AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 2002
1933 ACT FILE NO. 333-
1940 ACT FILE NO. 811-21152
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.____
[ ] POST-EFFECTIVE AMENDMENT NO.____
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
[X] AMENDMENT NO. 4
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
Exact Name of Registrant as Specified in Declaration of Trust
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(800) 917-7700
Registrant's Telephone Number, including Area Code
GIFFORD R. ZIMMERMAN, ESQ.
VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State and Zip Code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
DAVID A. STURMS THOMAS S. HARMAN CYNTHIA G. COBDEN
VEDDER, PRICE, KAUFMAN & MORGAN, LEWIS & BOCKIUS LLP SIMPSON THACHER & BARTLETT
KAMMHOLZ 1800 M STREET, N.W. 425 LEXINGTON AVE.
222 N. LASALLE ST. WASHINGTON, D.C. 20036 NEW YORK, NY 10017
CHICAGO, IL 60601
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
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If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED UNIT PRICE(1) REGISTRATION FEE(2)
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MuniPreferred shares, $0.01
par value.................. 40 Shares $25,000 $1,000,000 $92
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2002
PROSPECTUS
(NUVEEN INVESTMENTS LOGO)
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("MUNIPREFERRED(R)")
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen Georgia Dividend Advantage Municipal Fund 2 (the "Fund") is a
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. 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 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.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7700. Investors are
advised to read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A Statement of Additional Information dated
, 2002 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference in its entirety into this prospectus. A copy of the
Statement of Additional Information, the table of contents of which appears on
page of this prospectus, may be obtained without charge by
calling the Fund at (800) 257-8787. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information filed electronically
with the SEC.
---------------------
INVESTING IN MUNIPREFERRED SHARES INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE .
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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(R) Registered trademark of Nuveen Investments
PER
SHARE TOTAL
----- -----
Public Offering Price $25,000
Sales Load $ 500
Proceeds to Fund(1) (before expenses) $24,500
------------
(1) Not including offering expenses payable by the Fund estimated to be
$ .
The underwriters are offering the shares of MuniPreferred subject to
various conditions. The underwriters expect to deliver shares of MuniPreferred
in book-entry form, through the facilities of the Depository Trust Company to
purchasers on or about , 2002.
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SALOMON SMITH BARNEY NUVEEN INVESTMENTS
, 2002
The Fund is offering shares of Series MuniPreferred. The
shares are referred to in this prospectus as "MuniPreferred." The MuniPreferred
have a liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. The MuniPreferred also have priority over the Fund's common shares as
to distribution of assets as described in this prospectus. The dividend rate for
the initial dividend rate period will be % for MuniPreferred Series .
The initial rate period is from the date of issuance through , 2002.
For subsequent rate periods, MuniPreferred shares pay dividends based on a rate
set at auction, usually held weekly. Prospective purchasers should carefully
review the auction procedures described in the prospectus and should note: (1) a
buy order (called a "bid order") or sell order is a commitment to buy or sell
MuniPreferred shares based on the results of an auction; (2) auctions will be
conducted by telephone; and (3) purchases and sales will be settled on the next
business day after the auction. MuniPreferred shares are not listed on an
exchange. You may only buy or sell MuniPreferred shares through an order placed
at an auction with or through a broker-dealer that has entered into an agreement
with the auction agent and the Fund, or in a secondary market maintained by
certain broker-dealers. These broker-dealers are not required to maintain this
market, and it may not provide you with liquidity.
The MuniPreferred 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.
---------------------
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.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 6
The Fund.................................................... 7
Use of Proceeds............................................. 7
Capitalization.............................................. 8
Portfolio Composition....................................... 8
The Fund's Investments...................................... 9
Risk Factors................................................ 14
How the Fund Manages Risk................................... 16
Management of the Fund...................................... 17
Description of MuniPreferred Shares......................... 18
The Auction................................................. 27
Description of Common Shares................................ 30
Certain Provisions in the Declaration of Trust.............. 31
Repurchase of Common Shares; Conversion to Open-End Fund.... 31
Tax Matters................................................. 32
Other Matters............................................... 34
Custodian, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent.......................................... 34
Underwriting................................................ 35
Legal Opinions.............................................. 36
Available Information....................................... 36
Table of Contents for the Statement of Additional
Information............................................... 37
Taxable Equivalent Yield Table.............................. A-1
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this prospectus and the Fund's
Statement Establishing and Fixing the Rights and Preferences of Municipal
Auction Rate Cumulative Preferred Shares (the "Statement") attached as Appendix
A to the Statement of Additional Information. Capitalized terms used but not
defined in this prospectus shall have the meanings given to such terms in the
Statement.
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
Fund's common shares, $.01 par value ("common
shares"), are traded on the American Stock
Exchange (the "Exchange") under the symbol NKG.
See "Description of Common Shares." As of
, 2002, the Fund had
common shares outstanding and
net assets of $ .
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 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
1
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."
Investment Adviser............ Nuveen Advisory Corp. ("Nuveen Advisory" or the
"Adviser") acts as the Fund's investment
adviser. Nuveen Advisory is a wholly owned
subsidiary of The John Nuveen Company. See
"Management of the Fund" and "Underwriting."
The Offering.................. The Fund is offering shares of
Series
MuniPreferred at a purchase price of $25,000
per share. Shares of MuniPreferred are being
offered by the underwriters listed under
"Underwriting."
Risk Factors Summary.......... Risk is inherent in all investing. Therefore,
before investing in the Fund you should
consider certain risks carefully. The primary
risks of investing in MuniPreferred shares are:
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
MuniPreferred shares, you may receive less
than the price you paid for your shares if
you sell them outside of the auction,
especially when market interest rates are
rising;
- a rating agency could downgrade MuniPreferred
shares, which could affect liquidity;
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances;
- in extraordinary circumstances the Fund may
not earn sufficient income from its
investments to pay dividends;
- if long-term interest rates rise, the value
of the Fund's investment portfolio will
decline, reducing the asset coverage for the
MuniPreferred shares;
- if an issuer of a municipal bond in which the
Fund invests is downgraded or defaults, there
may be a negative impact on the income and/or
asset value of the Fund's portfolio;
- the Fund is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political
or regulatory occurrence; and
- 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 those issuers. To the
extent that a particular industry sector
represents a larger portion of the state's
total economy, the greater the impact that a
downturn in such sector is likely to have on
the state's economy.
For additional general risks of investing in
MuniPreferred shares of the Fund, see "Risk
Factors" below.
2
Trading Market................ MuniPreferred shares are not listed on an
exchange. Instead, you may buy or sell
MuniPreferred shares at an auction that
normally is held weekly by submitting orders to
a broker-dealer that has entered into an
agreement with the auction agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in
MuniPreferred shares outside of auctions, but
may discontinue this activity at any time.
There is no assurance that a secondary market
will provide shareholders with liquidity. You
may transfer shares outside of auctions only to
or through a Broker-Dealer, or a broker-dealer
that has entered into a separate agreement with
a Broker-Dealer.
The first auction date for the MuniPreferred
will be , 2002, the business day
before the dividend payment date for the
initial rate period for the MuniPreferred. The
start date for subsequent rate periods normally
will be the business day following the auction
date unless the then-current rate period is a
special rate period, or the day that normally
would be the auction date or the first day of
the subsequent rate period is not a business
day.
Dividends and Rate Periods.... The table below shows the dividend rate for the
initial rate period of the MuniPreferred
offered in this prospectus. For subsequent rate
periods, MuniPreferred shares will pay
dividends based on a rate set at auctions,
normally held weekly. In most instances
dividends are also paid weekly, on the day
following the end of the rate period. The rate
set at auction will not exceed the Maximum
Rate. See "Description of MuniPreferred
Shares -- Dividends and Dividend
Periods -- General."
The table below also shows the date from which
dividends on the MuniPreferred shares will
accumulate at the initial rate, the dividend
payment date for the initial rate period and
the day on which dividends will normally be
paid. If dividends are payable on a Monday or
Tuesday and that day is not a business day,
then your dividends will be paid on the first
business day that falls after that day. If
dividends are payable on a Wednesday, Thursday
or Friday and that day is not a business day,
then your dividends will be paid on the first
business day prior to that day.
Finally, the table below shows the number of
days of the initial rate period for the
MuniPreferred. Subsequent rate periods
generally will be seven days. The dividend
payment date for special rate periods of more
than 28 days will be set out in the notice
designating a special rate period. See
"Description of MuniPreferred
Shares -- Dividends and Dividend
Periods -- Designation of Special Rate
Periods."
3
DIVIDEND
DATE OF PAYMENT SUBSEQUENT NUMBER OF
INITIAL ACCUMULATION DATE FOR DIVIDEND DAYS OF
DIVIDEND AT INITIAL INITIAL RATE PAYMENT INITIAL RATE
RATE RATE* PERIOD* DAY PERIOD
-------- ------------ ------------ ---------- ------------
----------------------------------------------
* All dates are 2002.
Taxation...................... Because under normal circumstances the Fund
will invest substantially all of its assets in
municipal bonds that pay interest exempt from
regular federal income tax and Georgia income
tax, the income you receive will ordinarily be
similarly exempt. To the extent the Fund
invests in Out of State Bonds, your income may
be subject to Georgia income tax. All or a
portion of the income from these bonds will be
subject to the federal alternative minimum tax,
so MuniPreferred shares may not be a suitable
investment if you are subject to this tax or
would become subject to such tax by investing
in MuniPreferred shares. Taxable income or gain
earned by the Fund will be allocated
proportionately to holders of MuniPreferred
shares and common shares, based on the
percentage of total dividends paid to each
class for that year. Accordingly, certain
specified MuniPreferred dividends may be
subject to regular federal income tax on income
or gains attributed to the Fund. The Fund
intends to notify shareholders, before any
applicable auction for a rate period of 28 days
or less, of the amount of any taxable income
and gain for regular federal income tax
purposes only, to be paid for the period
relating to that auction. For longer periods,
the Fund may notify shareholders. In certain
circumstances, the Fund will make shareholders
whole for taxes owing on dividends paid to
shareholders that include taxable income and
gain. See "Tax Matters."
