fund. The secondary market for
municipal bonds, particularly the below investment
grade bonds in which the Fund may invest, also tends
to be less well-developed or liquid than many other
securities markets, which may adversely affect the
Fund's ability to sell its bonds at attractive
prices. See "Risks--Municipal Bond Market Risk."
Non-Diversification. Because the Fund is classified
as "non-diversified" under the Investment Company
Act of 1940, as amended (the "1940 Act"), it can
invest a greater portion of its assets in
obligations of a single issuer than a "diversified"
fund. As a result, the Fund will be more susceptible
than a diversified fund to any single corporate,
economic, political or regulatory occurrence. See
"The Fund's Investments" and
"Risks--Non-Diversification."
Anti-Takeover Provisions. The Fund's Declaration of
Trust (the "Declaration") includes provisions that
could limit the ability of other entities or persons
to acquire control of the Fund or convert the Fund
to open-end status. The provisions of the
Declaration described above could have the effect of
depriving the Common Shareholders of opportunities
to sell their Common Shares at a premium over the
then current market price of the Common Shares. See
"Certain Provisions in the Declaration of Trust" and
"Risks--Anti-Takeover Provisions."
9
SUMMARY OF FUND EXPENSES
The Annual Expenses table below assumes the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's capital (after their issuance), and
shows Fund expenses as a percentage of net assets attributable to Common Shares.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)..................... 4.50%
Offering Expenses Borne by the Fund (as a percentage of offering price)/(1)(2)/ .20%
Dividend Reinvestment Plan Fees................................................ None(3)
Percentage of Net
Assets Attributable
to Common Shares(4)
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Annual Expenses
Management Fees.......................... 1.00%
Other Expenses........................... .38%
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Total Annual Expenses.................... 1.38%
Fee and Expense Reimbursement (Years 1-5) (.49%)/(5)/
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Total Net Annual Expenses (Years 1-5).... .89%/(5)/
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(1)Nuveen has agreed to pay offering costs (other than sales load) that exceed
$0.03 per Common Share.
(2)If the Fund offers MuniPreferred Shares, costs of that offering, estimated
to be approximately 2.4% of the total amount of the MuniPreferred Share
offering, will effectively be borne by the Common Shareholders and result in
the reduction of the net asset value of the Common Shares. Assuming the
issuance of MuniPreferred Shares in the amount equal to 35% of the Fund's
total capital (after issuance), those offering costs are estimated to be
approximately $0.19 per Common Share (1.27% of the offering price).
(3)You will be charged a $2.50 service charge and pay brokerage charges if you
direct State Street Bank and Trust Company, as agent for the Common
Shareholders (the "Plan Agent") to sell your Common Shares held in a
dividend reinvestment account.
(4)Stated as percentages of net assets attributable to Common Shares. Assuming
no issuance of MuniPreferred Shares, the Fund's expenses would be estimated
to be as follows:
Percentage of Net
Assets Attributable
to Common Shares
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Annual Expenses
Management Fees....................................................... .65%
Other Expenses........................................................ .25%
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Total Annual Expenses................................................. .90%
Fees and Expense Reimbursement (Years 1-5)............................ (.32%)/(5)/
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Total Net Annual Expenses (Years 1-5)................................. .58%/(5)/
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(5)Nuveen Advisory has contractually agreed to reimburse the Fund for fees and
expenses in the amount of .32% of average daily Managed Assets for the first
5 full years of the Fund's operations, .24% of average daily Managed Assets
in year 6, .16% in year 7 and .08% in year 8. Assuming the issuance of
MuniPreferred Shares in an amount equal to 35% of the Fund's total assets
(including
10
the amount obtained from leverage) and calculated as a percentage of net
assets attributable to Common Shares, those amounts would be .49% for the
first 5 years, .37% in year 6, .25% in year 7 and .12% in year 8. Without
the reimbursement, "Total Net Annual Expenses" would be estimated to be
1.38% of average daily net assets attributable to Common Shares (or,
assuming no issuance of MuniPreferred Shares, .90% of average daily net
assets).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues approximately
4,000,000 Common Shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated
MuniPreferred Share offering costs assuming MuniPreferred Shares are issued
representing 35% of the Fund's total capital (after issuance) of $13) that you
would pay on a $1,000 investment in Common Shares, assuming (1) total net
annual expenses of .89% of net assets attributable to Common Shares in years 1
through 5, increasing to 1.38% in years 9 and 10 and (2) a 5% annual
return:/(1)/
1 Year 3 Years 5 Years 10 Years/(2)/
------ ------- ------- ------------
$69 $87 $106 $185
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
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(1)The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at Common Share net asset value. Actual expenses may be greater
or less than those assumed. Moreover, the Fund's actual rate of return may
be greater or less than the hypothetical 5% return shown in the example.
(2)Assumes reimbursement of fees and expenses of .24% of average daily Managed
Assets in year 6, .16% in year 7 and .08% in year 8. Nuveen Advisory has not
agreed to reimburse the Fund for any portion of its fees and expenses beyond
September 30, 2010. See Footnote 5 above and "Management of the
Fund--Investment Management Agreement."
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THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on October 26, 2001, pursuant to a Declaration
governed by the laws of the Commonwealth of Massachusetts. As a newly organized
entity, the Fund has no operating history. The Fund's principal office is
located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone
number is (800) 257-8787. The Fund is designed to provide tax benefits to
investors who are residents of Georgia.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$60,039,000 ($69,044,850 if the Underwriters exercise the over-allotment option
in full) after payment of the estimated organization and offering costs. Nuveen
has agreed to pay (i) all organizational expenses and (ii) offering costs
(other than sales load) that exceed $0.03 per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's
investment objectives and policies as stated below. It is presently anticipated
that the Fund will be able to invest substantially all of the net proceeds in
municipal bonds that meet those investment objectives and policies within three
months after the completion of the offering. Pending such investment, it is
anticipated that the proceeds will be invested in short-term, tax-exempt
securities.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's investment objectives are:
. to provide current income exempt from regular federal and Georgia income
tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes are
underrated or undervalued or that represent municipal market sectors that
are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times believe
that bonds associated with a particular municipal market sector (for example,
electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds
regardless of the direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to Common Shareholders.
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Under normal circumstances, the Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and Georgia
income taxes. Under normal circumstances, the Fund expects to be fully invested
(at least 95% of its assets) in such tax-exempt municipal bonds. After the
completion of the offering through September 30, 2003, the Fund may invest in
Out of State Bonds, provided that no more than 10% of the Fund's investment
income during that time may be derived from Out of State Bonds. The Fund will
purchase Out of State Bonds if other suitable investments are not available.
Investment in Out of State Bonds would result in a portion of your dividends
being subject to Georgia income tax. For more information, see the Statement of
Additional Information. The Fund will invest at least 80% of its net assets in
investment grade quality municipal bonds. Investment grade quality means that
such bonds are rated, at the time of investment, within the four highest grades
(Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be
of comparable quality by Nuveen Advisory. Investment grade quality bonds may
include split-rated bonds. The Fund may invest up to 20% of its net assets in
municipal bonds that are rated, at the time of investment, Ba/BB or B by
Moody's, S&P or Fitch or that are unrated but judged to be of comparable
quality by Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or
below) are commonly referred to as junk bonds. Bonds of below investment grade
quality are regarded as having predominately speculative characteristics with
respect to capacity to pay interest and repay principal. The foregoing credit
quality policies apply only at the time a security is purchased, and the Fund
is not required to dispose of a security in the event that a rating agency
downgrades its assessment of the credit characteristics of a particular issue.
In determining whether to retain or sell such a security, Nuveen Advisory may
consider such factors as Nuveen Advisory's assessment of the credit quality of
the issuer of such security, the price at which such security could be sold and
the rating, if any, assigned to such security by other rating agencies. A
general description of Moody's, S&P's and Fitch's ratings of municipal bonds is
set forth in Appendix A to the Statement of Additional Information. See
"--Municipal Bonds" below for a general description of the economic and credit
characteristics of municipal issuers in Georgia. The Fund may also invest in
securities of other open- or closed-end investment companies that invest
primarily in municipal bonds of the types in which the Fund may invest
directly. See "--Other Investment Companies" and "--Initial Portfolio
Composition."
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance feature does not guarantee the market value of the insured
obligations or the net asset value of the Common Shares.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period
during which the net proceeds of the offering of Common Shares or MuniPreferred
Shares are being invested, the Fund may deviate from its investment objectives
and invest up to 100% of its net assets in short-term investments including
high quality, short-term securities that may be either tax-exempt or taxable.
The Fund intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at reasonable
prices and yields. Investment in taxable short-term investments would result in
a portion of your dividends being subject to regular federal and Georgia income
taxes. For more information, see the Statement of Additional Information.
13
The Fund cannot change its investment objectives without the approval of the
holders of a "majority of the outstanding" Common Shares and, if issued,
MuniPreferred Shares voting together as a single class, and of the holders of a
"majority of the outstanding" MuniPreferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less. See "Description
of Shares--MuniPreferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--MuniPreferred Shares--Voting Rights"
for additional information with respect to the voting rights of holders of
MuniPreferred Shares.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gain dividends will be subject to capital gains taxes. See "Tax Matters."
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. Municipal
bonds may also be issued for private activities, such as housing, medical and
educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Fund will only
purchase municipal bonds representing lease obligations where Nuveen Advisory
believes the issuer has a strong incentive to continue making appropriations
until maturity.
The municipal bonds in which the Fund will invest are generally issued by
the State of Georgia, a municipality in Georgia, or a political subdivision or
agency or instrumentality of such State or municipality ("Georgia municipal
bonds"), and pay interest that, in the opinion of bond counsel to the issuer
(or on the basis of other authority believed by Nuveen Advisory to be
reliable), is exempt from regular federal and Georgia income taxes, although
the interest may be subject to the federal alternative minimum tax. The Fund
may invest in municipal bonds issued by United States territories (such as
Puerto Rico or Guam) that are exempt from regular federal and Georgia income
taxes. Through September 30, 2003, the Fund also may invest in Out of State
Bonds subject to the limitations described under "--Investment Objectives and
Policies."
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of municipal bonds
will vary with changes in interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
14
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve an
element of risk because no interest accrues on the bonds prior to settlement
and, because bonds are subject to market fluctuations, the value of the bonds
at time of delivery may be less (or more) than cost. A separate account of the
Fund will be established with its custodian consisting of cash, cash
equivalents, or liquid securities having a market value at all times at least
equal to the amount of the commitment.
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other open-
or closed-end investment companies that invest primarily in municipal bonds of
the types in which the Fund may invest directly. The Fund generally expects to
invest in other investment companies either during periods when it has large
amounts of uninvested cash, such as the period shortly after the Fund receives
the proceeds of the offering of its Common Shares or MuniPreferred Shares, or
during periods when there is a shortage of attractive, high-yielding municipal
bonds available in the market. As a stockholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's advisory and administrative fees
with respect to assets so invested. Common Shareholders would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. Nuveen Advisory will take expenses into account when
evaluating the investment merits of an investment in the investment company
relative to available municipal bond investments. In addition, the securities
of other investment companies may also be leveraged and will therefore be
subject to the same leverage risks described herein. As described in the
section entitled "Risks," the net asset value and market value of leveraged
shares will be more volatile and the yield to Common Shareholders will tend to
fluctuate more than the yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
100% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by at least one NRSRO within the four highest grades or are
unrated but judged to be of comparable quality by Nuveen Advisory
(approximately 60% in Aaa/AAA; 10% in Aa/AA; 15% in A; and 15% in Baa/BBB).
Investment grade bonds may include split-rated bonds. The Fund will generally
select obligations which may not be redeemed at the option of the issuer for
approximately seven to nine years from the date of purchase by the Fund. See
the Statement of Additional Information under "Other Investment Policies and
Techniques--Portfolio Trading and Turnover Rate." The Fund does not intend to
invest any amount of its initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade or that are unrated but
judged to be of comparable quality by Nuveen Advisory. See "--Investment
Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer
MuniPreferred Shares representing
15
approximately 35% of the Fund's capital immediately after the issuance of the
MuniPreferred Shares. The MuniPreferred Shares will have complete priority upon
distribution of assets over the Common Shares. The issuance of MuniPreferred
Shares will leverage the Common Shares. Leverage involves special risks. There
is no assurance that the Fund's leveraging strategy will be successful.
Although the timing and other terms of the offering of the MuniPreferred Shares
will be determined by the Fund's Board of Trustees, the Fund expects to invest
the proceeds of the MuniPreferred Shares offering in long-term municipal bonds.
The MuniPreferred Shares will pay dividends based on shorter-term rates (which
would be redetermined periodically by an auction process). So long as the
Fund's portfolio is invested in securities that provide a higher rate of return
than the dividend rate of the MuniPreferred Shares (after taking expenses into
consideration), the leverage will cause you to receive a higher current rate of
return than if the Fund were not leveraged.
Changes in the value of the Fund's bond portfolio (including bonds bought
with the proceeds of the MuniPreferred Shares offering) will be borne entirely
by the Common Shareholders. If there is a net decrease (or increase) in the
value of the Fund's investment portfolio, the leverage will decrease (or
increase) the net asset value per Common Share to a greater extent than if the
Fund were not leveraged. During periods in which the Fund is using leverage,
the fees paid to Nuveen Advisory for advisory services will be higher than if
the Fund did not use leverage because the fees paid will be calculated on the
basis of the Fund's total net assets, including the proceeds from the issuance
of MuniPreferred Shares.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between the Common Shares and
MuniPreferred Shares in proportion to total dividends paid to each class for
the year in which the net capital gain or other taxable income is realized. If
net capital gain or other taxable income is allocated to MuniPreferred Shares
(instead of solely tax-exempt income), the Fund will likely have to pay higher
total dividends to MuniPreferred Shareholders or make special payments to
MuniPreferred Shareholders to compensate them for the increased tax liability.
This would reduce the total amount of dividends paid to the Common
Shareholders, but would increase the portion of the dividend that is
tax-exempt. On an after-tax basis, Common Shareholders may still be better off
than if they had been allocated all of the Fund's net capital gain or other
taxable income (resulting in a higher amount of total dividends), but received
a lower amount of tax-exempt income. If the increase in dividend payments or
the special payments to MuniPreferred Shareholders are not entirely offset by a
reduction in the tax liability of, and an increase in the tax-exempt dividends
received by, the Common Shareholders, the advantage of the Fund's leveraged
structure to Common Shareholders will be reduced.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance, the value of the Fund's asset coverage
is at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the Fund's asset coverage).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless, at the time of such declaration, the
value of the Fund's asset coverage is at least 200% of such liquidation value.
If MuniPreferred Shares are issued, the Fund intends, to the extent possible,
to purchase or redeem MuniPreferred Shares from time to time to the extent
necessary in order to maintain coverage of any MuniPreferred Shares of at least
200%. If the Fund has MuniPreferred Shares outstanding, two of the Fund's
trustees will be elected by the holders of MuniPreferred Shares, voting
separately as a class. The remaining trustees of the Fund will be elected by
holders of Common
16
Shares and MuniPreferred Shares voting together as a single class. In the event
the Fund failed to pay dividends on MuniPreferred Shares for two years,
MuniPreferred Shareholders would be entitled to elect a majority of the
trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of one
or more rating agencies which may issue ratings for MuniPreferred Shares issued
by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 1940 Act. It is not anticipated that these covenants or guidelines will
impede Nuveen Advisory from managing the Fund's portfolio in accordance with
the Fund's investment objectives and policies.
The Fund may also borrow money for repurchase of its shares or as a
temporary measure for extraordinary or emergency purposes, including the
payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
Assuming that the MuniPreferred Shares will represent in the aggregate
approximately 35% of the Fund's capital and pay dividends at an annual average
rate of 2.00%, the incremental income generated by the Fund's portfolio (net of
estimated expenses) must exceed .70% in order to cover such dividend payments
and other expenses specifically related to the MuniPreferred Shares. Of course,
these numbers are merely estimates, used for illustration. Actual MuniPreferred
Share dividend rates, interest or payment rates may vary frequently and may be
significantly higher or lower than the rate assumed above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative
of the investment portfolio returns expected to be experienced by the Fund. The
table further reflects the issuance of MuniPreferred Shares representing 35% of
the Fund's total capital, and the Fund's currently projected annual
MuniPreferred Share dividend rate of 2.00%. See "Risks" and "MuniPreferred
Shares and Leverage."
Assumed Portfolio Total Return (10.00)% (5.00)% 0.00 % 5.00% 10.00%
Common Share Total Return..... (16.46)% (8.77)% (1.08)% 6.62% 14.31%
Common Share total return is composed of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on MuniPreferred
Shares) and gains or losses on the value of the securities the Fund owns. As
required by Securities and Exchange Commission rules, the table assumes that
the Fund is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0%, the Fund must assume
that the tax-exempt interest it receives on its municipal bond investments is
entirely offset by losses in the value of those bonds.
Unless and until MuniPreferred Shares are issued, the Common Shares will not
be leveraged and this section will not apply.
17
RISKS
The net asset value of the Common Shares will fluctuate with and be affected
by, among other things, interest rate risk, credit risk, reinvestment risk and
leverage risk, and an investment in Common Shares will be subject to market
discount risk, concentration risk, inflation risk and municipal bond market
risk, each of which is more fully described below.
Newly Organized. The Fund is a newly organized, non-diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Interest Rate Risk. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in interest rates.