Ratings....................... Shares of each series of MuniPreferred will be
issued with a rating of "Aaa" from Moody's and
"AAA" from S&P. Because the Fund is required to
maintain at least one of these ratings, it must
own portfolio securities of a sufficient value
and with adequate credit quality to meet the
rating agencies' guidelines. See "Description
of MuniPreferred Shares -- Rating Agency
Guidelines and Asset Coverage."
Redemption.................... Although the Fund will not ordinarily redeem
MuniPreferred shares, it may be required to
redeem shares if, for example, the Fund does
not meet an asset coverage ratio required by
law or in order to correct a failure to meet a
rating agency guideline in a timely manner. The
Fund voluntarily may redeem MuniPreferred
shares in certain circumstances. See
"Description of MuniPreferred
Shares -- Redemption" and "Description of
MuniPreferred Shares -- Rating Agency
Guidelines and Asset Coverage."
4
Liquidation Preference........ The liquidation preference of the shares of
MuniPreferred will be $25,000 per share plus
accumulated but unpaid dividends, if any,
thereon. See "Description of MuniPreferred
Shares -- Liquidation."
Voting Rights................. The holders of the Fund's preferred shares,
$.01 par value ("Preferred Shares") including
MuniPreferred, voting as a separate class, have
the right to elect at least two trustees at all
times and to elect a majority of the trustees
in the event two years' dividends on the
Preferred Shares are unpaid. In each case, the
remaining trustees will be elected by holders
of common shares and Preferred Shares,
including MuniPreferred, voting together as a
single class. The holders of shares of
Preferred Shares, including MuniPreferred, will
vote as a separate class or classes on certain
other matters as required under the Declaration
of Trust, the Investment Company Act of 1940
(the "1940 Act") and Massachusetts law. See
"Description of MuniPreferred Shares -- Voting
Rights" and "Certain Provisions in the
Declaration of Trust."
5
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on , 2002 until , 2002. Since the Fund
commenced operations on , 2002, the table covers approximately
of operations, during which a substantial portion of the Fund's
assets were held in cash pending investment in municipal bonds that meet the
Fund's investment objectives and policies. Accordingly, the information
presented may not provide a meaningful picture of the Fund's operating
performances.
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period......................
Net Investment Income..................................
Net Gains on Securities (Unrealized)...................
Total from Investment Operations.....................
Offering Costs............................................
Net Asset Value, End of Period............................
Per Share Market Value, End of Period.....................
Total Return on Net Asset Value...........................
Total Investment Return on Market Value...................
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands)..................
Ratio of Expenses to Average Net Assets Before
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets
Before Reimbursement...................................
Ratio of Expenses to Average Net Assets After
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets After
Reimbursement..........................................
Portfolio Turnover Rate...................................
6
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. On ,
2002, the Fund issued an aggregate of common shares of beneficial
interest, par value $.01 per share, pursuant to the initial public offering
thereof. The Fund's common shares are traded on the Exchange under the symbol
"NKG." 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.
The following provides information about the Fund's outstanding shares as
of , 2002:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common.................................................... *
MuniPreferred.............................................
Series ..............................................
------------
* Includes 7,000 common shares issued to Nuveen Advisory on September 4, 2002 in
connection with the initial capitalization of the Fund.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of the sales load and estimated offering costs.
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.
7
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
, 2002, and as adjusted to give effect to the issuance of the common
shares on , 2002, as well as the issuance of the shares of
MuniPreferred offered hereby.
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED) (UNAUDITED)
MuniPreferred shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no shares
issued and shares issued, as adjusted),
respectively.............................................. $ $
COMMON SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value per share; unlimited shares
authorized, shares outstanding*...........
Paid-in surplus**.........................................
Undistributed net investment income.......................
Accumulated net realized gain from investments:...........
Net unrealized appreciation (depreciation) of
investments............................................
-------- --------
Net assets applicable to common shares.................... $ $
======== ========
------------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted, paid-in surplus reflects the proceeds of the issuance of the
common shares ($ ) less $.01 par value per common share
($ ) and the offering costs of per common share
($ ) as well as a reduction for the sales load and estimated
offering costs of the MuniPreferred shares' issuance ($ ).
PORTFOLIO COMPOSITION
As of , 2002, % of the market value of the Fund's
portfolio was invested in long-term municipal bonds. The following table sets
forth certain information with respect to the composition of the Fund's
investment portfolio as of , 2002.
CREDIT RATING** VALUE PERCENT
--------------- ----- -------
Aaa/AAA..................................................... $ %
Aa/AA.......................................................
A/A.........................................................
Baa/BBB.....................................................
Short-Term..................................................
-------- --------
Total................................................ $ %
======== ========
------------
** Using the higher of S&P's or Moody's rating.
8
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 and MuniPreferred shareholders.
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. 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. Investment grade bonds may include split-rated
bonds. 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 B 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
9
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.
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
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
General. 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
10
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.
Special Considerations Relating to Georgia Municipal Bonds. 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 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.
11
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 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 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
12
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.
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 "Risk Factors," the net asset value and market value of
leveraged shares will be more volatile and the yield to holders of common shares
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."
13
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in MuniPreferred shares.
LIMITED OPERATING HISTORY
The Fund is a newly organized, non-diversified, closed-end management
investment company and has a limited operating history.
INTEREST RATE RISK
The Fund issues MuniPreferred shares, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal bonds, which
pay interest based on long-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest rates. Both
long-term and short-term interest rates may fluctuate. If short-term interest
rates rise, MuniPreferred rates may rise so that the amount of dividends paid to
MuniPreferred shareholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of MuniPreferred shares. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the MuniPreferred share offering) is
available to pay MuniPreferred dividends, however, MuniPreferred dividend rates
would need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay MuniPreferred dividends would be jeopardized. If long-term rates
rise, the value of the Fund's investment portfolio will decline, reducing the
amount of assets serving as asset coverage for the MuniPreferred shares.
AUCTION RISK
You may not be able to sell your MuniPreferred shares at an auction if the
auction fails; that is, if there are more MuniPreferred shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain MuniPreferred shares) at an auction only at a specified rate, and that
bid rate exceeds the rate set at the auction, you will not retain your
MuniPreferred shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. See "Description of
MuniPreferred Shares" and "The Auction -- Auction Procedures."
SECONDARY MARKET RISK
If you try to sell your MuniPreferred shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than 7 days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for MuniPreferred shares are not required to maintain this
market, and the Fund is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. MuniPreferred
shares are not registered on a stock exchange or the NASDAQ stock market. If you
sell your MuniPreferred shares to a broker-dealer between auctions, you may
receive less than the price you paid for them, especially when market interest
rates have risen since the last auction. Accrued MuniPreferred dividends,
however, should at least partially compensate for the increased market interest
rates.
RATINGS AND ASSET COVERAGE RISK
While Moody's and S&P assign ratings of "Aaa" or "AAA" to MuniPreferred
shares, the ratings do not eliminate or necessarily mitigate the risks of
investing in MuniPreferred shares. A rating agency could downgrade MuniPreferred
shares, which may make your shares less liquid at an auction or in the secondary
market, although the downgrade would probably result in higher dividend rates.
If a rating agency downgrades
14
MuniPreferred shares, the Fund will alter its portfolio or redeem MuniPreferred
shares. The Fund may voluntarily redeem MuniPreferred shares under certain
circumstances. See "Description of MuniPreferred Shares -- Rating Agency
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Fund must meet.
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 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. For a description of
unique considerations relating to Georgia municipal bonds, see "The Fund's
Investments -- Municipal Bonds -- Special Considerations Relating to Georgia
Municipal Bonds."
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.
15
INCOME RISK
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short-term and long-term. If
interest rates drop, the Fund's income available over time to make dividend
payments with respect to the MuniPreferred could drop as well if the Fund
purchases securities with lower interest coupons. This risk is magnified when
prevailing short-term interest rates increase and the Fund holds residual
interest municipal bonds.
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.
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 your MuniPreferred investment
or the income from that investment will be worth less in the future. In other
word, as inflation occurs, the real value of the MuniPreferred shares and
distributions declines. In an inflationary period, however, it is expected that,
through the auction process, MuniPreferred dividend rates would increase,
tending to offset this risk.
CALL RISK
If interest rates fall, it is possible that issuers of callable bonds with
higher interest coupons will "call" (or prepay) their bonds before their
maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.
ECONOMIC SECTOR RISK
The Fund may invest 25% or more of its total assets in municipal
obligations in the same economic sector. This may make the Fund more susceptible
to adverse economic, political or regulatory occurrences affecting an economic
sector. As concentration increases, so does the potential for fluctuation in the
value of the Fund's assets.
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 susceptible than a diversified fund to any
single corporate, economic, political or regulatory occurrence. See "The Fund's
Investments." In addition, the Fund must satisfy certain asset diversification
rules in order to qualify as a regulated investment company for federal income
tax purposes.
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 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
16
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 is 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. 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.
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 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 14 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.
17
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
------------
* Including assets attributable to outstanding MuniPreferred shares ("Managed
Assets").
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.
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.
DESCRIPTION OF MUNIPREFERRED SHARES
The following is a brief description of the terms of the MuniPreferred
shares. This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the more detailed description of the
MuniPreferred shares in the Fund's Statement attached as Appendix A to the
Statement of Additional Information.
GENERAL
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees without the approval
of holders of common shares. The Statement currently authorizes the issuance of
shares of MuniPreferred Series . All MuniPreferred shares will have a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared).
18
The MuniPreferred shares of each series will rank on parity with shares of
any other series of MuniPreferred and with shares of any other series of
preferred shares of the Fund as to the payment of dividends and the distribution
of assets upon liquidation. All MuniPreferred shares carry one vote per share on
all matters on which such shares are entitled to be voted. Shares of
MuniPreferred are, when issued, fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable and have no
preemptive, conversion or cumulative voting rights.
DIVIDENDS AND DIVIDEND PERIODS
General. The initial Rate Period of MuniPreferred shares Series will be a
period consisting of days. Any Subsequent Rate Period of shares of a series
of MuniPreferred will be a Minimum Rate Period (7 Rate Period Days), unless the
Fund, subject to certain conditions, designates such Subsequent Rate Period as a
Special Rate Period. See "-- Designation of Special Rate Periods" below.
Dividends on shares of each series of MuniPreferred shall be payable, when,
as and if declared by the Board out of funds legally available therefor in
accordance with the Declaration of Trust, including the Statement, and
applicable law, on shares of MuniPreferred Series , on ,
2002, and thereafter on each ; provided, however, that (i) if the
Monday or the Tuesday on which dividends would otherwise be payable as set forth
above is not a Business Day, then such dividends shall be payable on such shares
on the first Business Day that falls after such Monday or Tuesday, as the case
may be; (ii) if the Wednesday, Thursday or Friday on which dividends would
otherwise be payable as set forth above is not a Business Day, then such
dividends shall be payable on such shares on the first Business Day that falls
prior to such Wednesday, Thursday or Friday, as the case may be; and (iii) the
Fund may specify different Dividend Payment Dates in respect of any Special Rate
Period of more than 28 Rate Period Days.
The amount of dividends per share payable on shares of a series of
MuniPreferred on any date on which dividends shall be payable on shares of such
series shall be computed by multiplying the Applicable Rate for shares of such
series in effect for such Dividend Period or Dividend Periods or part thereof
for which dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods or part
thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which currently provide
for it to distribute dividends in next-day funds to Agent Members, who in turn
are expected to distribute such dividend payments to the persons for whom they
are acting as agents. Each of the current Broker-Dealers, however, has indicated
to the Fund that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of each series of MuniPreferred will accumulate from
the Date of Original Issue thereof. The dividend rate for shares of
MuniPreferred of a particular series for the initial Rate Period for such shares
shall be % per annum for Series . For each Subsequent Rate
Period of shares of MuniPreferred of a particular series, the dividend rate for
such shares will be the Applicable Rate for such shares that the Auction Agent
advises the Fund results from an Auction, except as provided below. The
Applicable Rate that results from an Auction for shares of any series of
MuniPreferred will not be greater than the Maximum Rate for shares of such
series, which is:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (ii) the Rate Multiple on such Auction
Date, unless shares of such series have or had a Special Rate Period (other
than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction
at which Sufficient Clearing Bids existed has not yet occurred for a
19
Minimum Rate Period of shares of such series after such Special Rate
Period, in which case the higher of:
(A) the dividend rate on shares of such series for the then-ending
Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was more than 364
Rate Period Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of shares of
such series, if such Special Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to such Special Rate Period, if such Special Rate Period
was more than 364 Rate Period Days and (y) the Rate Multiple on such
Auction Date; or
(b) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series, if
such then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate
on such Auction Date for Minimum Rate Periods and (ii) the Rate Multiple on
such Auction Date.
If an Auction for any Subsequent Rate Period of shares of any series of
MuniPreferred is not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), but, prior to 12:00 noon on the third
Business Day next succeeding the date such failure occurred, such failure shall
have been cured and the Fund shall have paid a late charge, as described more
fully in the Statement, no Auction will be held in respect of shares of such
series for the first Subsequent Rate Period thereof thereafter and the dividend
rate for shares of such series for such Subsequent Rate Period will be the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), and, prior to 12:00 noon on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Fund shall not have paid a late charge,
as described more fully in the Statement, no Auction will be held in respect of
shares of such series for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured and such late charge so paid) (such late
charge to be paid only in the event Moody's is rating such shares at the time
the Fund cures such failure), and the dividend rate for shares of such series
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
'ba3'/BB2").
20
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during a Special Rate Period thereof of more than 364 Rate
Period Days, or during any Rate Period thereof succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured, and such failure shall not have been cured or the Fund
shall not have paid a late charge, as described more fully in the Statement, no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period thereof (or for any Rate Period thereof thereafter to and including
the Rate Period during which such failure is so cured and such late charge so
paid) (such late charge to be paid only in the event Moody's is rating such
shares at the time the Fund cures such failure), and the dividend rate for
shares of such series for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate for shares of such series on the Auction Date
for each such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below 'ba3'/BB2").
A failure to pay dividends on, or the redemption price of, shares of any
series of MuniPreferred shall have been cured with respect to any Rate Period
thereof if, within the respective time periods described in the Statement, the
Fund shall have paid to the Auction Agent (a) all accumulated and unpaid
dividends on the shares of such series and (b) without duplication, the
redemption price for shares, if any, of such series for which notice of
redemption has been mailed by the Fund; provided, however, that the foregoing
clause (b) shall not apply to the Fund's failure to pay the redemption price in
respect of shares of MuniPreferred when the related notice of redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such notice of redemption.
Gross-up Payments. Holders of shares of MuniPreferred are entitled to
receive, when, as and if declared by the Board, out of funds legally available
therefor in accordance with the Declaration of Trust, including the Statement,
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payments in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for regular federal income tax purposes to a dividend paid on
shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as described below under "The Auction -- Auction Procedures" (a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of MuniPreferred or the liquidation of the Fund, the Fund
will, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares (initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the stock books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
MuniPreferred without having given advance notice thereof to the Auction Agent,
the Fund shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares that was entitled to such dividend payment during such calendar year at
such holder's address as the same appears or last appeared on the stock books of
the Fund.
A "Gross-up Payment" means payment to a holder of shares of MuniPreferred
of an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates, would
cause such holder's dividends in dollars (after federal and Georgia income tax
consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations would have been excludable from the gross income of such holder.
Such Gross-up Payment shall be calculated: (a) without consideration being given
to the time value of money; (b) assuming that no holder of shares of
MuniPreferred is subject to the federal alternative minimum tax with
21
respect to dividends received from the Fund; and (c) assuming that each Taxable
Allocation and each Gross-up Payment (except to the extent such Gross-up Payment
is designated as an exempt-interest dividend under Section 852(b)(5) of the
Internal Revenue Code or successor provisions) would be taxable in the hands of
each holder of shares of MuniPreferred at the maximum marginal combined regular
federal and Georgia personal income tax rate applicable to ordinary income
(taking into account the federal income tax deductibility of state and local
taxes paid or incurred) or net capital gain, as applicable, or the maximum
marginal regular federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
Restrictions on Dividends and Other Distributions. Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in, or in options,
warrants or rights to subscribe for or purchase, its shares of common shares) in
respect of its common shares or any other shares of the Fund ranking junior to,
or on parity with, shares of MuniPreferred as to the payments of dividends or
the distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
common shares or other such junior shares or other such parity shares (except by
conversion into or exchange for shares of the Fund ranking junior to the shares
of MuniPreferred as to the payment of dividends and the distribution of assets
upon liquidation, dissolution or winding up of the affairs of the Fund), unless
(a) full cumulative dividends on shares of each series of MuniPreferred through
its most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (b) the Fund shall have redeemed the full number of shares of
MuniPreferred required to be redeemed by any provision for mandatory redemption
pertaining thereto. Except as otherwise described herein, for so long as any
shares of MuniPreferred are outstanding, the Fund may not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, common shares or other shares, if any, ranking junior to shares
of MuniPreferred as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up) in respect of common shares or any
other shares of the Fund ranking junior to shares of MuniPreferred as to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any common shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to shares of
MuniPreferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of the Fund's portfolio would at least equal
the MuniPreferred Basic Maintenance Amount in accordance with guidelines of the
rating agency or agencies then rating the shares of MuniPreferred.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of Fund
shares ranking, as to the payment of dividends, on a parity with shares of
MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of
MuniPreferred through its most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of each series of MuniPreferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred through their most recent respective dividend payment dates,
all dividends declared upon shares of MuniPreferred and any such other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares shall in all cases bear to each other the same ratio that accumulated
dividends per share on the shares of MuniPreferred and such other class or
series of shares bear to each other.
Designation of Special Rate Periods. The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a particular series
of MuniPreferred as a Special Rate Period consisting of a specified number of
Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to certain adjustments. A designation of a
Special Rate Period shall be effective only if, among other things, (a) the Fund
shall have given certain notices to the Auction Agent, (b) an Auction for shares
of such
22
series shall have been held on the Auction Date immediately preceding the first
day of such proposed Special Rate Period and Sufficient Clearing Bids for shares
of such series shall have existed in such Auction and (c) if the Fund shall have
mailed a notice of redemption with respect to any shares of such series, the
redemption price with respect to such shares shall have been deposited with the
Auction Agent. The Fund will give MuniPreferred shareholders notice of a special
rate period as provided in the Statement.
REDEMPTION
Mandatory Redemption. In the event the Fund does not timely cure a failure
to maintain (a) a Discounted Value of its eligible portfolio securities equal to
the MuniPreferred Basic Maintenance Amount or (b) the 1940 Act MuniPreferred
Asset Coverage (as defined below), in each case in accordance with the
requirements of the rating agency or agencies then rating the shares of
MuniPreferred, shares of MuniPreferred will be subject to mandatory redemption
on a date specified by the Board out of funds legally available therefor in
accordance with the Declaration of Trust, including the Statement, and
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption. Any such
redemption will be limited to the lesser of the number of shares of
MuniPreferred necessary to restore the required Discounted Value or the 1940 Act
MuniPreferred Asset Coverage, as the case may be, or the maximum number that can
be redeemed with the funds legally available under the Declaration of Trust and
applicable law.
Optional Redemption. Shares of MuniPreferred of each series are
redeemable, at the option of the Fund:
(a) as a whole or from time to time in part, on the second Business
Day preceding any Dividend Payment Date for shares of such series, out of
funds legally available therefor in accordance with the Declaration of
Trust, including the Statement, and applicable law, at the redemption price
of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (i)
shares of such series may not be redeemed in part if after such partial
redemption fewer than 250 shares of such series would remain outstanding;
(ii) shares of a series of MuniPreferred are redeemable by the Fund during
the Initial Rate Period thereof only on the second Business Day next
preceding the last Dividend Payment Date for such Initial Rate Period; and
(iii) the notice establishing a Special Rate Period of shares of such
series, as delivered to the Auction Agent and filed with the Secretary of
the Fund, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in clause (b) below) or shall be redeemable during the whole or
any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration of Trust, including the
Statement, and applicable law, on the first day following any Dividend
Period thereof included in a Rate Period of more than 364 Rate Period Days
if, on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equaled or exceeded on
such date of determination the Treasury Note Rate for such Rate Period, at
a redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of a series of
MuniPreferred (whether or not earned or declared) are in arrears, no shares of
such series shall be redeemed unless all outstanding shares of such series are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any shares of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series.