Generally, municipal bonds will decrease in value when interest rates rise and
increase in value when interest rates decline. This means that the net asset
value of the Common Shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Fund's municipal bond holdings. The
value of the longer-term bonds in which the Fund generally invests fluctuates
more in response to changes in interest rates than does the value of
shorter-term bonds. Conversely, the values of lower-rated and comparable
unrated debt securities are less likely than those of investment grade and
comparable unrated debt securities to fluctuate inversely with changes in
interest rates. Because the Fund will invest primarily in long-term bonds, the
Common Share net asset value and market price per share will fluctuate more in
response to changes in market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund's use of leverage, as described
below, will tend to increase Common Share interest rate risk.
Credit Risk. Credit risk is the risk that one or more municipal bonds in the
Fund's portfolio will decline in price, or fail to pay interest or principal
when due, because the issuer of the bond experiences a decline in its financial
status. In general, lower-rated municipal bonds carry a greater degree of risk
that the issuer will lose its ability to make interest and principal payments,
which could have a negative impact on the Fund's net asset value or dividends.
The Fund may invest in split-rated bonds. Split-rated bonds are those bonds
that, at the time of investment, are rated below investment grade by Moody's,
S&P or Fitch, so long as at least one NRSRO rates such bonds within the four
highest grades (i.e., investment grade quality). This means that split-rated
bonds may be regarded by one NRSRO (but by definition not by all NRSROs or by
Nuveen Advisory) as having characteristics of bonds rated Ba/BB or B by
Moody's, S&P or Fitch, as discussed below. The Fund may invest up to 20% of its
net assets in municipal bonds that are rated Ba/BB or B by Moody's, S&P or
Fitch or that are unrated but judged to be of comparable quality by the Fund's
investment adviser. Bonds rated Ba/BB or B are regarded as having predominately
speculative characteristics with respect to capacity to pay interest and repay
principal, and these bonds are commonly referred to as junk bonds. The prices
of these lower grade bonds are more sensitive to negative developments, such as
a decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration Risk. As described above, except to the extent the Fund
invests in temporary investments, the Fund will invest substantially all of its
net assets in Georgia municipal bonds. The Fund is therefore susceptible to
political, economic or regulatory factors affecting issuers of Georgia
18
municipal bonds. The information set forth below and the related information in
the Statement of Additional Information is derived from sources that are
generally available to investors. The information is intended to give a recent
historical description and is not intended to indicate future or continuing
trends in the financial or other positions of Georgia. It should be noted that
the creditworthiness of obligations issued by local Georgia issuers may be
unrelated to the creditworthiness of obligations issued by the State of
Georgia, and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
The Georgia economy slid into recession in the third quarter of 2001 and
likely continued through the second quarter of 2002, but a gradual recovery is
expected in the second half of 2002. Underlying the recession are the excesses
in business investment, staffing levels, and bubbles in the equities markets
along with the collapse of consumers' and businesses' confidence. The 2002
forecast anticipates that Georgia's real gross state product ("GSP"), will
decrease 0.9% in 2002 after growing 1.6% in 2001. The 2002 anticipated
percentage gain is down dramatically from the peak growth of 6.4% in 1998, 5.7%
in 1999, and 4.7% in 2000. This decrease in the growth of the GSP is attributed
to slowdowns in the national economy as a whole, and also to the effects of the
State's recent growth, such as traffic congestion and deteriorating air quality.
In 2002, the State's nonagricultural employment is estimated to decrease by
almost 33,000 jobs, or a drop of 0.9%. The percentage loss is only slightly
smaller than the 1.2 percent decrease predicted for the nation. Job losses and
growth in the number of people in the labor force will create an uncomfortable
degree of slack in the State's formerly taut labor market.
The service sector is projected to see the fastest growth at 1.3% by adding
14,500 jobs. Retailers will be thwarted by the 0.1% decline in wholesale and
retail employment brought about by a drop in sales of new cars, big-ticket
consumer durables, and discretionary goods. Employment in government will
expand by 0.1%, or 900 jobs, all of which will be in local and federal
government but state government employment is expected to decline due to
intense budgetary pressures. Manufacturers will see a sector employment drop of
2.8% or a loss of 15,900 jobs. Employment in finance, insurance and real estate
is also expected to decline as is employment in the transportation,
communications, and public utilities sector which is expected to lose 8,500
jobs. Due to regulation, technical advances and restructuring, relatively few
jobs will be created in the public utilities sector.
Until 2001, Georgia's average annual unemployment rate had decreased every
year since 1992. Beginning in early 2001, the seasonally adjusted unemployment
rate has slowly risen from approximately 3.6% to over 4.5%. As of July 2002,
the seasonally adjusted unemployment rate for Georgia was 4.6%.
Based on preliminary estimates for 2001, Georgia's personal income grew 2.3%
to $238,420,000 in 2001, bringing the per capita income for the State to
$28,438. Nationwide, personal income grew 2.7% to $8,621,023,000, with per
capita income at $30,271 for the same year. According to the U.S. Department of
Commerce Bureau of Economic Analysis, the 2.7% increase was the smallest growth
rate since the 1990-91 recession.
The State's annual rate of population growth, after dipping slightly over
the past couple of years--from 2.1% in 1996, to 2% in 1997, to 1.9% in 1998 to
1.8% in 2000--rose 2.4% in 2001. According to the U.S. Census Bureau's latest
statistics, Georgia's population has reached approximately 8.38 million. The
population is expected to grow to 9.2 million by 2010.
19
For Fiscal Year 2001, Georgia had revenues totaling $23,350,071,847 with a
majority of revenue derived from various taxes, and expenditures totaling
$22,572,870,542.
The Georgia Constitution permits the issuance by the State of general
obligation debt and of certain guaranteed revenue debt. The State may incur
guaranteed revenue debt by guaranteeing the payment of certain revenue
obligations issued by an instrumentality of the State. The Georgia Constitution
prohibits the incurring of any general obligation debt or guaranteed revenue
debt if the highest aggregate annual debt service requirement for the then
current year or any subsequent fiscal year for outstanding debt and guaranteed
revenue debt, including the proposed debt, exceeds 10% of the total revenue
receipts, less refunds, of the State treasury in the fiscal year immediately
preceding the year in which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year created by
a delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State
treasury in the fiscal year immediately preceding the year in which such debt
is incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied for that
fiscal year. No such debt may be incurred in any fiscal year if there is then
outstanding unpaid debt from any previous fiscal year which was incurred to
supply a temporary deficit in the State treasury.
As of June 30, 2001, outstanding general obligation debt issues of the State
of Georgia totaled $5,311,335,000. Outstanding revenue bonds of certain blended
and discretely presented component units totaled $1,160,254,518, of which
$149,555,255 are guaranteed by the State. During fiscal year 2001, general
obligation bonds in the amount of $395,515,000 were retired. General obligation
debt issued during fiscal year 2001 totaled $567,280,000.
Virtually all of the issues of long-term debt obligation issued by or on
behalf of the State of Georgia and counties, municipalities, and other
political subdivisions and public authorities thereof are required by law to be
validated and confirmed in a judicial proceeding prior to issuance. The legal
effect of an approved validation in Georgia is to render incontestable the
validity of the pertinent bond issue and the security therefor.
Georgia is involved in certain legal proceedings that, if decided against
the State, may require the State to make significant future expenditures or may
substantially impair revenues. An adverse final decision could materially
affect the State's governmental operations and, consequently, its ability to
pay debt service on its obligations.
As of September 19, 2002, State of Georgia general obligation bonds were
rated as follows: Standard & Poor's, AAA (upgraded from AA+ on July 29, 1997);
Moody's, Aaa; and Fitch, AAA. There can be no assurance that such ratings will
be maintained in the future. It should be noted that the creditworthiness of
obligations issued by local Georgia issuers may be unrelated to the
creditworthiness of obligations issued by the State of Georgia, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal bonds and does
not purport to be a complete or exhaustive
20
description of all adverse conditions to which the issuers of municipal bonds
held by the Fund are subject. Additionally, many factors including national
economic, social and environmental policies and conditions, which are not
within the control of the issuers of the municipal bonds, could affect or could
have an adverse impact on the financial condition of the issuers. The Fund is
unable to predict whether or to what extent such factors or other factors may
affect the issuers of the municipal bonds, the market value or marketability of
the municipal bonds or the ability of the respective issuers of the municipal
bonds acquired by the Fund to pay interest on or principal of the municipal
bonds. This information has not been independently verified. See the Statement
of Additional Information for a further discussion of factors affecting
municipal bonds in Georgia.
Municipal Bond Market Risk. Investing in the municipal bond market involves
certain risks. The amount of public information available about the municipal
bonds in the Fund's portfolio is generally less than that for corporate
equities or bonds, and the investment performance of the Fund may therefore be
more dependent on the analytical abilities of Nuveen Advisory than if the Fund
were a stock fund or taxable bond fund. The secondary market for municipal
bonds, particularly the below investment grade bonds in which the Fund may
invest, also tends to be less well-developed or liquid than many other
securities markets, which may adversely affect the Fund's ability to sell its
bonds at attractive prices or at prices approximating those at which the Fund
currently values them.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's
operating expenses. Any income derived from the Fund's ownership or operation
of such assets may not be tax-exempt.
Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's
bond portfolio will decline if and when the Fund invests the proceeds from
matured, traded or called bonds at market interest rates that are below the
portfolio's current earnings rate. A decline in income could affect the Common
Shares' market price or their overall returns.
Leverage Risk. Leverage risk is the risk associated with the issuance of the
MuniPreferred Shares to leverage the Common Shares. There can be no assurance
that the Fund's leveraging strategy will be successful. Once the MuniPreferred
Shares are issued, the net asset value and market value of Common Shares will
be more volatile, and the yield to Common Shareholders will tend to fluctuate
with changes in the shorter-term dividend rates on the MuniPreferred Shares.
Long-term municipal bond rates of return are typically, although not always,
higher than shorter-term municipal bond rates of return. If the dividend rate
on the MuniPreferred Shares approaches the net rate of return on the Fund's
investment portfolio, the benefit of leverage to Common Shareholders would be
reduced. If the dividend rate on the MuniPreferred Shares exceeds the net rate
of return on the Fund's portfolio, the leverage will result in a
21
lower rate of return to Common Shareholders than if the Fund were not
leveraged. Because the long-term bonds included in the Fund's portfolio will
typically pay fixed rates of interest while the dividend rate on the
MuniPreferred Shares will be adjusted periodically, this could occur even when
both long-term and short-term municipal rates rise. In addition, the Fund will
pay (and Common Shareholders will bear) any costs and expenses relating to the
issuance and ongoing maintenance of the MuniPreferred Shares (for example,
distribution related expenses such as the participation fee paid at what it
expects will be an annual rate of 0.25% of MuniPreferred Share liquidation
preference to broker-dealers participating in MuniPreferred Share auctions).
Accordingly, the Fund cannot assure you that the issuance of MuniPreferred
Shares will result in a higher yield or return to Common Shareholders.
Similarly, any decline in the net asset value of the Fund's investments will
be borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines, the leverage will result in a greater decrease in
net asset value to Common Shareholders than if the Fund were not leveraged.
Such greater net asset value decrease will also tend to cause a greater decline
in the market price for the Common Shares. The Fund might be in danger of
failing to maintain the required 200% asset coverage or of losing its expected
AAA/Aaa ratings on the MuniPreferred Shares or, in an extreme case, the Fund's
current investment income might not be sufficient to meet the dividend
requirements on the MuniPreferred Shares. In order to counteract such an event,
the Fund might need to liquidate investments in order to fund a redemption of
some or all of the MuniPreferred Shares. Liquidation at times of low municipal
bond prices may result in capital loss and may reduce returns to Common
Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common Shares
and distributions can decline. In addition, during any periods of rising
inflation, MuniPreferred Share dividend rates would likely increase, which
would tend to further reduce returns to Common Shareholders.
Non-Diversification. Because the Fund is classified as "non-diversified"
under the 1940 Act it can invest a greater portion of its assets in obligations
of a single issuer. As a result, the Fund will be more
22
susceptible than a diversified fund to any single corporate, economic,
political or regulatory occurrence. See "The Fund's Investments."
Anti-Takover Provisions. The Fund's Declaration includes provisions that
could limit the ability of other entities or persons to acquire control of the
Fund or convert the Fund to open-end status. These provisions could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common
Shares.
23
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
"majority of the outstanding" Common Shares and, if issued, MuniPreferred
Shares voting together as a single class, and the approval of the holders of a
"majority of the outstanding" MuniPreferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less. Among other
restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does not
apply to municipal bonds backed by the assets and revenues of governments or
political subdivisions of governments.
The Fund may become subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred Shares that it intends to issue. The
Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve its
investment objectives. See "Investment Objectives" in the Statement of
Additional Information for information about these guidelines and a complete
list of the fundamental and non-fundamental investment policies of the Fund.
Quality Investments
The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated within the four highest grades by at least one of the
NRSROs (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but
judged to be of comparable quality by Nuveen Advisory. Investment grade bonds
may include split-rated bonds.
Limited Issuance of MuniPreferred Shares
Under the 1940 Act, the Fund could issue MuniPreferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the asset
coverage of the Fund. If the total liquidation value of the MuniPreferred
Shares was ever more than one-half of the value of the Fund's asset coverage,
the Fund would not be able to declare dividends on the Common Shares until the
liquidation value, as a percentage of the Fund's assets, was reduced. The Fund
intends to issue MuniPreferred Shares representing about 35% of the Fund's
total capital immediately after the time of issuance. This higher than required
margin of net asset value provides a cushion against later fluctuations in the
value of the Fund's portfolio and will subject Common Shareholders to less
income and net asset value volatility than if the Fund were more leveraged. The
Fund intends to purchase or redeem MuniPreferred Shares, if necessary, to keep
the liquidation value of the MuniPreferred Shares below one-half of the value
of the Fund's asset coverage.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative
24
impact of leverage on Common Shareholders, the Fund may shorten the average
maturity of its investment portfolio (by investing in short-term, high quality
securities) or may extend the maturity of outstanding MuniPreferred Shares. The
Fund may also attempt to reduce the leverage by redeeming or otherwise
purchasing MuniPreferred Shares. As explained above under "Risks--Leverage
Risk," the success of any such attempt to limit leverage risk depends on Nuveen
Advisory's ability to accurately predict interest rate or other market changes.
Because of the difficulty of making such predictions, the Fund may never
attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
Currently, the Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
Hedging Strategies
The Fund may use various investment strategies designed to limit the risk of
bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of Nuveen Advisory,
correlate with the prices of the Fund's investments. Successful implementation
of most hedging strategies would generate taxable income, and the Fund has no
present intention to use these strategies.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
Investment Adviser
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the municipal bonds in
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and administrative services. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$43.5 billion in assets under management. See the Statement of Additional
Information under "Investment Adviser."
Nuveen Advisory is responsible for execution of specific investment
strategies and day-to-day investment operations. Nuveen Advisory manages the
Fund using a team of analysts and portfolio
25
managers that focus on a specific group of funds. Thomas J. O'Shaughnessy is
the portfolio manager of the Fund and will provide daily oversight for, and
execution of, the Fund's investment activities. Mr. O'Shaughnessy has been a
portfolio manager for Nuveen Advisory since 1991 and Vice President since 2002
(formerly Assistant Vice President, since 1998). He currently manages
investments for 18 Nuveen-sponsored investment companies.
Nuveen Advisory is a wholly owned subsidiary of The John Nuveen Company, 333
West Wacker Drive, Chicago, Illinois 60606. Founded in 1898, The John Nuveen
Company and its affiliates had over $83 billion of net assets under management
or surveillance as of August 31, 2002. The John Nuveen Company is a
majority-owned subsidiary of The St. Paul Companies, Inc., a publicly-traded
company which is principally engaged in providing property-liability insurance
through subsidiaries.
Investment Management Agreement
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided
by Nuveen Advisory an annual management fee, payable on a monthly basis,
according to the following schedule:
Management
Average Daily Managed Assets Fee
---------------------------- ----------
Up to $125 million......................................... .6500%
$125 million to $250 million............................... .6375%
$250 million to $500 million............................... .6250%
$500 million to $1 billion................................. .6125%
$1 billion to $2 billion................................... .6000%
$2 billion and over........................................ .5750%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
Management
Net Assets Attributable to Common Shares Fee
---------------------------------------- ----------
Up to $125 million......................................... 1.0000%
$125 million to $250 million............................... .9808%
$250 million to $500 million............................... .9615%
$500 million to $1 billion................................. .9423%
$1 billion to $2 billion................................... .9231%
$2 billion and over........................................ .8846%
In addition to the fee of Nuveen Advisory, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with Nuveen Advisory), custodian, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of issuing any MuniPreferred Shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
26
For the first eight full years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of Year Ending (as a percentage of
September 30 Managed Assets) September 30 Managed Assets)
------------ ------------------- ------------ -------------------
2002/(1)/... .32% 2007.... .32%
2003........ .32% 2008.... .24%
2004........ .32% 2009.... .16%
2005........ .32% 2010.... .08%
2006........ .32%
--------
(1)From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond September 30, 2010.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular session trading (normally 4:00 p.m. eastern time) on each day the New
York Stock Exchange is open for business. Net asset value is calculated by
taking the fair value of the Fund's total assets, including interest or
dividends accrued but not yet collected, less all liabilities, and dividing by
the total number of shares outstanding. The result, rounded to the nearest
cent, is the net asset value per share.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are
valued at market value. The prices of municipal bonds are provided by a pricing
service and based on the mean between the bid and asked price. When price
quotes are not readily available (which is usually the case for municipal
bonds), the pricing service establishes a fair market value based on prices of
comparable municipal bonds. All valuations are subject to review by the Fund's
Board of Trustees or its delegate, Nuveen Advisory.