23
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of MuniPreferred with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of shares of MuniPreferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Fund available for distribution to its shareholders, before any payment or
distribution shall be made on the common shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the Fund. After the payment to the holders of shares of
MuniPreferred of the full preferential amounts provided for as described herein,
the holders of shares of MuniPreferred as such shall have no right or claim to
any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Fund, shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a Discounted Value at least equal to the MuniPreferred
Basic Maintenance Amount. Moody's and S&P have each established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value (as defined by such rating agency). The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Fund's assets
that may be invested in holdings not eligible for inclusion in the calculation
of the Discounted Value of the Fund's portfolio. The amount of such assets
included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio, although it is not anticipated that in the normal course of business
the value of such assets would exceed 20% of the Fund's total assets. The
MuniPreferred Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of shares of MuniPreferred then outstanding and (b)
certain accrued and projected payment obligations of the Fund.
The Fund is also required under the 1940 Act and rating agency guidelines
to maintain, with respect to shares of MuniPreferred, as of the last Business
Day of each month in which any such shares are outstanding, asset coverage of at
least 200% with respect to all outstanding senior securities which are shares of
beneficial interest, including MuniPreferred (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
MuniPreferred Asset Coverage"). Based on the composition of the portfolio of the
Fund and market conditions as of , 2002, 1940 Act MuniPreferred Asset
Coverage with respect to shares of MuniPreferred, assuming the issuance on the
date thereof of all shares of MuniPreferred offered hereby and giving effect to
the deduction of sales load and offering costs related thereto estimated at
$ , would have been computed as follows:
Value of Fund assets less liabilities not
constituting senior securities $
------------------------------------------------------------ = --------------- = %
Senior securities representing indebtedness plus $
liquidation value of the shares of MuniPreferred
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the MuniPreferred Basic Maintenance
Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in each case in
accordance with the requirements of the rating agency or agencies then rating
the shares of
24
MuniPreferred, the Fund will be required to redeem shares of MuniPreferred as
described under "Redemption -- Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the shares of MuniPreferred may, at any time, change or
withdraw any such rating. The Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Fund pursuant to the rating agency guidelines in the event
the Fund receives written confirmation from Moody's or S&P, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's and S&P to shares of MuniPreferred.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the shares of MuniPreferred are not recommendations
to purchase, hold or sell those shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
shares of MuniPreferred will be able to sell such shares in an Auction or
otherwise. The ratings are based on current information furnished to Moody's and
S&P by the Fund and the Adviser and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common shares have not been rated by a
nationally recognized statistical rating organization.
A rating agency's guidelines will apply to shares of MuniPreferred only so
long as such rating agency is rating such shares. The Fund will pay certain fees
to Moody's or S&P, or both, for rating shares of MuniPreferred.
VOTING RIGHTS
Except as otherwise provided in this prospectus and in the Statement of
Additional Information, in the Declaration of Trust or as otherwise required by
law, holders of shares of MuniPreferred will have equal voting rights with
holders of common shares and any Preferred Shares (one vote per share) and will
vote together with holders of common shares and any Preferred Shares as a single
class.
In connection with the election of the Fund's trustees, holders of
outstanding Preferred Shares, including MuniPreferred shares, voting as a
separate class, are entitled to elect two of the Fund's trustees, and the
remaining trustees are elected by holders of common shares and Preferred Shares,
including MuniPreferred shares, voting together as a single class. In addition,
if at any time dividends (whether or not earned or declared) on outstanding
Preferred Shares, including MuniPreferred shares, shall be due and unpaid in an
amount equal to two full years' dividends thereon, and sufficient cash or
specified securities shall not have been deposited with the Auction Agent for
the payment of such dividends, then, as the sole remedy of holders of
outstanding Preferred Shares, including MuniPreferred shares, the number of
trustees constituting the Board shall be automatically increased by the smallest
number that, when added to the two trustees elected exclusively by the holders
of Preferred Shares, including shares of MuniPreferred, as described above,
would constitute a majority of the Board as so increased by such smallest
number, and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of MuniPreferred,
voting as a separate class, will be entitled to elect the smallest number of
additional trustees that, together with the two trustees which such holders will
be in any event entitled to elect, constitutes a majority of the total number of
trustees of the Fund as so increased. The terms of office of the persons who are
trustees at the time of that election will continue. If the Fund thereafter
shall pay, or declare and set apart for payment, in full, all dividends payable
on all outstanding Preferred Shares, including MuniPreferred shares, the voting
rights stated in the second preceding sentence shall cease, and the terms of
office of all of the additional trustees elected by the holders of Preferred
Shares, including MuniPreferred shares (but not of the trustees with respect to
whose election the holders of common shares were entitled to vote or the two
trustees the holders of Preferred Shares have the right to elect in any event),
will terminate automatically.
25
So long as any shares of MuniPreferred are outstanding, the Fund will not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of MuniPreferred outstanding at the time (voting as a separate
class):
(a) authorize, create or issue any class or series of stock ranking
prior to or on a parity with shares of MuniPreferred with respect to the
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up of the affairs of the Fund or authorize, create
or issue additional shares of any series of MuniPreferred (except that,
notwithstanding the foregoing, but subject to certain rating agency
approvals, the Board, without the vote or consent of the holders of
MuniPreferred, may from time to time authorize and create, and the Fund may
from time to time issue additional shares of, any series of MuniPreferred
or classes or series of Preferred Shares ranking on a parity with shares of
MuniPreferred with respect to the payment of dividends and the distribution
of assets upon liquidation, dissolution or winding up of the affairs of the
Fund; provided, however, that if Moody's or S&P is not then rating the
shares of MuniPreferred, the aggregate liquidation preference of all
Preferred Shares of the Fund outstanding after any such issuance, exclusive
of accumulated and unpaid dividends, may not exceed $ ) or
(b) amend, alter or repeal the provisions of the Declaration of Trust,
including the Statement, whether by merger, consolidation or otherwise, so
as to affect any preference, right or power of such shares of MuniPreferred
or the holders thereof;
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the holders
of shares of MuniPreferred and (iii) the authorization, creation and issuance of
classes or series of stock ranking junior to shares of MuniPreferred with
respect to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the affairs of the Fund will be deemed
to affect such preferences, rights or powers only if Moody's or S&P is then
rating shares of MuniPreferred and such issuance would, at the time thereof,
cause the Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage or the
MuniPreferred Basic Maintenance Amount. So long as any shares of MuniPreferred
are outstanding, the Fund shall not, without the affirmative vote or consent of
the holders of at least 66 2/3% of the shares of MuniPreferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
If any action set forth above would adversely affect the rights of one or
more series (the "Affected Series") of MuniPreferred shares in a manner
different from any other series of MuniPreferred shares, the Fund will not
approve any such action without the affirmative vote or consent of the holders
of at least a majority of the shares of each such Affected Series outstanding at
the time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class). The Board may, without shareholder
approval, amend, alter or repeal any or all of the definitions and related
provisions which have been adopted by the Fund pursuant to the rating agency
guidelines in the event the Fund receives written confirmation from Moody's or
S&P, or both, as appropriate, that any such amendment, alteration or repeal
would not impair the ratings then assigned by Moody's and S&P to shares of
MuniPreferred. Unless a higher percentage is provided for in the Declaration of
Trust (see "Certain Provisions in the Declaration of Trust"), (A) the
affirmative vote of the holders of at least a majority of the Preferred Shares,
including MuniPreferred shares, outstanding at the time, voting as a separate
class, shall be required to approve any conversion of the Fund from a closed-end
to an open-end investment company and (B) the affirmative vote of the holders of
a majority of the outstanding Preferred Shares, including 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. The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including 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 of the Fund under Section 13(a) of the 1940
Act.
26
The foregoing voting provisions will not apply with respect to shares of
MuniPreferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described herein, the
Applicable Rate for the shares of each series of MuniPreferred, including the
shares of MuniPreferred to be issued in this offering, for each Rate Period of
shares of such series after the initial Rate Period thereof shall be equal to
the rate per annum that the Auction Agent advises has resulted on the Business
Day preceding the first day of such Subsequent Rate Period (an "Auction Date")
from implementation of the auction procedures (the "Auction Procedures") set
forth in the Statement and summarized below, in which persons determine to hold
or offer to sell or, based on dividend rates bid by them, offer to purchase or
sell shares of such series. Each periodic implementation of the Auction
Procedures is referred to herein as an "Auction." See the Statement for a more
complete description of the Auction process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred.
The Auction Agent after each Auction for shares of MuniPreferred will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a
series of MuniPreferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction
27
Agent) as a holder of shares of such series (a "Beneficial Owner") may submit
orders ("Orders") with respect to shares of such series to that Broker-Dealer as
follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof.
- Bid -- indicating its desire to sell shares of such series at $25,000 per
share if the Applicable Rate for shares of such series for the next Rate
Period thereof is less than the rate specified in such Bid (also known as
a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for shares of
such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of MuniPreferred then held by
such Beneficial Owner. A Beneficial Owner of shares of such series that submits
a Bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the Maximum Rate for shares of such series on the Auction Date
therefor will be treated as having submitted a Sell Order with respect to such
shares to its Broker-Dealer. A Beneficial Owner of shares of such series that
fails to submit an Order with respect to such shares to its Broker-Dealer will
be deemed to have submitted a Hold Order with respect to such shares of such
series to its Broker-Dealer; provided, however, that if a Beneficial Owner of
shares of such series fails to submit an Order with respect to shares of such
series to its Broker-Dealer for an Auction relating to a Rate Period of more
than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted
a Sell Order with respect to such shares to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of MuniPreferred
subject thereto. A Beneficial Owner that offers to become the Beneficial Owner
of additional shares of MuniPreferred is, for purposes of such offer, a
Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of MuniPreferred but that wishes to purchase shares of such series, or
that is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series (in each case, a "Potential Beneficial Owner"),
may submit Bids to its Broker-Dealer in which it offers to purchase shares of
such series at $25,000 per share if the Applicable Rate for shares of such
series for the next Rate Period thereof is not less than the rate specified in
such Bid. A Bid placed by a Potential Beneficial Owner of shares of such series
specifying a rate higher than the Maximum Rate for shares of such series on the
Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of MuniPreferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
MuniPreferred held by it. A Broker-Dealer may also submit Orders to the Auction
Agent for its own account as an Existing Holder or Potential Holder, provided it
is not an affiliate of the Fund.
If Sufficient Clearing Bids for shares of a series of MuniPreferred exist
(that is, the number of shares of such series subject to Bids submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Potential Holders with rates equal to or lower than the Maximum Rate for shares
of such series is at least equal to the number of shares of such series subject
to Sell Orders submitted or deemed submitted to the Auction Agent by
Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of such series for the next succeeding Rate Period thereof will be the
lowest rate specified in the Submitted Bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of Existing
28
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning the shares of such series available for purchase in the Auction.
If Sufficient Clearing Bids for shares of a series of MuniPreferred do not
exist, the Applicable Rate for shares of such series for the next succeeding
Rate Period thereof will be the Maximum Rate for shares of such series on the
Auction Date therefor. In such event, Beneficial Owners of shares of such series
that have submitted or are deemed to have submitted Sell Orders may not be able
to sell in such Auction all shares of such series subject to such Sell Orders.
If Broker-Dealers submit or are deemed to have submitted to the Auction Agent
Hold Orders with respect to all Existing Holders of shares of a series of
MuniPreferred, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of
MuniPreferred that is fewer than the number of shares of such series specified
in its Order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing Holders or Potential
Holders in respect of customer Orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
The Auctions for shares of MuniPreferred Series will normally be held
every and each Subsequent Rate Period of shares of such series will
normally begin on the following .
Whenever the Fund intends to include any net capital gain or other income
taxable for regular federal income tax purposes in any dividend on shares of
MuniPreferred, the Fund shall, in the case of Minimum Rate Periods or Special
Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.
SECONDARY MARKET TRADING AND TRANSFER OF MUNIPREFERRED SHARES
The Broker-Dealers are expected to maintain a secondary trading market in
shares of MuniPreferred outside of Auctions, but are not obligated to do so, and
may discontinue such activity at any time. There can be no assurance that such
secondary trading market in shares of MuniPreferred will provide owners with
liquidity of investment. The shares of MuniPreferred are not registered on any
stock exchange or on the Nasdaq Stock Market. Investors who purchase shares in
an Auction for a Special Rate Period should note that because the dividend rate
on such shares will be fixed for the length of such Rate Period, the value of
the shares may fluctuate in response to changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction therefor, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of shares of MuniPreferred only in whole shares and only (1) pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of shares of MuniPreferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and
29
(b) in the case of all transfers other than pursuant to Auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom such transfer
is made shall advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the MuniPreferred shares, the Declaration authorizes the
issuance of an unlimited number of common shares, par value of $0.01 per share.
All outstanding common shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation, are fully paid and, subject to
matters discussed in "Certain Provisions in the Declaration of Trust,"
non-assessable, and have no pre-emptive or conversion rights or rights to
cumulative voting. Whenever MuniPreferred shares are outstanding, holders of the
Fund's common shares 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.
30
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) 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."
Reference should be made to the Declaration on file with the SEC for the
full text of these provisions.
REPURCHASE OF COMMON 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 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
31
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 Fund's 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 Common 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 discussions below and in the Statement of Additional Information
provide general tax information. Because tax laws are complex and often change,
you should consult your tax advisor about the tax consequences of an investment
in the MuniPreferred shares.
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 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.
In addition to exempt-interest dividends, the Fund also may distribute to
its shareholders amounts that are treated as long-term capital gain or ordinary
income. 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. The Fund intends to notify
MuniPreferred shareholders in advance if it will allocate to them income that is
not exempt from regular federal income tax. In certain circumstances the Fund
will make payments to MuniPreferred shareholders to offset the tax effects of
the taxable distribution. See "Description of MuniPreferred Shares -- Dividends
and Dividend Periods -- Gross-Up Payments." 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 available to corporations. The
sale or other disposition of common shares or shares of MuniPreferred of the
Fund will normally result in capital gain or loss to shareholders if such shares
32
are held as a capital asset. Present law taxes both long-term and short-term
capital gains of corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, long-term capital gains are generally subject to
reduced rates of taxation. Losses realized by a shareholder on the sale or
exchange of shares of the Fund held for six months or less are disallowed to the
extent of any distribution of exempt-interest dividends received with respect to
such shares, and, if not disallowed, such losses are treated as long-term
capital losses to the extent of any distribution of long-term capital gain
received (or designated amounts of undistributed capital gain that are treated
as received) with respect to such shares. Under certain circumstances, a
shareholder's holding period may have to restart after, or may be suspended for,
any periods during which the shareholder's risk of loss is diminished as a
result of holding one or more other positions in substantially similar or
related property, or through certain options or short sales. Any loss realized
on a sale or exchange of shares of the Fund will be disallowed to the extent
those shares of the Fund are replaced by other substantially identical shares of
the Fund within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Fund will be adjusted to reflect the disallowed
loss. 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 of the year declared. The Fund is required in
certain circumstances to withhold a portion of dividends and certain other
payments paid to certain holders of the Fund's shares who do not furnish to the
Fund their correct taxpayer identification number (in the case of individuals,
their social security number) and certain certifications, or who are otherwise
subject to backup withholding. The Statement of Additional Information contains
a more detailed summary of the federal income tax rules that apply to the Fund
and its shareholders. Legislative, judicial or administrative action may change
the tax rules that apply to the Fund or its shareholders and any such change may
be retroactive. You should consult with your tax advisor about federal income
tax matters.
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
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.
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.
33
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 Investments ("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 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 opinion 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.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of and transfer agent for the Fund is State
Street Bank Corp., 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting services.
The Fund's shareholder services and dividend paying agent is Boston Financial
Data Services, 66 Brooks Drive, Suite 8391, Braintree, Massachusetts 02134.
Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey City, NJ
07311, a banking corporation organized under the laws of New York, is the
Auction Agent with respect to shares of MuniPreferred and acts as transfer
agent, registrar, dividend disbursing agent and redemption agent with respect to
such shares.
34
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each Underwriter named below has severally
agreed to purchase, and the Fund has agreed to sell to such Underwriter, the
number of MuniPreferred shares set forth opposite the name of such Underwriter.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Salomon Smith Barney Inc. ..................................
Nuveen Investments..........................................
--------
Total.............................................
========
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the MuniPreferred 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 MuniPreferred
shares if they purchase any of the shares.
The underwriters propose to offer some of the MuniPreferred shares directly
to the public at the public offering price set forth on the cover page of this
prospectus and some of the MuniPreferred shares to dealers at the public
offering price less a concession not in excess of $ per MuniPreferred share.
The sales load the Fund will pay of $ per share is equal to % of the
initial offering price. The underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per MuniPreferred share on
sales to other dealers. After the initial public offering, the underwriters may
change the public offering price and other selling terms. Investors must pay for
any MuniPreferred shares purchased on or before , 2002.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, the Fund. Nuveen may engage in these transactions only in
compliance with the 1940 Act.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
Information.
Nuveen, one of the underwriters, is the parent company of Nuveen Advisory.
The Fund and Nuveen Advisory have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, or to contribute payments the underwriters may be required to make
for any of those liabilities. Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
35
LEGAL OPINIONS
Certain legal matters in connection with the MuniPreferred shares will be
passed upon for the Fund by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois, and for the Underwriters by Simpson Thacher & Bartlett, New York, New
York. Vedder, Price, Kaufman & Kammholz and Simpson Thacher & Bartlett may rely
as to certain matters of Massachusetts law on the opinion of Bingham McCutchen
LLP, Boston, Massachusetts and as to certain matters of Georgia law on the
opinion of Chapman & Cutler.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and Northeast Regional Office, Woolworth Building, 233
Broadway, New York, NY 10013-2409. Reports, proxy statements, and other
information about the Fund can be inspected at the offices of the Exchange.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and MuniPreferred shares can be found
in the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains each Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934. Additional information may be found
on the internet at http://www.nuveen.com.
36
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives....................................... S-2
Investment Policies and Techniques.......................... S-4
Other Investment Policies and Techniques.................... S-10
Management of the Fund...................................... S-13
Investment Adviser.......................................... S-19
Portfolio Transactions...................................... S-21
Net Asset Value............................................. S-22
Additional Information Concerning the Auctions for
MuniPreferred............................................. S-23
Certain Provisions in the Declaration of Trust.............. S-24
Repurchase of Fund Shares; Conversion to Open-End Fund...... S-25
Tax Matters................................................. S-27
Experts..................................................... S-32
Additional Information...................................... S-32
Report of Independent Auditors and Financial Statements..... F-1
Financial Statements........................................ F-2
Appendices
Appendix A -- Statement Establishing and Fixing Rights and
Preferences of MuniPreferred Shares....................... A-1
Appendix B -- Ratings of Investments........................ B-1
Appendix C -- Hedging Strategies and Risks.................. C-1
Appendix D -- Factors Pertaining to Georgia................. D-1
37
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
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 for federal
regular income tax purposes 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 yield 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 YIELD
TAX RATE 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
-------- ----- ----- ----- ----- ----- -----
10.00% 0.56% 1.11% 1.67% 2.22% 2.78% 3.33%
15.00 0.59 1.18 1.76 2.35 2.94 3.53
27.00 0.68 1.37 2.05 2.74 3.42 4.11
30.00 0.71 1.43 2.14 2.86 3.57 4.29
35.00 0.77 1.54 2.31 3.08 3.85 4.62
38.60 0.81 1.63 2.44 3.26 4.07 4.89
------------
* In the table above, the taxable equivalent yields are calculated assuming that
the Fund's exempt-interest dividends are 100% federally tax-free. To the
extent the Fund were to invest in federally taxable investments (which it does
not expect to do), its taxable equivalent yield would be lower.