DISTRIBUTIONS
Commencing with the first dividend, the Fund intends to make regular monthly
cash distributions to Common Shareholders at a level rate (stated in terms of a
fixed cents per Common Share dividend rate) that reflects the past and
projected performance of the Fund. Distributions can only be made from net
investment income after paying any accrued dividends to MuniPreferred
Shareholders. The Fund's ability to maintain a level dividend rate will depend
on a number of factors, including dividends payable on the MuniPreferred
Shares. The net income of the Fund consists of all interest income accrued on
portfolio assets less all expenses of the Fund. Expenses of the Fund are
accrued each day. Over time, all the net investment income of the Fund will be
distributed. At least annually, the Fund also intends to distribute net capital
gain and ordinary taxable income, if any, after paying any accrued dividends or
making any liquidation payments to MuniPreferred Shareholders. Initial
distributions to Common Shareholders are expected to be declared approximately
45 days, and paid approximately 60 to 90 days, from the completion of this
offering, depending on market conditions. Although it does not now intend
27
to do so, the Board of Trustees may change the Fund's dividend policy and the
amount or timing of the distributions, based on a number of factors, including
the amount of the Fund's undistributed net investment income and historical and
projected investment income and the amount of the expenses and dividend rates
on the outstanding MuniPreferred Shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value.
DIVIDEND REINVESTMENT PLAN
You may elect to have all dividends, including any capital gain dividends,
on your Common Shares automatically reinvested by the Plan Agent in additional
Common Shares under the Dividend Reinvestment Plan (the "Plan"). You may elect
to participate in the Plan by completing the Dividend Reinvestment Plan
Application Form. If you do not participate, you will receive all distributions
in cash paid by check mailed directly to you by State Street Bank and Trust
Company as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the American Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per share
paid by the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the valuation date.
Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. Any proxy you receive will include all
Common Shares you have received under the Plan.
28
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that you
do not have to pay income taxes due upon receiving dividends and distributions.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however, the Fund reserves the
right to amend the Plan to include a service charge payable by the
participants. Additional information about the Plan may be obtained from State
Street Bank and Trust Company, Attn: Equiserve Nuveen Investments,
P.O. Box 43071, Providence, Rhode Island 02940-3071, (866) 290-4390 (after
10/13/02--(800) 257-8787).
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $0.01 per share
and, subject to the rights of holders of MuniPreferred Shares, if issued, have
equal rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Declaration of
Trust," non-assessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. Whenever MuniPreferred Shares are outstanding,
Common Shareholders will not be entitled to receive any cash distributions from
the Fund unless all accrued dividends on MuniPreferred Shares have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to
MuniPreferred Shares would be at least 200% after giving effect to the
distributions. See "--MuniPreferred Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to be greater because the Fund intends to have a leveraged capital structure.
Net asset value will be reduced immediately following the offering by the
amount of the sales load and offering expenses paid by the Fund. Nuveen has
agreed to pay (i) all organizational expenses and (ii) offering costs (other
than sales load) that exceed $0.03 per Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade on
an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than net
asset value and have during other periods traded at prices lower than net asset
value.
29
Because the market value of the Common Shares may be influenced by such factors
as dividend levels (which are in turn affected by expenses), call protection,
dividend stability, portfolio credit quality, net asset value, relative demand
for and supply of such shares in the market, general market and economic
conditions, and other factors beyond the control of the Fund, the Fund cannot
assure you that Common Shares will trade at a price equal to or higher than net
asset value in the future. The Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the
Fund as a vehicle for trading purposes. See "MuniPreferred Shares and Leverage"
and the Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares in one or more classes or series, with rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has authorized an offering of MuniPreferred
Shares (representing approximately 35% of the Fund's capital immediately after
the time the MuniPreferred Shares are issued) approximately one to three months
after completion of the offering of Common Shares. The Board has determined
that the MuniPreferred Shares, at least initially, would pay cumulative
dividends at rates determined weekly by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees has indicated that the preference on
distribution, liquidation preference, voting rights and redemption provisions
of the MuniPreferred Shares will be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund could
issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred Shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such dividend
or distribution) immediately after the distribution. If the Fund sells all the
Common Shares and MuniPreferred Shares discussed in this Prospectus, the
liquidation value of the MuniPreferred Shares is expected to be approximately
35% of the value of the Fund's total net assets. The Fund intends to purchase
or redeem MuniPreferred Shares, if necessary, to keep that fraction below
one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to Common Shareholders.
30
Voting Rights. MuniPreferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the Statement of Additional Information and except as
otherwise required by applicable law, holders of MuniPreferred Shares will vote
together with Common Shareholders as a single class.
Holders of MuniPreferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees (following the establishment of
the Fund by an initial trustee, the Declaration provides for a total of no less
than two and no more than twelve trustees). The remaining trustees will be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. In the unlikely event that two full years of
accrued dividends are unpaid on the MuniPreferred Shares, the holders of all
outstanding MuniPreferred Shares, voting as a separate class, will be entitled
to elect a majority of the Fund's trustees until all dividends in arrears have
been paid or declared and set apart for payment. Under the 1940 Act, in order
for the Fund to take certain actions or enter into certain transactions (i.e.,
convert to an open-end investment company or effect a reorganization adversely
affecting the MuniPreferred Shares), a separate class vote of holders of
MuniPreferred Shares will be required, in addition to the single class vote of
the holders of MuniPreferred Shares and Common Shares. See the Statement of
Additional Information under "Description of Shares--MuniPreferred
Shares--Voting Rights."
Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the
MuniPreferred Shares provide that they may be redeemed by the issuer at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any
issuance of shares by the Fund will increase such leverage. See "MuniPreferred
Shares and Leverage."
The discussion above describes the Board of Trustees' present intention with
respect to an offering of MuniPreferred Shares. The terms of the MuniPreferred
Shares may be the same as, or different from, the terms described above,
subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each agreement, obligation or instrument entered into or executed
by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and MuniPreferred Shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a
31
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series
or class of the Fund, (3) a sale, lease or transfer of all or substantially all
of the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund, or (5) a removal of trustees by shareholders, and
then only for cause, unless, with respect to (1) through (4), such transaction
has already been authorized by the affirmative vote of two-thirds of the total
number of trustees fixed in accordance with the Declaration or the By-laws, in
which case the affirmative vote of the holders of at least a majority of the
Fund's Common Shares and MuniPreferred Shares outstanding at the time, voting
together as a single class, is required, provided, however, that where only a
particular class or series is affected (or, in the case of removing a trustee,
when the trustee has been elected by only one class), only the required vote by
the applicable class or series will be required. Approval of shareholders is
not required, however, for any transaction, whether deemed a merger,
consolidation, reorganization or otherwise whereby the Fund issues Shares in
connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. None of the
foregoing provisions may be amended except by the vote of at least two-thirds
of the Common Shares and MuniPreferred Shares, voting together as a single
class. In the case of the conversion of the Fund to an open-end investment
company, or in the case of any of the foregoing transactions constituting a
plan of reorganization which adversely affects the holders of MuniPreferred
Shares, the action in question will also require the affirmative vote of the
holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding
at the time, voting as a separate class, or, if such action has been authorized
by the affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, the affirmative vote of the
holders of at least a majority of the Fund's MuniPreferred Shares outstanding
at the time, voting as a separate class. The votes required to approve the
conversion of the Fund from a closed-end to an open-end investment company or
to approve transactions constituting a plan of reorganization which adversely
affects the holders of MuniPreferred Shares are higher than those required by
the 1940 Act. The Board of Trustees believes that the provisions of the
Declaration relating to such higher votes are in the best interest of the Fund
and its shareholders. See the Statement of Additional Information under
"Certain Provisions in the Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
investment objectives and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at
32
a price that will be a function of several factors, including dividend levels
(which are in turn affected by expenses), net asset value, call protection,
dividend stability, portfolio credit quality, relative demand for and supply of
such shares in the market, general market and economic conditions and other
factors. Because shares of closed-end investment companies may frequently trade
at prices lower than net asset value, the Fund's Board of Trustees has
currently determined that, at least annually, it will consider action that
might be taken to reduce or eliminate any material discount from net asset
value in respect of Common Shares, which may include the repurchase of such
shares in the open market or in private transactions, the making of a tender
offer for such shares at net asset value, or the conversion of the Fund to an
open-end investment company. The Fund cannot assure you that its Board of
Trustees will decide to take any of these actions, or that share repurchases or
tender offers will actually reduce market discount.
If the Fund converted to an open-end investment company, it would be
required to redeem all MuniPreferred Shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the Common Shares
would no longer be listed on the American Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable to
the conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based on the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The discussions below and in the Statement of Additional Information provide
general tax information related to an investment in the Common Shares. Because
tax laws are complex and often change, you should consult your tax advisor
about the tax consequences of an investment in the Fund.
The Fund intends to elect to be treated and to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to distribute substantially all of its net
income and gains to its shareholders. Therefore, it is not expected that the
Fund will be subject to any federal income tax. The Fund primarily invests in
municipal bonds from issuers located in Georgia or in municipal bonds whose
income is otherwise exempt from regular
33
federal and Georgia income taxes. Thus, substantially all of the Fund's
dividends to you will qualify as "exempt-interest dividends." A shareholder
treats an exempt-interest dividend as interest on state and local bonds exempt
from regular federal income tax. Some or all of an exempt-interest dividend,
however, may be subject to federal alternative minimum tax imposed on the
shareholder. Different federal alternative minimum tax rules apply to
individuals and to corporations.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time
to time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any ordinary taxable income or net capital gain.
Distributions of net short-term capital gain are taxable as ordinary income.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable as long-term capital gains
regardless of how long you have owned your investment. The Fund will allocate
distributions to shareholders that are treated as tax-exempt interest and as
long-term capital gain and ordinary income, if any, among the Common Shares and
MuniPreferred Shares in proportion to total dividends paid to each class for
the year. As long as the Fund qualifies as a regulated investment company,
distributions paid by the Fund generally will not be eligible for the dividends
received deduction allowed to corporations.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the source
of investment income by state and the portion of income that is subject to the
federal alternative minimum tax. You will receive this statement from the firm
where you purchased your Common Shares if you hold your investment in street
name; the Fund will send you this statement if you hold your shares in
registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund must meet certain Internal Revenue Service ("I.R.S.")
requirements that govern the Fund's sources of income, diversification of
assets and distribution of earnings to shareholders. The Fund intends to meet
these requirements. If the Fund failed to do so, the Fund would be required to
pay corporate taxes on its earnings and all your distributions would be taxable
as ordinary income to the extent of the Fund's earnings and profits. In
particular, in order for the Fund to pay exempt-interest dividends, at least
50% of the value of the Fund's total assets must consist of tax-exempt
obligations at the close of each quarter of its taxable year. The Fund intends
to meet this requirement. If the Fund failed to do so, it would not be able to
pay exempt-interest dividends and your distributions attributable to interest
received by the Fund from any source would be taxable as ordinary income.
The sale or other disposition of Common Shares will result in capital gain
or loss to you if you hold such Common Shares as capital assets. Present law
taxes both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however, long-term
capital gains are eligible for reduced rates of taxation.
The Fund may be required to withhold a percentage of certain of your
dividends if you have not provided the Fund with your correct taxpayer
identification number (normally your Social Security number) and certain
certifications, or if you are otherwise subject to backup withholding. The
backup withholding percentage will be 30% in 2002 and 2003, 29% in 2004 and
2005, and 28% thereafter until
34
2011, when the percentage will revert to 31% unless amended by Congress. If you
receive Social Security benefits, you should be aware that exempt-interest
dividends are taken into account in calculating the amount of these benefits
that may be subject to federal income tax. If you borrow money to buy Fund
shares, you may not deduct the interest on that loan. Under I.R.S. rules, Fund
shares may be treated as having been bought with borrowed money even if the
purchase of the Fund shares cannot be traced directly to borrowed money.
If you are subject to the federal alternative minimum tax, a portion of your
regular monthly dividends may be taxable.
Georgia Tax Matters
The following is based upon the advice of Chapman and Cutler, special
Georgia counsel to the Fund.
The Fund is designed to provide tax benefits to investors who are residents
of Georgia. See "The Fund." Assuming the Fund qualifies as a "regulated
investment company" for federal income tax purposes under Subchapter M of the
Code, exempt-interest dividends from the Fund that are excluded from gross
income for federal income tax purposes and that are attributable to interest on
(i) obligations of the State of Georgia or its political subdivisions and (ii)
obligations of possessions of the United States, will be exempt from the income
tax imposed by the State of Georgia on individuals and corporations under
Chapter 7 of Title 48 of the Georgia Statutes. Other dividends from the Fund
may be subject to the Georgia income tax.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Fund, if the Fund distributes dividends exempt from the Georgia income
tax during a year, is not deductible for purposes of the Georgia income tax.
Ownership of shares in the Fund may result in other Georgia tax consequences to
certain taxpayers, and prospective investors should consult their tax advisors.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning Georgia state and local tax matters. Please
refer to the Statement of Additional Information for more detailed information.
OTHER MATTERS
A lawsuit was brought in June 1996 (Green et al. v. Nuveen Advisory Corp.,
et al.) by certain individual common shareholders of six leveraged closed-end
funds sponsored by Nuveen in the federal district court for the Seventh Circuit
Court of Appeals. The suit was originally brought against Nuveen, Nuveen
Advisory, six Nuveen investment companies (the "leveraged closed-end funds")
managed by Nuveen Advisory and two of the leveraged closed-end funds' former
directors seeking unspecified damages, an injunction, and other relief. The
suit also sought certification of a defendant class consisting of all
Nuveen-managed leveraged funds.
The plaintiffs alleged that the leveraged closed-end funds engaged in
certain practices that violated various provisions of the 1940 Act and common
law. The plaintiffs also alleged, among other things, breaches of fiduciary
duty by the funds' directors and Nuveen Advisory and various misrepresentations
and omissions in prospectuses and shareholder reports relating to the use of
leverage through the
35
issuance and periodic auctioning of preferred stock and the basis of the
calculation and payment of management fees to Nuveen Advisory and Nuveen.
Plaintiffs also filed a motion to certify defendant and plaintiff classes.
The defendants filed motions to dismiss the entire lawsuit asserting that
the claims are without merit and to oppose certification of any classes. On
March 30, 1999, the court entered a memorandum opinion and order (1) granting
the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to
dismiss all of plaintiffs' counts against it other than breach of fiduciary
duty under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs'
motion to certify a plaintiff class and a defendant class. No appeal was made
by plaintiffs of this decision, and the remaining Section 36(b) count against
Nuveen Advisory is discussed below.
As to alleged damages, plaintiffs have claimed as damages the portion of all
advisory compensation received by Nuveen Advisory from the funds during the
period from June 21, 1995 to the present that is equal to the proportion of
each of such fund's preferred stock to its total assets. The preferred stock
constitutes approximately one third of the funds' assets so the amount claimed
would equal approximately one third of management fees received by Nuveen
Advisory for managing the funds during this period. Nuveen Advisory believes
that it has no liability and the plaintiffs have suffered no damages and filed
a motion for summary judgment as to both liability and damages.
Plaintiffs filed a motion for partial summary judgment as to liability only.
In a memorandum opinion and order dated September 6, 2001, the federal district
court granted Nuveen Advisory's motion for summary judgment and denied
plaintiffs' motion for partial summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on October 8,
2001. In an opinon dated July 8, 2002, the Seventh Circuit Court of Appeals
affirmed the opinion of the district court dismissing the plaintiffs' lawsuit.
Any petition for a writ of certiorari to the United States Supreme Court
seeking to appeal the Seventh Circuit's opinion would need to be filed within
ninety days of the Seventh Circuit's July 8, 2002 opinion.
36
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
Number of
Underwriters Shares
------------ ---------
Salomon Smith Barney Inc.............................................. 365,600
Nuveen Investments.................................................... 365,500
A.G. Edwards & Sons, Inc.............................................. 365,500
Prudential Securities Incorporated.................................... 365,500
UBS Warburg LLC....................................................... 365,500
Deutsche Bank Securities Inc.......................................... 365,500
Raymond James & Associates, Inc....................................... 365,500
SunTrust Capital Markets, Inc......................................... 365,500
Wachovia Securities, Inc.............................................. 365,500
H&R Block Financial Advisors, Inc..................................... 117,000
CIBC World Markets Corp............................................... 117,000
Legg Mason Wood Walker, Incorporated.................................. 117,000
U.S. Bancorp Piper Jaffray Inc........................................ 117,000
Advest, Inc........................................................... 63,200
Robert W. Baird & Co. Incorporated.................................... 63,200
Fahnestock & Co. Inc.................................................. 63,200
Janney Montgomery Scott LLC........................................... 63,200
Quick & Reilly, Inc. A FleetBoston Financial Company.................. 63,200
Sterne, Agee & Leach, Inc............................................. 63,200
TD Waterhouse Investor Services, Inc.................................. 63,200
---------
Total.............................................................. 4,200,000
=========
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Common Shares
(other than those covered by the over-allotment option described below) if they
purchase any of the Common Shares. The representatives described below have
advised the Fund that the Underwriters do not intend to confirm any sales to
any accounts over which they exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc., Nuveen Investments,
A.G. Edwards & Sons, Inc., Prudential Securities Incorporated, UBS Warburg LLC,
Deutsche Bank Securities Inc., Raymond James & Associates, Inc., SunTrust
Capital Markets, Inc. and Wachovia Securities, Inc. are acting as
representatives, propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the Common Shares to certain dealers at the public
offering price less a concession not in excess of $0.45 per Common Share. The
sales load the Fund will pay of $0.675 per share is equal to 4.5% of the
initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per Common Share on sales to
certain other dealers. Certain dealers acting in the capacity of
sub-underwriters may receive additional compensation for acting in such a
capacity. If all of the
37
Common Shares are not sold at the initial offering price, the representatives
may change the public offering price and other selling terms. Investors must
pay for any Common Shares purchased on or before September 30, 2002. In
connection with this offering, Nuveen may perform clearing services without
charge for brokers and dealers for whom it regularly provides clearing services
that are participating in the offering as members of the selling group.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to 630,000 additional Common
Shares at the public offering price less the sales load. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional Common Shares approximately proportionate to such
Underwriter's initial purchase commitment.
The Fund and Nuveen Advisory have agreed that, for a period of 180 days from
the date of this Prospectus, they will not, without the prior written consent
of Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or
hedge any Common Shares or any securities convertible into or exchangeable for
Common Shares. Salomon Smith Barney Inc. in its sole discretion may release any
of the securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, Nuveen Advisory and the
representatives. There can be no assurance, however, that the price at which
the Common Shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after this
offering. The Common Shares have been approved for listing on the American
Stock Exchange, subject to official notice of issuance.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.
Certain Underwriters participating in the Common Share offering may be
invited, some period of time after completion of this offering, to participate
in the offering of the MuniPreferred Shares and will receive compensation for
their participation in that MuniPreferred Share offering. The number of Common
Shares purchased by each Underwriter in this offering may be a factor in
determining (i) whether that Underwriter is selected to participate in the
offering of the MuniPreferred Shares, (ii) the number of MuniPreferred Shares
allocated to that Underwriter in that offering, and (iii) the amount of certain
additional MuniPreferred Share underwriting compensation available to that
Underwriter. The offering costs associated with the issuance of MuniPreferred
Shares are currently estimated to be approximately 2.4% of the total amount of
the MuniPreferred Share offering. These costs will effectively be borne by the
Common Shareholders.
38
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 400 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading in
the Common Shares has commenced on the American Stock Exchange. No Underwriter
is, however, obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any
market-making activities undertaken by any Underwriter. This Prospectus is to
be used by any Underwriter in connection with the offering and, during the
period in which a prospectus must be delivered, with offers and sales of the
Common Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares on
the American Stock Exchange at a level above that which might otherwise prevail
in the open market. A "stabilizing bid" is a bid for or purchase of the Common
Shares on behalf of an Underwriter for the purpose of fixing or maintaining the
price of the Common Shares. A "covering transaction" is a bid for or purchase
of the Common Shares on behalf of an Underwriter to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is a contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting syndicate and the Common Shares
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Shares in question at the cost price
to the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question any or all compensation (including, with
respect to a representative, the applicable syndicate management fee)
applicable to the Common Shares in question. As a result, an Underwriter or
selling group member and, in turn, brokers may lose the fees that they
otherwise would have earned from a sale of the Common Shares if their customer
resells the Common Shares while the penalty bid is in effect. The Underwriters
are not required to engage in any of these activities, and any such activities,
if commenced, may be discontinued at any time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of the
Underwriters to the Fund or Nuveen Advisory if, prior to the delivery of and
payment for the Common Shares, (i) trading in the Fund's Common Shares shall
have been suspended by the Securities and Exchange Commission or the American
Stock Exchange or trading in securities generally on the New York Stock
Exchange or the American Stock Exchange shall have been suspended or limited or
minimum prices for trading in securities generally shall have been established
on either of such Exchanges, (ii) a commercial banking moratorium shall have
been declared by either federal or New York state authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets in the United States is such as to
make it, in
39
the sole judgment of the representatives, impracticable or inadvisable to
proceed with the offering or delivery of the Common Shares as contemplated by
the Prospectus (exclusive of any supplement thereto).
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
Prior to the public offering of Common Shares, Nuveen Advisory purchased
Common Shares from the Fund in an amount satisfying the net worth requirements
of Section 14(a) of the 1940 Act. As of the date of this Prospectus, Nuveen
Advisory owned 100% of the Fund's outstanding Common Shares. Nuveen Advisory
may be deemed to control the Fund until such time as it owns less than 25% of
the outstanding Common Shares which is expected to occur as of the completion
of the offering of Common Shares.
Nuveen, 333 West Wacker Drive, Chicago, Illinois, 60606, one of the
representatives of the Underwriters, is the parent company of Nuveen Advisory.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services. The
Fund's transfer, shareholder services and dividend paying agent is also State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd &
Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of
Massachusetts law on the opinion of Bingham McCutchen LLP, Boston,
Massachusetts.
40
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds.................................................. 3
Investment Objectives............................................ 5
Investment Policies and Techniques............................... 10
Other Investment Policies and Techniques......................... 18
Management of the Fund........................................... 21
Investment Adviser............................................... 27
Portfolio Transactions........................................... 28
Distributions.................................................... 29
Description of Shares............................................ 30
Certain Provisions in the Declaration of Trust................... 33
Repurchase of Fund Shares; Conversion to Open-End Fund........... 34
Tax Matters...................................................... 37
Experts.......................................................... 41
Custodian........................................................ 41
Additional Information........................................... 41
Report of Independent Auditors................................... 43
Financial Statements............................................. 44
Appendices
Appendix A--Ratings of Investments............................ A-1
Appendix B--Taxable Equivalent Yield Tables................... B-1
Appendix C--Hedging Strategies and Risks...................... C-1
Appendix D--Factors Pertaining to Georgia..................... D-1
Appendix E--Performance Related and Comparative Information... E-1
41
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,200,000 Shares
Nuveen Georgia Dividend Advantage Municipal Fund 2
Common Shares
--------
PROSPECTUS
September 25, 2002
--------
Salomon Smith Barney
Nuveen Investments
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg
Deutsche Bank Securities
Raymond James
SunTrust Robinson Humphrey
Wachovia Securities
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-GA-0902
Nuveen Georgia Dividend Advantage Municipal Fund 2
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Georgia Dividend Advantage Municipal Fund 2 (the "Fund" or the
"Georgia Fund") is a newly organized, non-diversified closed-end management
investment company.
This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") does not constitute a prospectus, but should be read in
conjunction with the Fund's Prospectus relating thereto dated September 25, 2002
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
Common Shares. Investors should obtain and read the Fund's Prospectus prior
to purchasing such shares. A copy of the Fund's Prospectus may be obtained
without charge by calling (800) 257-8787. You may also obtain a copy of the
Fund's Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
1
TABLE OF CONTENTS
Page
--------
Use of Proceeds 3
Investment Objectives 5
Investment Policies and Techniques 10
Other Investment Policies and Techniques 18
Management of the Fund 21
Investment Adviser 27
Portfolio Transactions 28
Distributions 29
Description of Shares 30
Certain Provisions in the Declaration of Trust 33
Repurchase of Fund Shares; Conversion to Open-End Fund 34
Tax Matters 37
Experts 41
Custodian 41
Additional Information 41
Report of Independent Auditors 43
Financial Statements 44
Ratings of Investments (Appendix A) A-1
Taxable Equivalent Yield Tables (Appendix B) B-1
Hedging Strategies and Risks (Appendix C) C-1
Factors Pertaining to Georgia (Appendix D) D-1
Performance Related and Comparative Information (Appendix E) E-1
This Statement of Additional Information is dated September 25, 2002
2
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be
approximately: $60,039,000 ($69,044,850 if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
3
For the Fund, Nuveen Advisory has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share.
Pending investment in municipal bonds that meet the Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the Fund
may also purchase, as temporary investments, short-term taxable investments of
the type described under "Investment Policies and Techniques--Investment in
Municipal Bonds--Portfolio Investments," the income on which is subject to
regular federal income tax and securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the type in which the Fund
may invest directly.
4
INVESTMENT OBJECTIVES
The Fund's investment objectives are to provide current income exempt from
regular federal and Georgia income tax, and to enhance portfolio value relative
to the municipal bond market by investing in tax-exempt municipal bonds that the
Fund's investment adviser believes are underrated or undervalued or that
represent municipal market sectors that are undervalued.
5
The Fund's investment in underrated or undervalued municipal bonds will be
based on Nuveen Advisory's belief that their yield is higher than that available
on bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise (relative to the
market) to reflect their true value. The Fund attempts to increase its
portfolio value relative to the municipal bond market by prudent selection of
municipal bonds regardless of the direction the market may move. Any capital
appreciation realized by the Fund will
6
generally result in the distribution of taxable capital gains to holders of
Common Shares. The Fund's investment objectives are fundamental policies of the
Fund.
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 the Fund expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. Common Shares therefore would not ordinarily be a suitable investment
for investors who are subject to the federal alternative minimum tax or who
would become subject to such tax by purchasing Common Shares. The suitability of
Common Shares as an investment for you will depend upon a comparison of the
after-tax yield likely to be provided from the Fund with that from comparable
tax-exempt investments not subject to the alternative minimum tax, and from
comparable fully taxable investments, in light of your tax position. Special
considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, MuniPreferred Shares (as hereinafter defined) voting
together as a single class, and of the holders of a majority of the outstanding
MuniPreferred Shares voting as a separate class:
(1) Under normal circumstances, invest less than 80% of the Fund's net
assets (plus any borrowings for investment purposes) in investments the
income from which is exempt from both regular federal and Georgia income
tax;
(2) Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred Shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the Prospectus;
(3) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount not
exceeding one-third of the value of the Fund's total assets (including the
amount borrowed) less the Fund's liabilities (other than borrowings);
(4) Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
(5) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal bonds other than those municipal bonds backed only by
the assets and revenues of non-governmental users;
7
(6) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
(7) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed by
physical commodities);
(8) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations; and
(9) Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total assets
would then be invested in securities of a single issuer or if as a result
the Fund would hold more than 10% of the outstanding voting securities of
any single issuer; provided that, with respect to 50% of the Fund's assets,
the Fund may invest up to 25% of its assets in the securities of any one
issuer.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is
less.
For the purpose of applying the limitation set forth in subparagraph (9)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up to
10% of its Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed Assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
stockholder in any investment company, the Fund will bear its ratable share of
8
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of Common Shares would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks", the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in kind and amount to the securities sold at
no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 or any
exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control.
(6) Invest in inverse floating rate securities (which are securities
that pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund intends to apply for ratings for its preferred shares (called
"MuniPreferred Shares" herein) from Moody's and/or S&P. In order to obtain and
maintain the required ratings, the Fund may be required to comply with
investment quality, diversification and other guidelines established by Moody's
or S&P. Such guidelines will likely be more restrictive than the restrictions
set forth above. The Fund does not anticipate that such guidelines would have a
material
9
adverse effect on its Common Shareholders or its ability to achieve its
investment objectives. The Fund presently anticipates that any MuniPreferred
Shares that it intends to issue would be initially given the highest ratings by
Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be given that such
ratings will be obtained. No minimum rating is required for the issuance of
MuniPreferred Shares by the Fund. Moody's and S&P receive fees in connection
with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
Investment in Municipal Bonds
Portfolio Investments
Under normal circumstances, the Georgia Fund will invest its net assets in
a portfolio of municipal bonds that are exempt from regular federal and Georgia
income tax.
Under normal circumstances, and except for the temporary investments
described below, the Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds described above. After completion of
the offering through September 30, 2003, the Fund may invest in municipal bonds
that are exempt from regular federal income tax but not from the Fund's
particular state income tax ("Out of State Bonds"), provided that no more than
10% of the Fund's investment income during that time may be derived from Out of
State Bonds.
The Fund will invest at least 80% of its net assets in municipal bonds that
at the time of investment are investment grade quality, which may include
split-rated bonds, as defined below. Investment
10
grade quality bonds are bonds rated within the four highest grades (Baa or BBB
or better by Moody's, S&P or Fitch) or bonds that are unrated but judged to be
of comparable quality by Nuveen Advisory. Investment grade bonds may include
bonds that, at the time of investment, are rated below investment grade by
Moody's, S&P or Fitch, so long as at least one NRSRO rates such bonds within the
four highest grades (such bonds are called "split-rated bonds"). "Split-rated
bonds" are those bonds that, at the time of investment, are rated below
investment grade by Moody's, S&P or Fitch, so long as at least one NRSRO rates
such bonds within the four highest grades (i.e., investment grade quality). This
means that split-rated bonds may be regarded by one NRSRO (but by definition not
by all NRSROs or by Nuveen Advisory) as having characteristics of bonds rated
Ba/BD or B by Moody's, S&P or Fitch, as discussed below. The Fund may invest up
to 20% of its net assets in municipal bonds that, at the time of investment, are
rated Ba/BB or B by Moody's, S&P or Fitch or unrated but judged to be of
comparable quality by Nuveen Advisory. Bonds of below investment grade quality
(Ba/BB or below) are commonly referred to as junk bonds. Issuers of bonds rated
Ba/BB or B are regarded as having current capacity to make principal and
interest payments but are subject to business, financial or economic conditions
which could adversely affect such payment capacity. Municipal bonds rated Baa or
BBB are considered "investment grade" securities; municipal bonds rated Baa are
considered medium grade obligations which lack outstanding investment
characteristics and have speculative characteristics, while municipal bonds
rated BBB are regarded as having adequate capacity to pay principal and
interest. Municipal bonds rated AAA in which the Fund may invest may have been
so rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest. Municipal bonds rated below
investment grade quality are obligations of issuers that are considered
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and, therefore,
carry greater investment risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Municipal bonds rated below
investment grade tend to be less marketable than higher-quality bonds because
the market for them is less broad. The market for unrated municipal bonds is
even narrower. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Fund
may have greater difficulty selling its portfolio securities. The Fund will be
more dependent on Nuveen Advisory's research and analysis when investing in
these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
11
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the average
weighted maturity of obligations held by the Fund may be shortened, depending on
market conditions. As a result, the Fund's portfolio at any given time may
include both long-term and intermediate-term municipal bonds. Moreover, during
temporary defensive periods (e.g., times when, in Nuveen Advisory's opinion,
temporary imbalances of supply and demand or other temporary dislocations in the
tax-exempt bond market adversely affect the price at which long-term or
intermediate-term municipal bonds are available), and in order to keep the
Fund's cash fully invested, including the period during which the net proceeds
of the offering are being invested, the Fund may invest any percentage of its
net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open or closed-end investment companies that
invest primarily in municipal bonds of the type in which the Fund may invest
directly. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Tax-exempt short-term investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. The Fund will invest only in
taxable short-term investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or floating
rate of interest. See Appendix A for a general description of Moody's, S&P's and
Fitch's ratings of securities in such categories. Taxable short-term investments
of the Fund may include certificates of deposit issued by U.S. banks with assets
of at least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Other Investment Policies and Techniques--Repurchase
Agreements." To the extent the Fund invests
12
in taxable investments, the Fund will not at such times be in a position to
achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and the Fund will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that it believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued. Underrated municipal bonds are those whose ratings do not, in
Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more
than the value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond is consistent with the
value of similar bonds. Municipal bonds of particular types or purposes (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value.
The Fund has not established any limit on the percentage of its portfolio
investments that may be invested in municipal bonds subject to the federal
alternative minimum tax provisions of federal tax law, and the Fund expects that
a substantial portion of the current income it produces will be includable in
alternative minimum taxable income. Special considerations apply to corporate
investors. See "Tax Matters."
Also included within the general category of municipal bonds described in
the Fund's Prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Fund will only
13
purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer
has a strong incentive to continue making appropriations until maturity.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period during
which the net proceeds of the offering of Common Shares or MuniPreferred Shares
are being invested, the Fund may deviate from its investment objectives and may
invest up to 100% of its Managed Assets in short-term investments including high
quality, short-term securities that may be either tax-exempt or taxable. To the
extent the Fund invests in taxable short-term investments, the Fund will not at
such times be in a position to achieve that portion of its investment objective
of seeking current income exempt from regular federal income tax. For further
information, see, "Short-Term Investments" below.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
The Fund also may invest up to 10% of its net assets in securities of other
open or closed-end investment companies that invest primarily in municipal bonds
of the type in which the Fund may invest directly. The Fund will generally
select obligations which may not be redeemed at the option of the issuer for
approximately seven to nine years.
14
Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested,
the Fund may invest up to 100% of its net assets in cash equivalents and short-
term taxable fixed-income securities, although the Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-
term investments are not available at reasonable prices and yields. Short-term
taxable fixed income investments are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the date
specified thereon. Under current FDIC regulations, the maximum insurance
payable as to any one certificate of deposit is $100,000; therefore,
certificates of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Fund to invest
15
temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans to
the seller, collateralized by the underlying securities. The risk to the
Fund is limited to the ability of the seller to pay the agreed-upon sum on
the repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If
the seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The investment adviser
monitors the value of the collateral at the time the action is entered into
and at all times during the term of the repurchase agreement. The Fund's
investment adviser does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price to be
paid to the Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate the collateral could be
delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. Nuveen Advisory will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity measures)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
16
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies, such
as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term
unsecured, negotiable promissory notes issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or a tax-exempt money market
index.