GEORGIA
The following table shows 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.
FEDERAL STATE COMBINED
SINGLE RETURN JOINT RETURN TAX TAX TAX
BRACKET BRACKET RATE RATE** RATE** 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
---------------- ---------------- ------- ------ -------- ----- ----- ----- ----- ----- -----
$ 0-6,000 10.00% 5.00% 14.5% 0.58% 1.17% 1.75% 2.34% 2.92% 3.51%
$ 0-12,000 10.00 6.00 15.4 0.59 1.18 1.77 2.36 2.96 3.55
6,000-27,950 12,000-46,700 15.00 6.00 20.1 0.63 1.25 1.88 2.50 3.13 3.75
27,950-67,700 46,700-112,850 27.00 6.00 31.4 0.73 1.46 2.19 2.92 3.64 4.37
67,700-141,250 112,850-171,950 30.00 6.00 34.2 0.76 1.52 2.28 3.04 3.80 4.56
141,250-307,050 171,950-307,050 35.00 6.00 38.9 0.82 1.64 2.45 3.27 4.09 4.91
Over 307,050 Over 307,050 38.60 6.00 42.3 0.87 1.73 2.60 3.47 4.33 5.20
------------
** 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.
A-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$
NUVEEN GEORGIA DIVIDEND
ADVANTAGE MUNICIPAL FUND 2
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
MUNIPREFERRED(R)
SHARES, SERIES
-----------------
PROSPECTUS
, 2002
-----------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNTIL , 2002 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE MUNIPREFERRED 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.
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ___________, 2002
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 MuniPreferred
shares of the Fund ("MuniPreferred shares") does not constitute a prospectus,
but should be read in conjunction with the Fund's Prospectus relating thereto
dated __________, 2002 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing MuniPreferred 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.
TABLE OF CONTENTS
PAGE
----
Investment Objectives.................................................................................S-2
Investment Policies and Techniques....................................................................S-4
Other Investment Policies and Techniques.............................................................S-10
Management of the Fund...............................................................................S-13
Investment Adviser...................................................................................S-19
Portfolio Transactions...............................................................................S-21
Net Asset Value......................................................................................S-22
Additional Information Concerning the Auctions for MuniPreferred.....................................S-23
Certain Provisions in the Declaration of Trust.......................................................S-24
Repurchase of Fund Shares; Conversion to Open-End Fund...............................................S-25
Tax Matters..........................................................................................S-27
Experts ..........................................................................................S-32
Additional Information...............................................................................S-32
Report of Independent Auditors and Financial Statements...............................................F-1
Financial Statements..................................................................................F-2
Appendices
Appendix A - Statement Establishing and Fixing the Rights and Preferences
of MuniPreferred Shares....................................................................A-1
Appendix B - Ratings of Investments...................................................................B-1
Appendix C - Hedging Strategies and Risks.............................................................C-1
Appendix D - Factors Pertaining to Georgia............................................................D-1
This Statement of Additional Information is dated , 2002
S-1
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.
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 holders of common shares and MuniPreferred 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. MuniPreferred 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 MuniPreferred
shares. The suitability of MuniPreferred 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 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;
S-2
(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;
(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, "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
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees with respect to
S-3
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 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 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.
S-4
INVESTMENT IN MUNICIPAL BONDS
PORTFOLIO INVESTMENTS
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 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 the 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 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. "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,
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 B 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.
S-5
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 B 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 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,
S-6
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 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 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.
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:
S-7
(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 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.,
S-8
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.
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.
S-9
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 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
S-10
Act of 1933, as amended (the "Securities Act"); and repurchase agreements with
maturities in excess of seven days.
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. Holders of the Fund's common shares 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 "Risk Factors," 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.
S-11
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 SEC 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 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 the 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,
S-12
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, birth dates 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.
NUMBER OF
POSITIONS AND PORTFOLIOS IN
OFFICES WITH THE FUND COMPLEX
FUND AND YEAR FIRST PRINCIPAL OCCUPATIONS INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
NAME, BIRTH DATE AND ADDRESS ELECTED OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
---------------------------- -------------------- --------------------------------------------------- -------------
TRUSTEE WHO IS AN INTERESTED PERSON OF THE FUND:
-----------------------------------------------
Timothy R. Schwertfeger* Chairman of the Board, Chairman and Director (since 1996) of The John Nuveen 130
3/28/49 President and Trustee Company, Nuveen Investments, Nuveen Advisory Corp. and
333 West Wacker Drive 2002 Nuveen Institutional Advisory Corp.; prior thereto,
Chicago, IL 60606 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
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
* 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.
S-13
Lawrence H. Brown** Trustee Retired (August 1989) as Senior Vice President of The 112
7/29/34 2002 Northern Trust Company.
201 Michigan Avenue
Highwood, IL 60040
Anne E. Impellizzeri Trustee Retired, formerly, Executive Director (since 1998) of 112
1/26/33 2002 Manitoga (Center for Russel Wright's Design with
3 West 29th Street Nature); formerly, President and Chief Executive Officer
New York, NY 10001 of Blanton-Peale Institutes of Religion and Health
(since 1990); prior thereto, Vice President,
Metropolitan Life Insurance Co.
Peter R. Sawers Trustee Adjunct Professor of Business and Economics, University 112
4/3/33 2002 of Dubuque, Iowa; formerly (1991-2000) Adjunct
22 The Landmark Professor, Lake Forest Graduate School of Management,
Northfield, IL 60093 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, Miller-Valentine
4000 Miller-Valentine Ct. Realty, a development and contract company; Chair, Miami
P. O. Box 744 Valley Hospital; Chair, Miami Valley Economic
Dayton, OH 45401 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 Donnelley 112
12/29/47 2002 Foundation (since 1994); prior thereto, Executive
35 E. Wacker Drive Director, Great Lakes Protection Fund (from 1990 to
Suite 2600 1994).
Chicago, IL 60601
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), previously,
333 W. Wacker Drive 2002 associate of Nuveen Investments.
Chicago, IL60606
** 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, 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 and, therefore, for purposes of this offering he is
treated as an interested person. Mr. Schneider owns less than 1% of such
securities outstanding.
S-14
Paul L. Brennan Vice President Vice President (since January 2002), formerly, Assistant 126
11/10/66 2002 Vice President (since 1997), of Nuveen Advisory Corp.;
333 W. Wacker Drive prior thereto, portfolio manager of Flagship Financial
Chicago, IL 60606 Inc.; Chartered Financial Analyst and Certified Public
Accountant.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments (since 1999), prior 130
11/28/67 Treasurer thereto, Assistant Vice President (from 1997); Vice
333 W. Wacker Drive 2002 President and Treasurer (since 1999) of Nuveen Senior
Chicago, IL60606 Loan Asset Management Inc.; Chartered Financial Analyst.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. (since 2001); 130
9/8/54 2002 previously, Vice President of Van Kampen Investment
333 W. Wacker Drive Advisory Corp. (since 1998); prior thereto, Assistant
Chicago, IL 60606 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 Vice
333 W. Wacker Drive 2002 President (since 1998) of Nuveen Investments; Vice
Chicago, IL 60606 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 President 130
10/24/45 2002 (since 1998) of Nuveen Advisory Corp. and Nuveen
333 W. Wacker Drive Institutional Advisory Corp.
Chicago, IL60606
William M. Fitzgerald Vice President Managing Director (since 2002) of Nuveen Investments; 130
3/2/64 2002 Managing Director (since 2001), formerly Vice President
333 W. Wacker Drive of Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp. (since 1995); Chartered Financial Analyst.
Stephen D. Foy Vice President and Vice President of Nuveen Investments and The John Nuveen 130
5/31/54 Controller Company; Vice President (since 1999) of Nuveen Senior
333 W. Wacker Drive 2002 Loan Management Inc.; Certified Public Accountant.
Chicago, IL 60606
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; Chartered 126
7/5/55 2002 Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
S-15
Richard A. Huber Vice President Vice President of Nuveen Institutional Advisory Corp. 126
3/26/63 2002 (since 1998) and Nuveen Advisory Corp. (since 1997);
333 W. Wacker Drive prior thereto, Vice President and Portfolio Manager of
Chicago, IL 60606 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 Investments, 130
3/22/63 2002 previously Assistant Vice President (since 1999); prior
333 W. Wacker Drive thereto, Associate of Nuveen Investments; Certified
Chicago, IL 60606 Public Accountant.
Tina M. Lazar Vice President Vice President (since 1999), previously, Assistant Vice 130
8/27/61 2002 President (since 1993) of Nuveen Investments.
333 W. Wacker Drive
Chicago, IL 60606
Larry W. Martin Vice President and Vice President, Assistant Secretary and Assistant 130
7/27/51 Assistant Secretary Secretary Assistant General Counsel of Nuveen
333 W. Wacker Drive 2002 Investments; Vice President and Assistant Secretary of
Chicago, IL 60606 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 Investments; 130
7/7/65 2002 Managing Director (since 1997), formerly Vice President
333 W. Wacker Drive (since 1996) of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; Chartered Financial
Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), formerly, Assistant 126
9/4/60 2002 Vice President (since 1998), of Nuveen Advisory Corp.;
333 W. Wacker Drive prior thereto, portfolio manager.
Chicago, IL 60606
Thomas C. Spalding Vice President Vice President of Nuveen Advisory Corp. and Nuveen 126
7/31/51 2002 Institutional Advisory Corp.; Chartered Financial
333 W. Wacker Drive Analyst.
Chicago, IL 60606
S-16
Gifford R. Zimmerman Vice President and Managing Director (since 2002), Assistant Secretary and 130
9/9/56 Secretary Associate General Counsel, formerly, Vice President and
333 W. Wacker Drive 2002 Assistant General Counsel of Nuveen Investments;
Chicago, IL 60606 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), and Assistant Secretary,
formerly, Vice President (since 1999) of Nuveen Senior
Loan Asset Management Inc.; 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.