While the various types of notes described above as a group represent the
major portion of the short-term tax-exempt note market, other types of notes are
available in the marketplace and the Fund may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.
Hedging Strategies
The Fund may periodically engage in hedging transactions. Hedging is a
term used for various methods of seeking to preserve portfolio capital value by
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in
17
financial futures and index futures as well as related put and call options on
such instruments. Both parties entering into an index or financial futures
contract are required to post an initial deposit of 1% to 5% of the total
contract price. Typically, option holders enter into offsetting closing
transactions to enable settlement in cash rather than take delivery of the
position in the future of the underlying security. The Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in the Fund's
portfolio. In addition, futures and options markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
contracts create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce yield. Net gains, if any, from
hedging and other portfolio transactions will be distributed as taxable
distributions to shareholders. The Fund will not make any investment (whether an
initial premium or deposit or a subsequent deposit) other than as necessary to
close a prior investment if, immediately after such investment, the sum of the
amount of its premiums and deposits would exceed 5% of the Fund's net assets.
The Fund will invest in these instruments only in markets believed by Nuveen
Advisory to be active and sufficiently liquid. Successful implementation of most
hedging strategies would generate taxable income, and the Fund has no present
intention to use these strategies. For further information regarding these
investment strategies and risks presented thereby, see Appendix C to this
Statement of Additional Information.
Factors Pertaining to Georgia
Factors pertaining to Georgia are set forth in Appendix D.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
18
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at a fair value as determined in good
faith by the Board of Trustees or its delegate.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what Nuveen Advisory
believes to be a temporary price disparity between the two securities. Temporary
price disparities between two comparable securities may result from supply and
demand imbalances where, for example, a temporary oversupply of certain bonds
may cause a temporarily low price for such bonds, as compared with other bonds
of like quality and characteristics. The Fund may also engage to a limited
extent in short-term trading consistent with its investment objectives.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its investment
objectives by prudent selection of municipal bonds with a view to holding them
for investment. While there can be no assurance thereof, the Fund anticipates
that its annual portfolio turnover rate will generally not exceed 100%. However,
the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, the annual portfolio turnover rate of the Fund may exceed 100% in
particular years.
Other Investment Companies
The Fund may invest in securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Fund may invest directly. The Fund generally expects to invest in other
investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its Common Shares or MuniPreferred Shares, or during periods
when there is a shortage of attractive, high-yielding municipal bonds available
in the market. As a stockholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Nuveen Advisory will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available municipal bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein. As described in the Fund's Prospectus in
the section entitled "Risks," the net asset value and market value of leveraged
shares will be more
19
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Commission to maintain in a separate account liquid assets,
consisting of cash, cash equivalents or liquid securities having a market value
at all times of at least equal to the amount of the commitment. Income generated
by any such assets which provide taxable income for federal income tax purposes
is includable in the taxable income of the Fund. The Fund may enter into
contracts to purchase municipal bonds on a forward basis (i.e., where settlement
will occur more than 60 days from the date of the transaction) only to the
extent that the Fund specifically collateralizes such obligations with a
security that is expected to be called or mature within sixty days before or
after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an
element of risk because no interest accrues on the bonds prior to settlement and
at the time of delivery the market value may be less than cost.
Repurchase Agreements
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and MuniPreferred Shares, if any. The Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of Nuveen Advisory, present minimal credit risk. The risk to the
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds
the agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will
20
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. When held to its maturity, its return
comes from the difference between purchase price and its maturity value. The
market prices of zero coupon bonds are affected to a greater extent by changes
in prevailing levels of interest rates and thereby tend to be more volatile in
price than securities that pay interest periodically and may be more speculative
than such securities. In addition, because the Fund accrues income with respect
to these securities prior to the receipt of such interest, it may have to
dispose of portfolio securities under disadvantageous circumstances in order to
obtain cash needed to pay income dividends in amounts necessary to avoid
unfavorable tax consequences.
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven. None of the trustees who are not "interested" persons of
the Fund has ever been a director or employee of, or consultant to, Nuveen or
its affiliates. The names and business addresses of the trustees and officers of
the Fund, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Trustee who is an interested person of the Fund:
-----------------------------------------------
Timothy R. Schwertfeger* Chairman of the Chairman and Director (since 1996) of The 130
3/28/49 Board, President John Nuveen Company, Nuveen Investments, Nuveen
333 West Wacker Drive and Trustee Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 2002 Advisory Corp.; prior thereto, Executive Vice
President and Director of The John Nuveen
Company and Nuveen Investments; Director (since
1992) and Chairman (since 1996) of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Chairman and Director (since
1997) of Nuveen Asset Management Inc.;
Director (since 1996) of Institutional Capital
Corporation; Chairman and Director (since 1999)
of
* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, because he is an officer and director of
Nuveen Advisory.
21
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Rittenhouse Financial Services Inc.; Chief
Executive Officer (since 1999) of
Nuveen Senior Loan Asset Management Inc.
Trustees who are not interested persons of the Fund:
---------------------------------------------------
Robert P. Bremner Trustee Private Investor and Management Consultant. 112
8/22/40 2002
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown** Trustee Retired (August 1989) as Senior Vice President 112
7/29/34 2002 of The Northern Trust Company.
201 Michigan Avenue
Highwood, IL 60040
Anne E. Impellizzeri Trustee Retired, formerly, Executive Director (since 112
1/26/33 2002 1998) of Manitoga (Center for Russel Wright's
3 West 29th Street Design with Nature); formerly, President and Chief
New York, NY 10001 Executive Officer of Blanton-Peale Institutes
of Religion and Health (since December 1990);
prior thereto, Vice President, Metropolitan
Life Insurance Co.
Peter R. Sawers Trustee Adjunct Professor of Business and Economics, 112
4/3/33 2002 University of Dubuque, Iowa; formerly
22 The Landmark (1991-2000) Adjunct Professor, Lake Forest
Northfield, IL 60093 Graduate School of Management, Lake Forest,
Illinois; prior thereto, Executive Director,
Towers Perrin Australia, a management consulting
firm; Chartered Financial Analyst; Certified
Management Consultant.
William J. Schneider*** Trustee Senior Partner and Chief Operating Officer, 112
9/24/44 2002 Miller-Valentine Group, Vice President,
4000 Miller-Valentine Ct. Miller-Valentine Realty, a development and
P. O. Box 744 contract company; Chair, Miami Valley Hospital;
Dayton, OH 45401 Chair, Miami Valley Economic Development
Coalition; formerly, Member, Community Advisory
Board, National City Bank, Dayton, Ohio and
Business Advisory Council, Cleveland Federal
Reserve Bank.
Judith M. Stockdale Trustee Executive Director, Gaylord and Dorothy 112
12/29/47 2002 Donnelley Foundation (since 1994); prior
35 E. Wacker Drive thereto, Executive Director, Great Lakes
Suite 2600 Protection Fund (from 1990 to 1994).
Chicago, IL 60601
** As a result of his ownership of fixed-income securities issued by Salomon
Smith Barney Inc., one of the principal underwriters of the Fund, the Fund
believes that Mr. Brown may be deemed to be an interested person for as long as
Salomon Smith Barney Inc. serves as principal underwriter to the Fund and,
therefore, for purposes of this offering he is being treated as an interested
person. Mr. Brown owns less than 1% of such securities outstanding and has
abstained from voting on any items involving the appointment of Salomon Smith
Barney Inc. as principal underwriter to the Fund.
*** As a result of his ownership of securities issued by Citigroup, the parent
company of Salomon Smith Barney Inc., one of the principal underwriters of the
Fund, the Fund believes that Mr. Schneider may be deemed to be an interested
person for as long as Salomon Smith Barney Inc. serves as principal underwriter
to the Fund and, therefore, for purposes of this offering he is being treated as
an interested person. Mr. Schneider owns less than 1% of such securities
outstanding.
22
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- ---------------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Officers of the Fund:
--------------------
Michael T. Atkinson Vice President and Vice President (since January 2002), formerly, 130
2/3/66 Assistant Secretary Assistant Vice President (since 2000),
333 W. Wacker Drive 2002 previously, Associate of Nuveen Investments.
Chicago, IL 60606
Paul L. Brennan Vice President Vice President (since January 2002), formerly, 126
11/10/66 2002 Assistant Vice President (since 1997), of Nuveen
333 W. Wacker Drive Advisory Corp.; prior thereto, portfolio
Chicago, IL 60606 manager of Flagship Financial Inc.; Chartered
Financial Analyst and Certified Public Accountant.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments (since 130
11/28/67 Treasurer 1999), prior thereto, Assistant Vice President
333 W. Wacker Drive 2002 (from 1997); Vice President and Treasurer (since
Chicago, IL 60606 1999) of Nuveen Senior Loan Asset Management
Inc.; Chartered Financial Analyst.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. (since 130
9/8/54 2002 2001); previously, Vice President of Van Kampen
333 W. Wacker Drive Investment Advisory Corp. (since 1998); prior
Chicago, IL 60606 thereto, Assistant Vice President of Van Kampen
Investment Advisory Corp. (since 1994).
Jessica R. Droeger Vice President and Vice President (since January 2002) and Assistant 130
9/24/64 Assistant Secretary General Counsel (since 1998) formerly, Assistant
333 W. Wacker Drive 2002 Vice President (since 1998) of Nuveen Investments;
Chicago, IL 60606 Vice President (since May 2002) and Assistant
Secretary (since 1998) formerly, Assistant Vice
President of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; prior thereto,
Associate at the law firm D'Ancona Partners LLC.
Lorna C. Ferguson Vice President Vice President of Nuveen Investments; Vice 130
10/24/45 2002 President (since 1998) of Nuveen
333 W. Wacker Drive Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.
William M. Fitzgerald Vice President Managing Director (since 2002) of Nuveen 130
3/2/64 2002 Investments; Managing Director (since 2001),
333 W. Wacker Drive formerly Vice President of Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp.
(since 1995); Chartered Financial Analyst.
Stephen D. Foy Vice President and Vice President of Nuveen Investments and 130
5/31/54 Controller The John Nuveen Company; Vice President
333 W. Wacker Drive 2002 (since 1999) of Nuveen Senior Loan
Chicago, IL 60606 Management Inc.; Certified Public Accountant.
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; 126
7/5/55 2002 Chartered Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
23
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Richard A. Huber Vice President Vice President of Nuveen Institutional Advisory 126
3/26/63 2002 Corp. (since 1998) and Nuveen Advisory
333 W. Wacker Drive Corp. (since 1997); prior thereto, Vice
Chicago, IL 60606 President and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa Vice President Vice President of Nuveen Advisory Corp. 126
8/21/57 2002
333 W. Wacker Drive
Chicago, IL 60606
David J. Lamb Vice President Vice President (since 2000) of Nuveen 130
3/22/63 2002 Investments, previously Assistant Vice
333 W. Wacker Drive President (since 1999); prior thereto,
Chicago, IL 60606 Associate of Nuveen Investments; Certified
Public Accountant.
Tina M. Lazar Vice President Vice President (since 1999), previously, 130
8/27/61 2002 Assistant Vice President (since 1993) of
333 W. Wacker Drive Nuveen Investments.
Chicago, IL 60606
Larry W. Martin Vice President and Vice President, Assistant Secretary and 130
7/27/51 Assistant Secretary Assistant General Counsel of Nuveen
333 W. Wacker Drive 2002 Investments; Vice President and Assistant
Chicago, IL 60606 Secretary of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Assistant
Secretary of The John Nuveen Company and (since
1997) Nuveen Asset Management Inc.; Vice President
and Assistant Secretary (since 1999) of Nuveen
Senior Loan Asset Management Inc.
Edward F. Neild, IV Vice President Managing Director (since 2002) of Nuveen 130
7/7/65 2002 Investments; Managing Director (since 1997),
333 W. Wacker Drive formerly Vice President (since 1996) of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.; Chartered Financial Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), 126
9/4/60 2002 formerly, Assistant Vice President (since 1998),
333 W. Wacker Drive of Nuveen Advisory Corp.; prior thereto,
Chicago, IL 60606 portfolio manager.
24
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Thomas C. Spalding Vice President Vice President of Nuveen Advisory Corp. and 126
7/31/51 2002 Nuveen Institutional Advisory Corp.; Chartered
333 W. Wacker Drive Financial Analyst.
Chicago, IL 60606
Gifford R. Zimmerman Vice President and Managing Director (since 2002), Assistant 130
9/9/56 Secretary Secretary and Associate General Counsel,
333 W. Wacker Drive 2002 formerly, Vice President and Assistant
Chicago, IL 60606 General Counsel of Nuveen Investments; Managing
Director (since 2002), General Counsel and
Assistant Secretary, formerly, Vice President of
Nuveen Advisory Corp and Nuveen Institutional
Advisory Corp.; Managing Director (since 2002),
Assistant Secretary, formerly, Vice President
(since 1999) of Nuveen Senior Loan Asset
Management Inc.; Managing Director (since 2002),
Assistant Secretary and Associate General
Counsel, formerly, Vice President (since 2000),
of Nuveen Asset Management Inc.; Vice President
and Assistant Secretary of The John Nuveen
Company (since 1994); Chartered Financial
Analyst.
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the valuation committee. Because the fund is newly
organized, none of the committees have met during the Fund's last fiscal year.
The executive committee met once prior to the commencement of the Fund's
operations.
Peter R. Sawers and Timothy R. Schwertfeger, Chair, serve as members of the
executive committee of the Board of Trustees of the Fund. The executive
committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are William J. Schneider, Chair, Robert P.
Bremner, Lawrence H. Brown, Anne E. Impellizzeri, Peter R. Sawers and Judith M.
Stockdale.
The nominating and governance committee is responsible for Board selection
and tenure; selection and review of committees; and Board education and
operations. In addition, the committee monitors performance of legal counsel and
other service providers; periodically reviews and makes recommendations about
any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities--including retaining special counsel
and other experts or consultants at the expense of the Fund. In the event of a
vacancy on the Board, the nominating and governance committee receives
suggestions from various sources as to suitable candidates. Suggestions should
be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen
Investments, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations
for new trustees and reserves the right to interview all candidates and to make
the final selection of any new trustees. The members of the nominating and
governance committee are Anne E. Impellizzeri, Chair, Robert P. Bremner,
Lawrence H. Brown, Peter R. Sawers, William J. Schneider and Judith M.
Stockdale.
The dividend committee is authorized to declare distributions on the Fund's
shares including, but not limited to regular and special dividends, capital
gains and ordinary income distributions. The members of the dividend committee
are Timothy R. Schwertfeger, Chair, and Lawrence H. Brown.
The valuation committee oversees the Fund's Pricing Procedures including,
but not limited to, the review and approval of fair value pricing determinations
made by Nuveen's Valuation Group. The members of the valuation committee are
Judith M. Stockdale and Lawrence H. Brown.
The trustees of the Fund are also directors or trustees, as the case may
be, of 30 Nuveen open-end funds and 82 Nuveen closed-end funds advised by Nuveen
Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of
18 Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory
Corp. None of the independent trustees, nor any of their immediate family
members, has ever been a director, officer, or employee of, or a consultant to,
Nuveen Advisory, Nuveen or their affiliates.
25
The Common Shareholders of the Fund will elect trustees at the next annual
meeting of Common Shareholders, unless any MuniPreferred Shares are outstanding
at that time, in which event holders of MuniPreferred Shares, voting as a
separate class, will elect two trustees and the remaining trustees shall be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. Holders of MuniPreferred Shares will be entitled to
elect a majority of the Fund's trustees under certain circumstances. See
"Description of Shares - MuniPreferred Shares - Voting Rights."
The following table sets forth the dollar range of equity securities
beneficially owned by each trustee as of December 31, 2001:
Aggregate Dollar Range of
Equity Securities in All
Registered Investment
Dollar Range of Equity Companies Overseen by
Securities in the Trustee in Family of
Name of Trustee Fund Investment Companies
--------------- ---------------------- -------------------------
Robert P. Bremner $ 0 over $100,000
-------------------------------------------------------------------------------
Lawrence H. Brown $ 0 over $100,000
-------------------------------------------------------------------------------
Anne E. Impellizzeri $ 0 over $100,000
-------------------------------------------------------------------------------
Peter R. Sawers $ 0 over $100,000
-------------------------------------------------------------------------------
William J. Schneider $ 0 over $100,000
-------------------------------------------------------------------------------
Timothy R. Schwertfeger $ 0 over $100,000
-------------------------------------------------------------------------------
Judith M. Stockdale $ 0 over $100,000
-------------------------------------------------------------------------------
No trustee who is not an interested person of the Fund owns beneficially
or of record, any security of Nuveen Advisory, Nuveen or any person (other than
a registered investment company) directly or indirectly controlling, controlled
by or under common control with Nuveen Advisory or Nuveen.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
Amount of Total
Estimated Aggregate Total Compensation Compensation that
Compensation From from Fund and Has Been
Name of Trustee the Fund* Fund Complex** Deferred
--------------- ------------------ ------------------ -----------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Robert P. Bremner $74 $ 72,500 $ 8,280
---------------------------------------------------------------------------------
Lawrence H. Brown $76 $ 78,500 $ 0
---------------------------------------------------------------------------------
Anne E. Impellizzeri $74 $ 72,500 $55,200
---------------------------------------------------------------------------------
Peter R. Sawers $74 $ 73,000 $54,788
---------------------------------------------------------------------------------
William J. Schneider $74 $ 72,500 $55,200
---------------------------------------------------------------------------------
Judith M. Stockdale $74 $ 72,500 $13,800
---------------------------------------------------------------------------------
26
--------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of the Fund's first full
fiscal year for services to the Fund.
**Based on the compensation paid to the trustees for the one year period
ending 12/31/01 for services to the open-end and closed-end funds advised by
Nuveen Advisory.
The Fund has no employees. Its officers are compensated by Nuveen Advisory
or The John Nuveen Company.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to the Fund, with
responsibility for the overall management of the Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing the Fund's business affairs and providing day-to-day administrative
services to the Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in the
Fund's Prospectus.
Nuveen Advisory is a wholly owned subsidiary of The John Nuveen Company.
Founded in 1898, The John Nuveen Company brings over a century of expertise to
the municipal bond market. According to data from Thomson Wealth Management,
Nuveen is the leading sponsor of exchange-traded municipal bond funds as
measured by number of funds (87) and fund assets under management ($33 billion)
as of August 31, 2002. Overall, The John Nuveen Company and its affiliates had
over $83 billion in assets under management or surveillance as of August 31,
2002. The John Nuveen Company is approximately 77% owned by The St. Paul
Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded company
27
located in St. Paul, Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.
The John Nuveen Company, through Nuveen Investments, provides high-
quality investment services that are essential to building balanced core
investment portfolios. Nuveen Investments serves financial advisors, and their
high-net-worth clients, as well as a growing number of institutional clients.
The Company today markets its capabilities under four distinct brands: Nuveen,
NWQ, Rittenhouse and Symphony. In total, the Company now manages approximately
$74 billion in assets. The John Nuveen Company is listed on The New York Stock
Exchange and trades under the symbol "JNC."
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided by
Nuveen Advisory an annual management fee, payable on a monthly basis, according
to the following schedule:
Average Daily Managed Assets Management Fee
---------------------------- ------------------
Up to $125 million......................................... .6500%
$125 million to $250 million............................... .6375%
$250 million to $500 million............................... .6250%
$500 million to $1 billion................................. .6125%
$1 billion to $2 billion................................... .6000%
$2 billion and over........................................ .5750%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 35% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
Net Assets Attributable to Common Shares Management Fee
---------------------------------------- ------------------
Up to $125 million......................................... 1.0000%
$125 million to $250 million............................... .9808%
$250 million to $500 million............................... .9615%
$500 million to $1 billion................................. .9423%
$1 billion to $2 billion................................... .9231%
$2 billion and over........................................ .8846%
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing MuniPreferred Shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies and taxes, if any. All
fees and expenses are accrued daily and deducted before payment of dividends to
investors.
For the first eight full years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of Year Ending (as a percentage of
September 30 Managed Assets) September 30 Managed Assets)
----------------------------------- ------------------------------------
2002(1) .32% 2008 .24%
2003 .32% 2009 .16%
2004 .32% 2010 .08%
2005 .32%
2006 .32%
2007 .32%
-----------------------
(1) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of
income available for the Common Shareholders. Nuveen Advisory has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond September 30,
2010.
Unless earlier terminated as described below, the Fund's investment
management agreement with Nuveen Advisory (the "management agreement") will
remain in effect until July 1, 2003. The management agreement continues in
effect from year to year so long as such continuation is approved at least
annually by (1) the Board of Trustees or the vote of a majority of the
outstanding voting securities of the Fund, and (2) a majority of the trustees
who are not interested persons of any party to the investment management
agreement, cast in person at a meeting called for the purpose of voting on such
approval. The investment management agreement may be terminated at any time,
without penalty, by either the Fund or Nuveen Advisory upon 60 days written
notice, and is automatically terminated in the event of its assignment as
defined in the 1940 Act.
The management agreement has been approved by a majority of the
independent trustees of the Fund and the sole shareholder of the Fund. The
independent trustees have determined that the terms of the Fund's management
agreement are fair and reasonable and that the agreement is in the Fund's
best interests. The independent trustees believe that the management agreement
will enable the Fund to obtain high quality investment management services at a
cost that they deem appropriate, reasonable, and in the best interests of the
Fund and its shareholders. In making such determination, the independent
trustees met independently from the interested trustee of the Fund and any
officers of Nuveen Advisory and its affiliates. The independent trustees also
relied upon the assistance of counsel to the independent trustees.
In evaluating the investment management agreement, the independent trustees
reviewed materials furnished by Nuveen Advisory, including information regarding
Nuveen Advisory, its affiliates and its personnel, operations and financial
condition. The independent trustees discussed with representatives of Nuveen
Advisory the Fund's operations and Nuveen Advisory's ability to provide advisory
and other services to the Fund. The independent trustees also reviewed, among
other things, the nature and quality of services to be provided by Nuveen
Advisory, the proposed fees to be charged by Nuveen Advisory for investment
management services, the profitability to Nuveen Advisory of its relationship
with the Fund, fall-out benefits to Nuveen Advisory from that relationship,
economies of scale achieved by Nuveen Advisory, the experience of the investment
advisory and other personnel providing services to the Fund, the historical
quality of the services provided by Nuveen Advisory and comparative fees and
expense ratios of investment companies with similar objectives and strategies
managed by other investment advisers, and other factors that the independent
trustees deemed relevant.
The Fund, Nuveen Advisory, Nuveen, Salomon Smith Barney and other related
entities have adopted codes of ethics which essentially prohibit certain of
their personnel, including the Nuveen fund portfolio manager, from engaging in
personal investments which compete or interfere with, or attempt to take
advantage of a client's, including the Fund's, anticipated or actual portfolio
transactions, and are designed to assure that the interests of clients,
including Fund shareholders, are placed before the interests of personnel in
connection with personal investment transactions. Text-only versions of the
codes of ethics of the Fund, Nuveen Advisory and Nuveen can be viewed online or
downloaded from the EDGAR Database on the SEC's internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 202-942-8090. In
addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or
28
execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
On occasion, the Fund may clear portfolio transactions through Nuveen. It is the
policy of Nuveen Advisory to seek the best execution under the circumstances of
each trade. Nuveen Advisory evaluates price as the primary consideration, with
the financial condition, reputation and responsiveness of the dealer considered
secondary in determining best execution. Given the best execution obtainable, it
will be Nuveen Advisory's practice to select dealers which, in addition, furnish
research information (primarily credit analyses of issuers and general economic
reports) and statistical and other services to Nuveen Advisory. It is not
possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to Nuveen
Advisory's own research efforts, the receipt of research information is not
expected to reduce significantly Nuveen Advisory's expenses. While Nuveen
Advisory will be primarily responsible for the placement of the business of the
Fund, the policies and practices of Nuveen Advisory in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
DISTRIBUTIONS
As described in the Fund's Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. To permit the Fund to maintain a
29
more stable monthly distribution, the Fund will initially (prior to its first
distribution), and may from time to time thereafter, distribute less than the
entire amount of net investment income earned in a particular period. Such
undistributed net investment income would be available to supplement future
distributions, including distributions that might otherwise have been reduced by
a decrease in the Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on the Fund's
outstanding MuniPreferred Shares. As a result, the distributions paid by the
Fund for any particular period may be more or less than the amount of net
investment income actually earned by the Fund during such period. Undistributed
net investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between Common Shares and MuniPreferred
Shares in proportion to total dividends paid to each class for the year in
which such net capital gain or other taxable income is realized. For information
relating to the impact of the issuance of MuniPreferred Shares on the
distributions made by a Fund to Common Shareholders, see the Fund's Prospectus
under "MuniPreferred Shares and Leverage."
While any MuniPreferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the MuniPreferred Shares
have been paid and (2) the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of any outstanding MuniPreferred Shares. This
latter limitation on the Fund's ability to make distributions on its Common
Shares could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
"Tax Matters."
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration of Trust (the "Declaration") authorizes the issuance
of an unlimited number of Common Shares. The Common Shares being offered have a
par value of $0.01 per share and, subject to the rights of holders of
MuniPreferred Shares, if issued, have equal rights as to the payment of
dividends and the distribution of assets upon liquidation of the Fund. The
Common Shares being offered will, when issued, be fully paid and, subject to
matters discussed in "Certain Provisions in the Declaration of Trust,"
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. At any time when the Fund's MuniPreferred Shares are
outstanding, Common Shareholders will not be entitled to receive any cash
distributions from the Fund unless all accrued dividends on MuniPreferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to MuniPreferred Shares would be at least 200% after giving effect to
such distributions. See "MuniPreferred Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
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Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest predominately in investment grade municipal bonds have during
some periods traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon a Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of the Fund's Common Shares will be determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Fund's Prospectus under "MuniPreferred Shares and
Leverage" and "The Fund's Investments--Municipal Bonds."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares in one or more classes or series, with rights as determined
by the Board of Trustees of the Fund, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has authorized an offering of MuniPreferred
Shares (representing approximately 35% of the Fund's capital immediately after
the time the MuniPreferred Shares are issued) within approximately one to three
months after completion of the offering of Common Shares. The Board has stated
that the initial series of MuniPreferred Shares would pay cumulative dividends
at rates determined weekly by providing for the periodic redetermination of the
dividend rate through an auction or remarketing procedure. The Board of Trustees
of the Fund has indicated that the liquidation preference, preference on
distribution, voting rights and redemption provisions of the MuniPreferred
Shares will be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the MuniPreferred Shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
MuniPreferred Shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
MuniPreferred Shares discussed in this Prospectus, the liquidation value of the
MuniPreferred Shares is expected to be approximately 35% of the value of the
Fund's total net assets. The Fund intends to purchase or redeem MuniPreferred
Shares, if necessary, to keep that fraction below one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
31
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of MuniPreferred Shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as otherwise required by applicable law,
holders of MuniPreferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of the Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of the Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of MuniPreferred Shares, voting together as a single
class. In addition, if at any time dividends on the Fund's outstanding
MuniPreferred Shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding MuniPreferred Shares, voting
as a separate class, will be entitled to elect a majority of the Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
The affirmative vote of the holders of a majority of the Fund's outstanding
MuniPreferred Shares of any class or series, as the case may be, voting as a
separate class, will be required to, among other things, (1) take certain
actions which would affect the preferences, rights, or powers of such class or
series or (2) authorize or issue any class or series ranking prior to the
MuniPreferred Shares. Except as may otherwise be required by law, (1) the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class, will
be required to approve any conversion of the Fund from a closed-end to an
open-end investment company and (2) the affirmative vote of the holders of at
least two-thirds of the outstanding MuniPreferred Shares, voting as a separate
class, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares, provided however, that
such separate class vote shall be a majority vote if the action in question has
previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of Trustees fixed in accordance with the
Declaration or the By-laws. The affirmative vote of the holders of a majority of
the outstanding MuniPreferred Shares, voting as a separate class, shall be
required to approve any action not described in the preceding sentence requiring
a vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in a Fund's investment objectives or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives and Policies--Investment Restrictions." The class or series vote of
holders of MuniPreferred Shares described
32
above shall in each case be in addition to any separate vote of the
requisite percentage of Common Shares and MuniPreferred Shares necessary to
authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
MuniPreferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (1) redeemed or (2) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
Redemption, Purchase and Sale of MuniPreferred Shares by the Fund. The
terms of the MuniPreferred Shares provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends, that the Fund may tender for or purchase
MuniPreferred Shares and that the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any resale
of shares by the Fund will increase such leverage.
The discussion above describes the Fund's Board of Trustees' present
intention with respect to an offering of MuniPreferred Shares. The terms of the
MuniPreferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and MuniPreferred Shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund or
(5) removal of trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's Common Shares and
MuniPreferred Shares
33
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), the required vote only by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. None of the foregoing provisions may be amended except by the
vote of at least two-thirds of the Common Shares and MuniPreferred Shares,
voting together as a single class. In the case of the conversion of the Fund to
an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred Shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class, or, if
such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the By-
laws, the affirmative vote of the holders of at least a majority of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class. The
votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of MuniPreferred Shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of a Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objectives and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding
upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic
34
conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the Fund's Board of
Trustees has currently determined that, at least annually, it will consider
action that might be taken to reduce or eliminate any material discount from net
asset value in respect of Common Shares, which may include the repurchase of
such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value, or the conversion of the Fund
to an open-end investment company. There can be no assurance, however, that the
Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares on the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by the Fund will be borne by the Fund and will not reduce
the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Fund a taxable entity, causing the
Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the American Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or state banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of
35
foreign currency, (e) commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the United
States, or (f) other event or condition which would have a material adverse
effect (including any adverse tax effect) on the Fund or its shareholders if
shares were repurchased. The Board of Trustees of the Fund may in the future
modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the
time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all MuniPreferred Shares then outstanding, and the Fund's
Common Shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of the
Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
MuniPreferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Fund's Prospectus under
"Risks--Concentration Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
36
TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The Fund intends to qualify under Subchapter M of the Code for tax
treatment as a regulated investment company and to satisfy certain conditions
which will enable interest from municipal obligations, which is exempt from
regular federal income taxes in the hands of the Fund, to qualify as "exempt-
interest dividends" when distributed to the Fund's shareholders. In order to
qualify for tax treatment as a regulated investment company, the Fund must
satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, the Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"). Second, the Fund must diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the value of its
total assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses.
As a regulated investment company, the Fund will not be subject to federal
income tax in any taxable year with respect to "net investment income" (i.e.,
its "investment company taxable income," as that term is defined in the Code,
determined without reference to the deduction for dividends paid) and "net
capital gain" (i.e., the excess of the Fund's net long-term capital gain over
its net short-term capital loss), provided that it distributes at least 90% of
the sum of (i) its investment company taxable income (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of net
long-term capital loss, and any other taxable income other than net capital gain
and is reduced by deductible expenses) and (ii) its net tax-exempt interest (the
excess of its gross tax-exempt interest income over certain disallowed
deductions). The Fund may retain for investment its net capital gain. However,
if the Fund retains any net capital gain or any investment company taxable
income, it will be subject to tax at regular corporate rates on the amount
retained. If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its shareholders
who, if subject to federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their share of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Fund on
such undistributed amount against their federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds such liabilities. For
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to the
difference between the amount of undistributed capital gains included in the
shareholder's gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence. The
37
Fund intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect (unless it
has made a taxable year election for excise tax purposes) to treat all or part
of any net capital loss, any net long-term capital loss or any net foreign
currency loss incurred after October 31 as if it had been incurred in the
succeeding year.
The Fund intends to qualify to pay "exempt-interest dividends" by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the value of its total assets consist of tax-exempt
municipal obligations. Distributions from the Fund will constitute exempt-
interest dividends to the extent of its tax-exempt interest income (net of
expenses and amortized bond premium). Exempt-interest dividends distributed to
Common Shareholders are excluded from gross income for federal income tax
purposes, although they are required to be reported on the Common Shareholders'
federal income tax returns. Gain from the sale or redemption of Common Shares,
however, will be taxable to the Common Shareholders as capital gain (provided
such Common Shares were held as capital assets) even though the increase in
value of such Common Shares is attributable to tax-exempt interest income. In
addition, gain realized by the Fund from the disposition of a tax-exempt
municipal obligation that was purchased at a price less than the principal
amount of the bond will be taxable to the Fund's shareholders as ordinary income
to the extent of accrued market discount. Under the Code, interest on
indebtedness incurred or continued to purchase or carry Common Shares, which
interest is deemed to relate to exempt-interest dividends, will not be
deductible by Common Shareholders for federal income tax purposes. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax and may have
other collateral tax consequences. Taxpayers that may be subject to the
alternative minimum tax should consult their advisers before investing in Common
Shares.
Distributions by the Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gain realized by the Fund, if any, will be taxable to Common
Shareholders as ordinary income whether received in cash or additional shares.
Any net long-term capital gain realized by the Fund and distributed to Common
Shareholders in cash or additional shares will be taxable to Common Shareholders
as long-term capital gain regardless of the length of time investors have owned
shares of the Fund. Taxable distributions will not be eligible for the dividends
received deduction allowed to corporations. Distributions by the Fund to Common
Shareholders that do not constitute ordinary income dividends, capital gain
dividends or exempt-interest dividends will be treated as a return of capital to
the extent of (and in reduction of) the Common Shareholder's tax basis in his or
her shares. Any excess will be treated as gain from the sale of his or her
shares, as discussed below.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Fund is required to designate distributions paid with respect
to its Common Shares and its MuniPreferred 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 dividends received by such class. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends between the holders of the Common Shares and the holders of
MuniPreferred Shares, in proportion to the total dividends paid to each such
class during or with respect to the taxable year, or otherwise as required by
applicable law. Capital gain dividends and ordinary income dividends will
similarly be allocated between the two classes.
If the Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Fund, defer the Fund's losses, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends or distributions which are expected to be or
have been declared, but not paid. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31.