S-17
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.
The holders of common shares 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 COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY BY TRUSTEE IN FAMILY OF
NAME OF TRUSTEE SECURITIES IN THE 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
S-18
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.
ESTIMATED AGGREGATE TOTAL COMPENSATION AMOUNT OF TOTAL
COMPENSATION FROM THE FROM FUND AND FUND COMPENSATION THAT HAS
NAME OF TRUSTEE FUND* COMPLEX** BEEN DEFERRED
--------------------------------------- --------------------- ------------------- ----------------------
Robert P. Bremner........................... $74 $72,500 $ 8,280
Lawrence H. Brown........................... 76 78,500 --
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
---------------------
* 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 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 care
investment portfolios. Nuveen Investments serves financial advisors
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 manages approximately $74
billion in assets. The John Nuveen Company is listed on The New York Stock
Exchange and trades under the symbol "JNC".
S-19
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
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 (AS A REIMBURSED (AS A
PERCENTAGE OF AVERAGE PERCENTAGE OF AVERAGE
YEAR ENDING SEPTEMBER 30, DAILY MANAGED ASSETS) YEAR ENDING SEPTEMBER 30, DAILY 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.
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
S-20
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 Inc. 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 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
S-21
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.
Under the 1940 Act, the Fund may not purchase portfolio securities
from any underwriting syndicate of which Nuveen is a member except under certain
limited conditions set forth in Rule 10f-3. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund that may be invested in a particular
issue. In addition, purchases of securities made pursuant to the terms of the
Rule must be approved at least quarterly by the Board of Trustees of the Fund,
including a majority of the members thereof who are not interested persons of
the Fund.
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.
S-22
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR MUNIPREFERRED
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred. See "Broker-Dealers"
below.
Securities Depository. The Depository Trust Company ("DTC") will act
as the Securities Depository for the Agent Members (as defined below) with
respect to shares of each series of MuniPreferred. One certificate for all of
the shares of each series of MuniPreferred will be registered in the name of
Cede, as nominee of the Securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of shares of MuniPreferred contained in the Statement. The
Fund will also issue stop-transfer instructions to the transfer agent for shares
of each series of MuniPreferred. Prior to the commencement of the right of
holders of preferred shares to elect a majority of the Fund's trustees, as
described under "Description of MuniPreferred Shares -- Voting Rights" in the
Prospectus, Cede will be the holder of record of all shares of each series of
MuniPreferred and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of MuniPreferred, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of MuniPreferred, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of MuniPreferred" in
the prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
S-23
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of MuniPreferred will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
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
S-24
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 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.
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 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
S-25
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 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
S-26
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.
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.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon
the advice of Vedder, Price, Kaufman & Kammholz, special counsel to the Fund.
The Fund intends to elect to be treated and to qualify under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company and to satisfy conditions which enable dividends on
common shares or shares of MuniPreferred which are attributable to interest on
municipal obligations to be exempt from federal income tax in the hands of
owners of such stock, subject to the possible application of the federal
alternative minimum tax.
S-27
To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to its
shareholders each year at least 90% of the sum of (i) its investment company
taxable income (as that term is defined in the Code, determined without regard
to the deduction for dividends paid) and (ii) its net tax-exempt income (the
excess of its gross tax-exempt interest income over certain disallowed
deductions) and (b) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. government securities,
securities of other regulated investment companies, and other securities, with
these other securities limited, with respect to any one issuer, to an amount not
greater in value than 5% 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 market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or 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. In meeting these
requirements of Subchapter M of the Code, the Fund may be restricted in the
utilization of certain of the investment techniques described under "Investment
Policies and Techniques" and "Other Investment Policies and Techniques" above.
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
federal corporate income tax upon its taxable income for that year, and
distributions to its shareholders would be taxable to such holders as ordinary
income to the extent of the earnings and profits of the Fund. A regulated
investment company that fails to distribute, by the close of each calendar year,
an amount equal to the sum of 98% of its ordinary taxable income for such year
and 98% of its capital gain net income for the one-year period ending October 31
in such year, plus any shortfalls from the prior years' required distribution,
is liable for a 4% excise tax on the excess of the required distribution for
such calendar year over the distributed amount for such calendar year. To avoid
the imposition of this excise tax, the Fund generally intends to make the
required distributions of its ordinary taxable income, if any, and its capital
gain net income, to the extent possible, by the close of each calendar year.
The Fund intends to qualify to pay "exempt-interest" dividends, as
defined in the Code, on its common shares and shares of MuniPreferred by
satisfying the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consist of tax-exempt
municipal bonds. Exempt-interest dividends are dividends or any part thereof
(other than a capital gain dividend) paid by the Fund which are attributable to
interest on municipal bonds and are so designated by the Fund. Exempt-interest
dividends will be exempt from federal income tax, subject to the possible
application of the federal alternative minimum tax. Insurance proceeds received
by the Fund under any insurance policies in respect of scheduled interest
payments on defaulted municipal bonds, as described herein, will generally be
excludable from federal gross income under Section 103(a) of the Code. In the
case of non-appropriation by a political subdivision, however, there can be no
assurance that payments made by the issuer representing interest on such
"non-appropriation" municipal lease obligations will be excludable from gross
income for federal income tax purposes. See "Investment Policies and Techniques"
above. Gains of the Fund that are attributable to market discount on certain
municipal obligations acquired after April 30, 1993 are treated as ordinary
income to the extent of accrued market discount on the bond. Distributions to
shareholders of net income received by the Fund from taxable temporary
investments, if any, and of net short-term capital gains realized by the Fund,
if any, will be taxable to its shareholders as ordinary income. Distributions by
the Fund of net capital gain (i.e., the excess of net long-term capital gain
over net short-term capital loss), if any, are taxable as long-term capital
gain, regardless of the length of time the shareholder has owned common shares
or shares of MuniPreferred of the Fund. The amount of taxable income allocable
to the Fund's shares of MuniPreferred will depend upon the amount of such income
realized by the Fund, but is not generally expected to be significant. Except
for dividends paid on shares of MuniPreferred which include an allocable portion
of any net capital gain or other taxable income, the Fund anticipates that all
other dividends paid on shares of its MuniPreferred will constitute
S-28
exempt-interest dividends for federal income tax purposes. Distributions, if
any, in excess of the Fund's earnings and profits will first reduce the adjusted
tax basis of a shareholder's shares and, after that basis has been reduced to
zero, will constitute capital gain to the shareholder (assuming the shares are
held as a capital asset). As long as the Fund qualifies as a regulated
investment company under the Code, no part of its distributions to shareholders
will qualify for the dividends-received deduction available to corporate
shareholders.
The Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must designate to each
such class proportionate amounts of each type of its income for each tax year
based upon the percentage of total dividends distributed to each class for such
year. The Fund intends each year to allocate, to the fullest extent practicable,
net tax-exempt interest, net capital gain and other taxable income, if any,
between its common shares and shares of MuniPreferred in proportion to the total
dividends paid to each class with respect to such year. To the extent permitted
under applicable law, the Fund reserves the right to make special allocations of
income within a class, consistent with the objectives of the Fund. The Fund
will, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate
Period Days or fewer, and may, in the case of any other Special Rate Period,
notify the Auction Agent of the amount of any net capital gain or other income
taxable for regular federal income tax purposes to be included in any dividend
on shares of its MuniPreferred prior to the Auction establishing the Applicable
Rate for such dividend. If (a) in the case of any Minimum Rate Period or any
Special Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net
capital gain or other income taxable for regular federal income tax purposes to
a dividend paid on shares of MuniPreferred without having given advance notice
thereof to the Auction Agent as required by the Statement solely by reason of
the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of its MuniPreferred or
the liquidation of the Fund or (b) in the case of any Special Rate Period of
more than 28 Rate Period Days, the Fund allocates any net capital gain or other
taxable income for regular federal income tax purposes to shares of its
MuniPreferred without having given advance notice thereof as described above,
the Fund will make certain payments to owners of shares of its MuniPreferred to
which such allocation was made to offset the federal income tax effect thereof
as described under "Description of MuniPreferred Shares -- Dividends and
Dividend Periods -- Gross-up Payments" in the Prospectus.
In order for any distributions to owners of the Fund's shares of
MuniPreferred to be eligible to be treated as exempt-interest dividends, such
shares of MuniPreferred must be treated as stock for federal income tax
purposes. Nuveen Advisory believes the shares of MuniPreferred should be treated
as stock for federal income tax purposes.
If at any time when the Fund's shares of MuniPreferred are
outstanding the Fund fails to meet the MuniPreferred Basic Maintenance Amount or
the 1940 Act MuniPreferred Asset Coverage, the Fund will be required to suspend
distributions to holders of its common shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
MuniPreferred Shares -- Dividends and Dividend Periods -- Restrictions on
Dividends and Other Distributions" in the prospectus. This may prevent the Fund
from distributing at least 90% of the sum of its investment company taxable
income (as that term is defined in the Code, determined without regard to the
deduction for dividends paid) and its net tax-exempt income, and may therefore
jeopardize the Fund's qualification for taxation as a regulated investment
company or cause the Fund to incur a tax liability or a non-deductible 4% excise
tax on the undistributed taxable income (including gain), or both. Upon failure
to meet the MuniPreferred Basic Maintenance Amount or the 1940 Act MuniPreferred
Asset Coverage, the Fund will be required to redeem its shares of MuniPreferred
in order to maintain or restore such maintenance amount or asset coverage and
avoid the adverse consequences to the Fund and its shareholders of failing to
qualify as a
S-29
regulated investment company. There can be no assurance, however, that any such
redemption would achieve such objectives.
The Code provides that interest on indebtedness incurred or continued
to purchase or carry the Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.