The sale or exchange of Common Shares normally will result in capital
gain or loss to the Common Shareholders who hold their Common Shares as capital
assets. However, any loss on the sale or exchange of a Common Share that has
been held for six months or less will be disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such Common
Share. Generally, a Common Shareholder's gain or loss will be long-term gain or
loss if the shares have been held for more than one year. If a shareholder sells
or otherwise disposes of Common Shares before holding them for more than six
months, however, any loss on the sale or other disposition of such Common Shares
shall be treated as a long-term capital loss to the extent of any capital gain
dividends received by the Common Shareholder (or amounts credited to the Common
Shareholder as an undistributed capital gain) with respect to such Common
Shares. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities is taxed at a
maximum rate of 20%, while short-term capital gain and other ordinary income is
taxed at a maximum
38
rate of 38.6% in 2002 and 2003, 37.6% in 2004 and 2005, and 35% thereafter until
2011, when the maximum rate on ordinary income will revert to 39.6% unless
amended by Congress. The maximum long-term capital gain rate is 18% for capital
assets that are held for more than five years and whose holding periods begin
after December 31, 2000. Because of the limitations on itemized deductions and
the deduction for personal exemptions applicable to higher income taxpayers, the
effective tax rate may be higher in certain circumstances.
All or a portion of a sales charge paid in purchasing Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another fund are subsequently acquired without payment of
a sales charge pursuant to a reinvestment right. Any disregarded portion of such
charge will result in an increase in the Common Shareholder's tax basis in the
shares subsequently acquired. In addition, no loss will be allowed on the
redemption or exchange of Common Shares if the Common Shareholder purchases
other shares of the Fund (whether through reinvestment of distributions or
otherwise) or the Common Shareholder acquires or enters into a contract or
option to acquire securities that are substantially identical to shares of the
Fund within a period of 61 days beginning 30 days before and ending 30 days
after such redemption or exchange. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
In order to avoid a 4% federal excise tax, the Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of its capital gain net
income (the excess of its realized capital gains over its realized capital
losses, generally computed on the basis of the one-year period ending on October
31 of such year) and 100% of any taxable ordinary income and any excess of
realized capital gains over realized capital losses for the prior year that was
not distributed during such year and on which the Fund paid no federal income
tax. For purposes of the excise tax, a regulated investment company may reduce
its capital gain net income (but not below its net capital gain) by the amount
of any net ordinary loss for the calendar year. The Fund intends to make timely
distributions in compliance with these requirements and consequently it is
anticipated that it generally will not be required to pay the excise tax.
If in any year the Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year, and distributions to
its Common Shareholders would be taxable to Common Shareholders as ordinary
dividend income for federal income tax purposes to the extent of the Fund's
earnings and profits.
The Fund is required in certain circumstances to withhold a percentage of
taxable dividends and certain other payments paid to non-corporate holders of
shares who have not furnished to the Fund their correct taxpayer identification
numbers (in the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding. The backup
withholding percentage will be 30% in 2002 and 2003, 29% in 2004 and 2005, and
28% thereafter until 2011, when the percentage will revert to 31% unless amended
by Congress. Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax
39
advisors for more detailed information concerning the federal taxation of the
Fund and the income tax consequences to its Common Shareholders.
State Tax Matters
Tax matters pertaining to Georgia are set forth in Appendix D.
40
EXPERTS
The Financial Statements of the Fund as of September 4, 2002, appearing in
this Statement of Additional Information have been audited by Ernst & Young LLP,
233 South Wacker Drive, Chicago, Illinois 60606, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP provides accounting and auditing
services to the Fund.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts, 02110. The custodian
performs custodial, fund accounting and portfolio accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Securities and Exchange Commission (the "Commission"), Washington, D.C.
The Fund's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Fund's Registration Statement. Statements contained in the Fund's Prospectus and
this Statement of Additional Information as to the contents of any contract or
other document referred to are not
41
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
42
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Nuveen Georgia Dividend Advantage Municipal Fund 2
We have audited the accompanying statement of assets and liabilities of Nuveen
Georgia Dividend Advantage Municipal Fund 2 (the "Fund") as of September 4, 2002
and the related statement of operations for the period from October 26, 2001
(date of organization) through September 4, 2002. These financial statements are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Fund at September 4, 2002,
and results of its operations for the period from October 26, 2001 (date of
organization) through September 4, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
September 5, 2002
43
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
FINANCIAL STATEMENTS
Nuveen Georgia Dividend Advantage Municipal Fund 2
Statement of Assets and Liabilities
September 4, 2002
Assets:
Cash................................................................. $100,275
Offering costs....................................................... 78,000
Receivable from Adviser.............................................. 11,500
--------
Total assets...................................................... 189,775
--------
Liabilities:
Accrued offering costs............................................... 78,000
Payable for organization costs....................................... 11,500
--------
Total liabilities................................................. 89,500
--------
MuniPreferred Shares, $25,000 liquidation value; unlimited
number of shares authorized, no shares outstanding................ -
--------
Net assets applicable to Common Shares................................... $100,275
========
Net asset value per Common Share outstanding ($100,275 divided
by 7,000 Common Shares outstanding).................................. $ 14.325
========
Net Assets Applicable to Common Shares Represent:
Common Shares, $.01 par value; unlimited number of shares
authorized, 7,000 shares outstanding.............................. 70
Paid-in surplus...................................................... 100,205
--------
$100,275
========
44
Nuveen Georgia Dividend Advantage Municipal Fund 2
Statement of Operations
Period from October 26, 2001 (date of organization) through September 4, 2002
Investment income.................................................... $ -
--------
Expenses:
Organization costs................................................ 11,500
Expense reimbursement............................................. (11,500)
--------
Total expenses................................................. -
--------
Net investment income................................................ $ -
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on October 26, 2001,
and has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 7,000 Common Shares to
Nuveen Advisory Corp., the Fund's investment adviser (the "Adviser"), a wholly
owned subsidiary of The John Nuveen Company.
Nuveen Investments, also a wholly owned subsidiary of The John Nuveen Company,
has agreed to reimburse all organization expenses (approximately $11,500) and
pay all Common Share offering costs (other than the sales load) that exceed $.03
per Common Share.
The Fund seeks to provide current income exempt from regular federal and Georgia
income tax.
The Fund is authorized by its Declaration of Trust to issue Preferred Shares
("MuniPreferred Shares") having a liquidation value of $25,000 per share in one
or more classes or series, with dividend, liquidation preference and other
rights as determined by the Fund's Board of Trustees without approval of the
Common Shareholders. If the Fund completes an offering of MuniPreferred Shares,
the Fund will pay expenses in connection with such offering.
Note 2: Significant Accounting Policies
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. Actual results may differ from those estimates.
The Fund's share of Common Share offering costs will be recorded as a reduction
of the proceeds from the sale of Common Shares upon the commencement of Fund
operations. The Common Share offering costs reflected in the Statement of Assets
and Liabilities assume the sale of 2,600,000 Common Shares. If the Fund offers
MuniPreferred Shares, the offering costs will be borne by Common Shareholders as
a direct reduction to paid in capital.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund, upon commencement of Fund operations, has agreed to pay a management
fee, payable on a monthly basis, at an annual rate ranging from 0.6500% of the
first $125 million of the average daily net assets (including net assets
attributable to MuniPreferred Shares ("managed assets")) to 0.5750% of the
average daily managed assets in excess of $2 billion.
In addition to the reimbursement and waiver of organization and Common Share
offering costs discussed in Note 1, the Adviser has contractually agreed to
reimburse the Fund for fees and expenses in the amount of .32% of average daily
Managed Assets for the first 5 full years of the Fund's operations, .24% in year
6, .16% in year 7 and .08% in year 8. The Adviser has not agreed to reimburse
the Fund for any portion of its fees and expenses beyond September 30, 2010.
Note 4: Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
tax-exempt net investment income, in addition to any significant amounts of net
realized capital gains and/or market discount realized from investment
transactions.
45
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation, a division of The McGraw-Hill Companies ("Standard & Poor's"
or "S&P") rating symbols and their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
A-1
commitment on the obligation is extremely strong.
AA
An obligation rated `AA' differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated `A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB
An obligation rated `BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, And C
Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as having
significant speculative characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB
An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B
An obligation rated `B' is more vulnerable to nonpayment than obligations
rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC
An obligation rated `CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC
An obligation rated `CC' is currently highly vulnerable to nonpayment.
A-2
C
The `C' rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D
An obligation rated `D' is in payment default. The `D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-) The ratings from `AA' to `CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The `c' subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r The `r' highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (`AAA', `AA', `A', `BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
. Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
. Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
A-3
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from `A-1' for the highest
quality obligations to `D' for the lowest. These categories are as follows:
A-1 A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The `D' rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-4
Moody's Investors Service, Inc.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated `Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated `Aa' are judged to be of high quality by all
standards. Together with the `Aaa' group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in `Aaa' securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks 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.
Caa Bonds which are rated `Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated `Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated `C' are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5
Issues that are secured by escrowed funds held in trust, reinvested in direct,
non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the
condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic
rating category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-6
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch Ratings--A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or
A-7
financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of
some kind appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization
or liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve
as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have
the highest prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated `DD' and
`D' are generally undergoing a formal reorganization or liquidation
process; those rated `DD' are likely to satisfy a higher portion of their
outstanding obligations, while entities rated `D' have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
A-8
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a one
to two year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
companies whose outlooks are `stable' could be downgraded before an outlook
moves to positive or negative if circumstances warrant such an action.
Occasionally, Fitch may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
A-9
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like
the Fund with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields assuming
the stated marginal Federal tax rates for 2002 listed below:
Taxable Equivalent of Tax-Free Yields
Tax Free Yields
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
-------------------------------------------------------------------------------
10.00% 4.44% 5.00% 5.56% 6.11% 6.67% 7.22%
15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
27.00% 5.48% 6.16% 6.85% 7.53% 8.22% 8.90%
30.00% 5.71% 6.43% 7.14% 7.86% 8.57% 9.29%
35.00% 6.15% 6.92% 7.69% 8.46% 9.23% 10.00%
38.60% 6.51% 7.33% 8.14% 8.96% 9.77% 10.59%
B-1
GEORGIA
The following tables show the approximate taxable yields for individuals
that are equivalent to tax-free yields under combined Federal and Georgia state
tax rates, using published 2002 marginal Federal tax rates and marginal Georgia
tax rates currently available and scheduled to be in effect.
Single Return Joint Return Federal Tax State Tax Combined Tax
Bracket Bracket Rate Rate* Rate*
--------------- --------------- ----------- --------- ------------
$ 0-6,000 10.00% 5.00% 14.5%
$ 0-12,000 10.00% 6.00% 15.4%
6,000-27,950 12,000-46,700 15.00% 6.00% 20.1%
27,950-67,700 46,700-112,850 27.00% 6.00% 31.4%
67,700-141,250 112,850-171,950 30.00% 6.00% 34.2%
141,250-307,050 171,950-307,050 35.00% 6.00% 38.9%
Over 307,050 Over 307,050 38.60% 6.00% 42.3%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
----- ----- ----- ----- ----- -----
4.68% 5.26% 5.85% 6.43% 7.02% 7.60%
4.73% 5.32% 5.91% 6.50% 7.09% 7.68%
5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
5.83% 6.56% 7.29% 8.02% 8.75% 9.48%
6.08% 6.84% 7.60% 8.36% 9.12% 9.88%
6.55% 7.36% 8.18% 9.00% 9.82% 10.64%
6.93% 7.80% 8.67% 9.53% 10.40% 11.27%
* The combined tax rates shown reflect the fact that state tax payments are
currently deductible for Federal tax purposes. Please note that the table
does not reflect (i) any Federal or state limitations on the amounts of
allowable itemized deductions, phase-outs of personal or dependent
exemption credits or other allowable credits, (ii) any local taxes imposed,
(iii) any alternative minimum taxes or any taxes other than personal
income taxes, or (iv) the deductibility of Georgia state income taxes in
computing Georgia income subject to tax. The table assumes that federal
taxable income is equal to state income subject to tax, and in cases where
more than one state rate falls within a federal bracket, the highest state
rate corresponding to the highest income within that federal bracket is
used. The numbers in the Combined Tax Rate column are rounded to the
nearest one-tenth of one percent.
B-2
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various defensive
hedging techniques.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. When the Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to the Fund to settle the final determination and the Fund
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. For example, if
the Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the Fund's portfolio would decline, but the value of the
Fund's financial futures would be expected to increase at approximately the same
rate thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have.
Among the risks associated with the use of financial futures by the Fund as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
C-1
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures
The Fund may also purchase put or call options on financial futures which
are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by the Fund on its
portfolio securities to hedge against the risk of rising interest rates. As with
options on debt securities, the holder of an option may terminate his position
by selling an option of the Fund. There is no guarantee that such closing
transactions can be effected.
Index Contracts
Index Futures
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to a specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and
the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
Index Options
The Fund may also purchase put or call options on U.S. Government or tax-
exempt bond index futures and enter into closing transactions with respect to
such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security 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 of the writer's futures margin account which represents the amount by
which the market price of the index futures contract, at exercise, is less than
the exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
C-2
APPENDIX D
Factors Pertaining to Georgia
An investment containing Georgia municipal obligations is suceptible to
political, economic or regulatory factors affecting issuers of such obligations.
These include the possible adverse effects of certain Georgia constitutional
amendments, legislative measures, voter initiatives and other matters that are
described. The information provided is only a brief summary of the complex
factors affecting the financial situation in Georgia and is derived from sources
that are generally available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or completeness of any of
the following information. It is based in part on information obtained from
various State and local agencies in Georgia.
The Georgia economy slid into recession in the third quarter of 2001 and
likely continued through the second quarter of 2002, but a gradual recovery is
expected in the second half of 2002. Underlying the recession are the excesses
in business investment, staffing levels, and bubbles in the equities markets
along with the collapse of consumers' and businesses' confidence. The 2002
forecast anticipates that Georgia's real gross state product ("GSP"), will
decrease 0.9% in 2002 after growing 1.6% in 2001. The 2002 percentage gain is
down dramatically from the peak growth of 6.4% in 1998, 5.7% in 1999, and 4.7%
in 2000. This decrease in the growth of the GSP is attributed to slowdowns in
the national economy as a whole, and also to the effects of the State's recent
growth, such as traffic congestion and deteriorating air quality.
In 2002, the State's nonagricultural employment will decrease by almost
33,000 jobs, or a drop of 0.9%. The percentage loss is only slightly smaller
than the 1.2 percent decrease predicted for the nation. Job losses and growth
in the number of people in the labor force will create an uncomfortable degree
of slack in the State's formerly taut labor market.
The service sector is projected to see the fastest growth at 1.3% by adding
14,500 jobs. Retailers will be thwarted by the 0.1% decline in wholesale and
retail employment brought about by a drop in sales of new cars, big-ticket
consumer durables, and discretionary goods. Employment in government will expand
by 0.1%, or 900 jobs, all of which will be in local and federal government but
state government employment is expected to decline due to intense budgetary
pressures. Manufacturers will see a sector employment drop of 2.8% or a loss of
15,900 jobs. Employment in finance, insurance and real estate is also expected
to decline as is the transportation, communications, and public utilities
sector which is expected to lose 8,500 jobs. Due to regulation, technical
advances and restructuring, relatively few jobs will be created in the public
utilities sector.
Until 2001, Georgia's average annual unemployment rate had decreased every
year since 1992. Beginning in early 2001, the seasonally adjusted unemployment
rate has slowly risen from approximately 3.6% to over 4.5%. As of July 2002, the
seasonally adjusted unemployment rate for Georgia was 4.6%
Based on preliminary estimates for 2001, Georgia's personal income grew
2.3% to $238,420,000 in 2001, bringing the per capita income for the State to
$28,438. Nationwide, personal income grew 2.7% to $8,621,023,000, with per
capita income at $30,271 for the same year. According to the U.S. Department of
Commerce Bureau of Economic Analysis, the 2.7% increase was the smallest growth
rate since the 1990-91 recession.
The State's annual rate of population growth, after dipping slightly over
the past couple of years--from 2.1% in 1996, to 2% in 1997, to 1.9% in 1998 to
1.8% in 2000--rose 2.4% in 2001. According to the U.S. Census Bureau's latest
statistics, Georgia's population has reached approximately 8.38 million. The
population is expected to grow to 9.2 million by 2010.
For Fiscal Year 2001, Georgia had revenues totaling $23,350,071,847 with a
majority of revenue derived from various taxes, and expenditures totaling
$22,572,870,542.
The Georgia constitution permits the issuance by the State of general
obligation debt and of certain guaranteed revenue debt. The State may incur
guaranteed revenue debt by guaranteeing the payment of certain revenue
obligations issued by an instrumentality of the State. The Georgia Constitution
prohibits the incurring of any general obligation debt or guaranteed revenue
debt if the highest aggregate annual debt service requirement for the then
current year or any subsequent fiscal year for outstanding general obligation
debt and guaranteed revenue debt, including the proposed debt, exceeds 10% of
the total revenue receipts, less refunds, of the State treasury in the fiscal
year immediately preceeding the year in which any such debt is to be incurred.
The Georgia Constitution also permits the State to incur public debt to
supply a temporary deficit in the State treasury in any fiscal year created by a
delay in collecting the taxes of that year. Such debt must not exceed, in the
aggregate, 5% of the total revenue receipts, less refunds, of the State treasury
in the fiscal year immediately preceding the year in which such debt is
incurred. The debt incurred must be repaid on or before the last day of the
fiscal year in which it is to be incurred out of the taxes levied for that
fiscal year. No such debt may be incurred in any fiscal year if there is then
outstanding unpaid debt from any previous fiscal year which was incurred to
supply a temporary deficit in the State treasury.
D-1
As of June 30, 2001, outstanding general obligation debt issues of the
State of Georgia totaled $5,311,335,000. Outstanding revenue bonds of certain
blended and discretely presented component units totaled $1,160,254,518, of
which $149,555,255 are guaranteed by the State. During fiscal year 2001, general
obligation bonds in the amount of $395,515,000 were retired. General obligation
debt issued during fiscal year 2001 totaled $567,280,000.
Virtually all of the issues of long-term debt obligations issued by or on
behalf of the State of Georgia and counties, municipalities and other political
subdivisions and public authorities thereof are required by law to be validated
and confirmed in a judicial proceeding prior to issuance. The legal effect of an
approved validation in Georgia is to render incontestable the validity of the
pertinent bond issue and the security therefor.
Georgia is involved in certain legal proceedings that, if decided against
the State, may require the State to make significant future expenditures or may
substantially impair revenues. An adverse final decision could materially affect
the State's governmental operations and, consequently, its ability to pay debt
service on its obligations.
As of September 19, 2002, State of Georgia general obligation bonds were
rated as follows: Standard & Poor's, AAA (upgraded from AA+ on July 29, 1997);
Moody's, Aaa; and Fitch, AAA. There can be no assurance that such ratings will
be maintained in the future. It should be noted that the creditworthiness of
obligations issued by local Georgia issuers may be unrelated to the
creditworthiness of obligations issued by the State of Georgia, and that there
is no obligation on the part of the State to make payment on such local
obligations in the event of default.
Georgia Tax Matters
The following is based upon the advice of Chapman and Cutler, special
Georgia counsel to the Fund. The following is a general, abbreviated summary of
certain provisions of the applicable Georgia tax law as presently in effect as
it directly governs the taxation of Georgia resident individual and corporate
Common Shareholders of the Fund. This summary does not address the taxation of
other shareholders nor does it discuss any local taxes that may be applicable.
These provisions are subject to change by legislative or administrative action,
and any such change may be retroactive with respect to transactions of the Fund.
Assuming the Fund qualifies as a "regulated investment company" for federal
income tax purposes under Subchapter M of the Internal Revenue Code,
exempt-interest dividends from the Fund that are excluded from gross income for
federal income tax purposes and that are attributable to interest on (i)
obligations of the State of Georgia or its political subdivisions and (ii)
obligations of possessions of the United States, will be exempt from the income
tax imposed by the State of Georgia on individuals and corporations under
Chapter 7 of Title 48 of the Georgia Statutes. Other dividends from the Fund may
be subject to the Georgia income tax.
Interest on indebtedness incurred or continued to purchase or carry shares
of the Fund, if the Fund distributes dividends exempt from the Georgia income
tax during a year, is not deductible for purposes of the Georgia income tax.
Ownership of shares in the Fund may result in other Georgia tax consequences to
certain taxpayers, and prospective investors should consult their tax advisors.
D-2
APPENDIX E
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may be a suitable investment for a shareholder that is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding. Municipal bonds can provide double, tax-free income
(exempt from regular federal and state income taxes) for residents of that
state. Because the Fund expects that a substantial portion of its investments
will pay interest that is taxable under the federal alternative minimum tax, the
Fund may not be a suitable investment for shareholders that are subject to the
federal alternative minimum tax.
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of the Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
The Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that the Fund believes to be generally
accurate. According to Thomson Wealth Management, Nuveen is the leading sponsor
of municipal closed-end exchange-traded bond funds measured by the number of
funds (87) and fund assets under management ($33 billion) as of August 31, 2002.
E-1
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
Features of Nuveen Municipal Closed-End ETFs
Monthly Dividends*
Enhanced income potential through leverage*
Automatic dividend reinvestment*
Exchange listing
Widespread price visibility
Convenient intra-day trading*
Professional management
Low minimum investment
*As outlined elsewhere in this SAI, share prices will fluctuate. Systematic
reinvestment does not ensure a profit, nor does it protect you against a loss in
a declining market.
Municipal Bond/Equity Portfolios May
Provide Attractive Returns and Reduced Risk
Nuveen research shows that, over the past 20 years, a portfolio of 20% municipal
bonds and 80% equities produced 99% of the annual after-tax return of an
all-equity portfolio with measurably less risk.
These conclusions are based on research done by Nuveen Investments using the
following portfolio assumptions: Municipal bonds are represented by the Lehman
Brothers Long Municipal Index. Treasury Bonds are represented by Lehman Brothers
Long Treasury Index. Equities are the S&P 500 stocks as tracked by the Ibbotson
Associates Large Company Stock Index. It is not possible to invest directly in
any of these indexes. Hypothetical portfolios using varying percentages of
municipal bonds or Treasury bonds and equities, in each case totaling 100%, were
constructed, and the investment results and volatility determined, for every
year from 1982 through 2001.
All investment income generated by the portfolio was considered to be reinvested
annually, along with the after-tax proceeds of an arbitrarily assumed 20%
annualized turnover rate. The allocation between the two assets was allowed to
fluctuate within a 5% band around its target before rebalancing. No provision
was made for investment fees or commissions. Investment income was taxed at the
historically appropriate rate for an individual with $100,000 in taxable income
in year dollars. Net capital gains taxes, if any, were deducted at the rate
appropriate for the period. At the end of 2001, the portfolios were fully
liquidated to recognize the existing tax liability.
This study was based on historical data gathered from sources Nuveen Investments
considers to be reliable and consistent. The results produced by this study in
no way should be considered representative of the past performance of any actual
investment product or predictive of future investment expectations and
performance for the municipal market or any actual investment products.
In particular, municipal bond rates during the early portion of the 20-year
period covered by this research were higher than current municipal rates, and
returns for municipal bonds going forward will likely be less than those shown
on the chart.
20 Yr. Horizon Data Tables
1-Balanced Portfolios with Large Cap Equities
After-Tax Returns
[GRAPH APPEARS HERE]
Bond Long Municipals Long Treasuries Long Corporates
Portion Risk Return Risk Return Risk Return
0% 15.29% 11.94% 15.29% 11.94% 15.29% 11.94%
5% 14.65% 11.94% 14.67% 11.82% 14.67% 11.81%
10% 14.03% 11.89% 14.06% 11.66% 14.06% 11.65%
15% 13.42% 11.85% 13.48% 11.50% 13.47% 11.49%
20% 12.81% 11.79% 12.91% 11.33% 12.88% 11.31%
25% 12.22% 11.74% 12.37% 11.16% 12.31% 11.14%
30% 11.64% 11.67% 11.85% 10.98% 11.74% 10.96%
35% 11.08% 11.61% 11.36% 10.79% 11.20% 10.77%
40% 10.55% 11.54% 10.90% 10.60% 10.68% 10.58%
45% 10.04% 11.46% 10.49% 10.40% 10.18% 10.39%
50% 9.56% 11.38% 10.12% 10.20% 9.72% 10.19%
55% 9.12% 11.30% 9.80% 10.00% 9.29% 9.99%
60% 8.72% 11.21% 9.53% 9.79% 8.89% 9.79%
65% 8.37% 11.12% 9.33% 9.58% 8.54% 9.58%
70% 8.07% 11.03% 9.19% 9.37% 8.24% 9.38%
75% 7.83% 10.94% 9.11% 9.15% 8.00% 9.17%
80% 7.65% 10.84% 9.10% 8.94% 7.81% 8.96%
85% 7.54% 10.74% 9.16% 8.72% 7.68% 8.75%
90% 7.50% 10.64% 9.28% 8.50% 7.62% 8.54%
95% 7.53% 10.54% 9.46% 8.28% 7.63% 8.34%
100% 7.63% 10.43% 9.70% 8.05% 7.70% 8.11%
Market price is affected by many factors, including market interest rates,
income tax rates, the common shares' net asset value and dividend stability, the
portfolio's duration, call protection and credit quality, analyst
recommendations, and other market factors. Any of these factors individually or
collectively may, at any given time, be as or more important to market price
than annualized dividend rates. A positive correlation does not necessarily mean
that higher dividends cause or result in higher market prices, and you should
not assume that any particular level of dividends will result in any particular
market price. In addition, the positive correlation between dividends and market
price of this group of funds does not necessarily mean that every fund in the
group exhibits a positive correlation between dividend and market price, and it
is possible that the Fund may not exhibit such a correlation. There can be no
assurance that the correlation suggested by the above data will continue in the
future.
On Average, Nuveen Funds Have Traded at Greater Premiums or Smaller Discounts
than Competing Funds
[Graph Appears Here]
25-Jul-97 0.038522115
8-Aug-97 0.035379787
15-Aug-97 0.03273153
22-Aug-97 0.04029108
29-Aug-97 0.037233259
5-Sep-97 0.041429825
12-Sep-97 0.042412528
19-Sep-97 0.042494317
26-Sep-97 0.043137061
3-Oct-97 0.041079948
10-Oct-97 0.036549511
17-Oct-97 0.037820911
24-Oct-97 0.036572942
31-Oct-97 0.036296244
7-Nov-97 0.036971035
14-Nov-97 0.037746733
21-Nov-97 0.036235724
28-Nov-97 0.034928058
5-Dec-97 0.03759602
12-Dec-97 0.03694678
19-Dec-97 0.039660897
26-Dec-97 0.039236665
2-Jan-98 0.039619687
9-Jan-98 0.044366773
16-Jan-98 0.038933121
23-Jan-98 0.037478394
30-Jan-98 0.040981632
6-Feb-98 0.044253503
13-Feb-98 0.048217687
20-Feb-98 0.045418904
27-Feb-98 0.045606483
6-Mar-98 0.05044092
13-Mar-98 0.053888158
20-Mar-98 0.054673246
27-Mar-98 0.053675439
3-Apr-98 0.055637624
9-Apr-98 0.052235894
17-Apr-98 0.054192034
24-Apr-98 0.050518374
8-May-98 0.049896385
15-May-98 0.051353821
22-May-98 0.051483104
29-May-98 0.045881903
5-Jun-98 0.055602496
12-Jun-98 0.055573296
19-Jun-98 0.053353468
26-Jun-98 0.050081479
2-Jul-98 0.050875309
10-Jul-98 0.05453185
17-Jul-98 0.049196788
24-Jul-98 0.048390204
31-Jul-98 0.051474744
7-Aug-98 0.049411162
14-Aug-98 0.049813964
21-Aug-98 0.05188779
28-Aug-98 0.051906354
4-Sep-98 0.050087127
11-Sep-98 0.04917935
18-Sep-98 0.046593528
25-Sep-98 0.047709123
2-Oct-98 0.057751133
9-Oct-98 0.054570175
16-Oct-98 0.056760965
23-Oct-98 0.048675439
30-Oct-98 0.049666667
6-Nov-98 0.046473684
20-Nov-98 0.043697368
27-Nov-98 0.042625
4-Dec-98 0.048682018
11-Dec-98 0.047938596
18-Dec-98 0.045574561
24-Dec-98 0.044484649
8-Jan-99 0.040269737
15-Jan-99 0.032574561
22-Jan-99 0.032019737
29-Jan-99 0.032486842
5-Feb-99 0.042296053
12-Feb-99 0.042750239
19-Feb-99 0.043902073
26-Feb-99 0.044498884
5-Mar-99 0.04725933
19-Mar-99 0.054052316
26-Mar-99 0.053597122
1-Apr-99 0.058263788
9-Apr-99 0.049830129
16-Apr-99 0.059694926
23-Apr-99 0.060500788
30-Apr-99 0.059889169
7-May-99 0.057512974
14-May-99 0.056063872
21-May-99 0.051220927
28-May-99 0.05302889
4-Jun-99 0.05539521
11-Jun-99 0.057811171
18-Jun-99 0.06445
25-Jun-99 0.067863095
2-Jul-99 0.068096429
9-Jul-99 0.071166667
16-Jul-99 0.076167857
23-Jul-99 0.081947619
30-Jul-99 0.082119048
6-Aug-99 0.077934884
20-Aug-99 0.07645155
27-Aug-99 0.074089922
3-Sep-99 0.074571839
10-Sep-99 0.076186207
17-Sep-99 0.069099425
24-Sep-99 0.070118571
1-Oct-99 0.055396667
8-Oct-99 0.063321841
15-Oct-99 0.060172669
22-Oct-99 0.057560767
29-Oct-99 0.056708398
5-Nov-99 0.057400231
12-Nov-99 0.052517238
19-Nov-99 0.052458398
26-Nov-99 0.050856895
10-Dec-99 0.029167111
17-Dec-99 0.022930972
23-Dec-99 0.031247988
31-Dec-99 0.030041852
7-Jan-00 0.034098191
14-Jan-00 0.02985598
21-Jan-00 0.030763375
28-Jan-00 0.036890351
4-Feb-00 0.043249219
11-Feb-00 0.042941578
18-Feb-00 0.037741596
25-Feb-00 0.037772843
3-Mar-00 0.031488401
10-Mar-00 0.035108011
17-Mar-00 0.040553742
24-Mar-00 0.046507843
31-Mar-00 0.0504471
7-Apr-00 0.047919915
14-Apr-00 0.045770233
20-Apr-00 0.041533157
28-Apr-00 0.041838665
5-May-00 0.046265678
12-May-00 0.042325106
19-May-00 0.046130932
26-May-00 0.04666536
2-Jun-00 0.047785911
9-Jun-00 0.049809534
16-Jun-00 0.048623199
23-Jun-00 0.044137394
30-Jun-00 0.040320869
7-Jul-00 0.045994597
14-Jul-00 0.038319492
21-Jul-00 0.037719386
28-Jul-00 0.042682839
4-Aug-00 0.044612288
11-Aug-00 0.042435805
18-Aug-00 0.037838661
25-Aug-00 0.040834263
1-Sep-00 0.043817958
8-Sep-00 0.042935636
15-Sep-00 0.038175499
22-Sep-00 0.041251663
29-Sep-00 0.040976185
6-Oct-00 0.04203186
13-Oct-00 0.031649968
20-Oct-00 0.034736966
27-Oct-00 0.044490667
3-Nov-00 0.052386183
17-Nov-00 0.053132482
24-Nov-00 0.054112744
1-Dec-00 0.023133662
8-Dec-00 0.048791139
15-Dec-00 0.051525316
22-Dec-00 0.048712615
29-Dec-00 0.051922656
5-Jan-01 0.058615104
12-Jan-01 0.056114246
19-Jan-01 0.054739501
26-Jan-01 0.055520134
2-Feb-01 0.058139048
9-Feb-01 0.051868149
16-Feb-01 0.051985582
23-Feb-01 0.054773168
2-Mar-01 0.037264033
9-Mar-01 0.056907458
16-Mar-01 0.05181887
23-Mar-01 0.046485198
30-Mar-01 0.051052429
6-Apr-01 0.053114011
12-Apr-01 0.057032542
20-Apr-01 0.057815266
27-Apr-01 0.058606757
4-May-01 0.073973346
11-May-01 0.047453979
18-May-01 0.072847939
25-May-01 0.068227804
1-Jun-01 0.071706711
8-Jun-01 0.071167402
15-Jun-01 0.062091156
22-Jun-01 0.072736735
29-Jun-01 0.060622449
6-Jul-01 0.075916
13-Jul-01 0.061898
20-Jul-01 0.073488
27-Jul-01 0.072848
3-Aug-01 0.072396
10-Aug-01 0.071645
17-Aug-01 0.069541
24_Aug-01 0.067018
31-Aug-01 0.056737
7-Sep-01 0.061211
10-Sep-01 0.0605
21-Sep-01 0.055704
28-Sep-01 0.054845
5-Oct-01 0.057874
12-Oct-01 0.053677
19-Oct-01 0.053425
26-Oct-01 0.056936
2-Nov-01 0.055613
9-Nov-01 0.053192
16-Nov-01 0.051534
23-Nov-01 0.056095
30-Nov-01 0.057148
7-Dec-01 0.061395
14-Dec-01 0.064372
21-Dec-01 0.057279
28-Dec-01 0.055627
4-Jan-02 0.051193
11-Jan-02 0.053965
18-Jan-02 0.053611
25-Jan-02 0.039327
1-Feb-02 0.034753
8-Feb-02 0.057732
15-Feb-02 0.054999
22-Feb-02 0.054658
1-Mar-02 0.054265
8-Mar-02 0.060019
15-Mar-02 0.060412
22-Mar-02 0.056865
28-Mar-02 0.054582
5-Apr-02 0.048424
12-Apr-02 0-048736
19-Apr-02 0.049366
26-Apr-02 0.050541
3-May-02 0.056629
10-May-02 0.056496
17-May-02 0.058598
24-May-02 0.055657
31-May-02 0.055425
7-Jun-02 0.056835
14-Jun-02 0.055105
21-Jun-02 0.055471
28-Jun-02 0.054866
5-Jul-02 0.054265
12-Jul-02 0.053863
19-Jul-02 0.048931
26-Jul-02 0.047383
This chart shows the week-by-week difference between the average premium or
discount for all Nuveen municipal closed-end funds and all non-Nuveen municipal
closed-end funds as reported by Lipper for the five-year period from July 25,
1997 through July 26, 2002. The weekly averages include all Nuveen and
non-Nuveen funds in existence during that week over the course of this
measurement period. As of July 26, 2002, there were 87 Nuveen funds and 144
non-Nuveen funds included in the Lipper database. Past trading history is no
guarantee of future results, and is no guarantee of how these new Funds may
trade.
E-2
Nuveen Georgia Dividend Advantage Municipal Fund 2 4,200,000 Common Shares
------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------
September 25, 2002