The interest on private activity bonds in most instances is not
federally tax-exempt to a person who is a "substantial user" of a facility
financed by such bonds or a "related person" of such "substantial user." As a
result, the Fund may not be an appropriate investment for a shareholder who is
considered either a "substantial user" or a "related person" within the meaning
of the Code. In general, a "substantial user" of a facility includes a
"nonexempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and certain members of their families), an S corporation and each of its
shareholders (and certain members of their families) and various combinations of
these and other relationships. The foregoing is not a complete description of
all of the provisions of the Code covering the definitions of "substantial user"
and "related person."
The Fund may, at its option, redeem shares of its MuniPreferred in
whole or in part, and is required to redeem shares of its MuniPreferred to the
extent required to maintain the MuniPreferred Basic Maintenance Amount and the
1940 Act MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a
redemption of the shares of MuniPreferred will be taxed as gain or loss from the
sale or exchange of the shares of MuniPreferred under Section 302 of the Code
rather than as a dividend, but only if the redemption distribution (a) is deemed
not to be essentially equivalent to a dividend, (b) is in complete redemption of
an owner's interest in the Fund, (c) is substantially disproportionate with
respect to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
ownership of common shares will be taken into account. In determining whether
the above conditions are satisfied, shares owned by certain persons related to
the owner will be treated as held by such owner.
Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S. withholding
tax at the rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on distributions of taxable net investment income and net short-term
capital gain. To the extent received by foreign investors, exempt-interest
dividends, distributions of net long-term capital gain and gain from the sale or
other disposition of the shares of MuniPreferred generally are exempt from U.S.
federal income taxation. Different tax consequences may result if the owner is
engaged in a trade or business in the United States or, in the case of an
individual, is present in the United States for more than 182 days during a
taxable year and certain other conditions are met.
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 of the year declared.
Certain of the Fund's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Fund and affect the holding
S-30
period of securities held by the Fund and the character of the gains or losses
realized by the Fund. These provisions may also require the Fund to recognize
income or gain without receiving cash with which to make distributions in the
amounts necessary to satisfy the requirements for maintaining regulated
investment company status and for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections in order to
mitigate the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
The sale or other disposition of common shares or shares of
MuniPreferred of the Fund (other than redemptions, the rules for which are
described above) will normally result in capital gain or loss to shareholders
who hold their 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
generally subject to reduced rates of taxation. Losses realized by a shareholder
on the sale or exchange of shares of the Fund held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of
long-term capital gain received (or designated amounts of undistributed capital
gain that are treated as received) with respect to such shares. Under certain
circumstances, a shareholder's holding period may have to restart after, or may
be suspended for, any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any loss
realized on a sale or exchange of shares of the Fund will be disallowed to the
extent those shares of the Fund are replaced by other substantially identical
shares of the Fund within a period of 61 days beginning 30 days before and
ending 30 days after the date of disposition of the original shares. In that
event, the basis of the replacement shares of the Fund will be adjusted to
reflect the disallowed loss.
Federal tax law imposes an alternative minimum tax with respect to
corporations, individuals, trusts and estates. Interest on certain municipal
obligations, such as bonds issued to make loans for housing purposes or to
private entities (but not to certain tax-exempt organizations such as
universities and non-profit hospitals) is included as an item of tax preference
in determining the amount of a taxpayer's alternative minimum taxable income. To
the extent that the Fund receives income from municipal obligations subject to
the federal alternative minimum tax, a portion of the dividends paid by it,
although otherwise exempt from federal income tax, will be taxable to its
shareholders to the extent that their tax liability is determined under the
alternative minimum tax. The Fund will annually supply a report indicating the
percentage of the Fund's income attributable to municipal obligations subject to
the federal alternative minimum tax. In addition, for certain corporations,
alternative minimum taxable income is increased by 75% of the difference between
an alternative measure of income ("adjusted current earnings") and the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all distributions by the Fund that
would otherwise be tax-exempt, is included in calculating a corporation's
adjusted current earnings. Certain small corporations are not subject to the
alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the
Fund, is taken into account in calculating the amount of social security and
railroad retirement benefits that may be subject to federal income tax.
The Fund is required in certain circumstances to withhold a portion
of taxable dividends and certain other payments paid to certain holders of the
Fund's shares who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited
S-31
against such shareholder's U.S. federal income tax liability, provided the
required information is furnished to the IRS.
The Code provides that every shareholder required to file a tax
return must include for information purposes on such return the amount of
tax-exempt interest received during the taxable year, including any
exempt-interest dividends received from the Fund.
The value of common shares acquired pursuant to the Fund's Dividend
Reinvestment Plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income.
The foregoing is a general summary of the provisions of the Code and
regulations thereunder presently in effect as they directly govern the federal
income taxation of the Fund and its shareholders. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive. Moreover, the foregoing does not address many of the factors that
may be determinative of whether an investor will be liable for the alternative
minimum tax. Shareholders are advised to consult their own tax advisors for more
detailed information concerning the federal income tax consequences of
purchasing, holding and disposing of Fund shares.
STATE TAX MATTERS
Tax matters pertaining to Georgia are set forth in Appendix D.
EXPERTS
The Financial Statements of the Fund as of ___________, 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.
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 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.
S-32
REPORT OF INDEPENDENT AUDITORS
AND FINANCIAL STATEMENTS
[to come]
F-1
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
FINANCIAL STATEMENTS
[to come]
F-2
APPENDIX A
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
TABLE OF CONTENTS
PAGE
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Definitions
"AA" Composite Commercial Paper Rate......................................................................1
Accountant's Confirmation.................................................................................2
Affiliate.................................................................................................2
Agent Member..............................................................................................2
All Hold Order............................................................................................2
Anticipation Notes........................................................................................2
Applicable Rate...........................................................................................2
Auction...................................................................................................2
Auction Agency Agreement..................................................................................2
Auction Agent.............................................................................................2
Auction Date..............................................................................................2
Auction Procedures........................................................................................2
Available Munipreferred...................................................................................2
Benchmark Rate............................................................................................2
Beneficial Owner..........................................................................................3
Bid and Bids..............................................................................................3
Bidder and Bidders........................................................................................3
Board of Trustees.........................................................................................3
Broker-Dealer.............................................................................................3
Broker-Dealer Agreement...................................................................................3
Business Day..............................................................................................3
Code......................................................................................................3
Commercial Paper Dealers..................................................................................3
Common Shares.............................................................................................3
Cure Date.................................................................................................3
Date of Original Issue....................................................................................3
Declaration...............................................................................................3
Deposit Securities........................................................................................3
Discounted Value..........................................................................................3
Dividend Payment Date.....................................................................................4
Dividend Period...........................................................................................4
Existing Holder...........................................................................................4
Failure to Deposit........................................................................................4
Federal Tax Rate Increase.................................................................................4
Fund......................................................................................................4
Gross-Up Payment..........................................................................................4
i
Hold Order and Hold Orders................................................................................4
Holder....................................................................................................4
Independent Accountant....................................................................................5
Initial Rate Period.......................................................................................5
Interest Equivalent.......................................................................................5
Issue Type Category.......................................................................................5
Kenny Index...............................................................................................5
Late Charge...............................................................................................5
Liquidation Preference....................................................................................5
Market Value..............................................................................................5
Maximum Potential Gross-Up Payment Liability..............................................................5
Maximum Rate..............................................................................................5
Minimum Rate Period.......................................................................................6
Moody's...................................................................................................6
Moody's Discount Factor...................................................................................6
Moody's Eligible Asset....................................................................................6
Moody's Exposure Period...................................................................................6
Moody's Volatility Factor.................................................................................6
Municipal Obligations.....................................................................................7
MuniPreferred.............................................................................................7
MuniPreferred Basic Maintenance Amount....................................................................7
MuniPreferred Basic Maintenance Cure Date.................................................................8
MuniPreferred Basic Maintenance Report....................................................................8
1940 Act..................................................................................................9
1940 Act Cure Date........................................................................................9
1940 Act MuniPreferred Asset Coverage.....................................................................9
Notice of Redemption......................................................................................9
Notice of Special Rate Period.............................................................................9
Order and Orders..........................................................................................9
Original Issue Insurance..................................................................................9
Other Issues..............................................................................................9
Outstanding...............................................................................................9
Permanent Insurance.......................................................................................9
Person....................................................................................................9
Portfolio Insurance.......................................................................................9
Potential Beneficial Owner................................................................................9
Potential Holder.........................................................................................10
Preferred Shares.........................................................................................10
Quarterly Valuation Date.................................................................................10
Rate Period..............................................................................................10
Rate Period Days.........................................................................................10
Receivables for Municipal Obligations Sold...............................................................10
Redemption Price.........................................................................................10
Reference Rate...........................................................................................10
Registration Statement...................................................................................10
S&P......................................................................................................10
S&P Discount Factor......................................................................................11
S&P Eligible Asset.......................................................................................11
S&P Exposure Period......................................................................................11
S&P Volatility Factor....................................................................................11
ii
Secondary Market Insurance...............................................................................11
Securities Depository....................................................................................11
Sell Order and Sell Orders...............................................................................11
Special Rate Period......................................................................................11
Special Redemption Provisions............................................................................11
Submission Deadline......................................................................................11
Submitted Bid and Submitted Bids.........................................................................11
Submitted Hold Order and Submitted Hold Orders...........................................................11
Submitted Order and Submitted Orders.....................................................................11
Submitted Sell Order and Submitted Sell Orders...........................................................11
Subsequent Rate Period...................................................................................11
Substitute Commercial Paper Dealer.......................................................................12
Substitute U.S. Government Securities Dealer.............................................................12
Sufficient Clearing Bids.................................................................................12
Taxable Allocation.......................................................................................12
Taxable Equivalent of the Short-Term Municipal Bond Rate.................................................12
Taxable Income...........................................................................................12
Treasury Bill............................................................................................12
Treasury Bill Rate.......................................................................................12
Treasury Note............................................................................................13
Treasury Note Rate.......................................................................................13
U.S. Government Securities Dealer........................................................................13
Valuation Date...........................................................................................13
Volatility Factor........................................................................................13
Voting Period............................................................................................13
Winning Bid Rate.........................................................................................13
Part I ......................................................................................................................14
1. Number Of Authorized Shares.................................................................................14
2. Dividends...................................................................................................14
(a) Ranking...........................................................................................14
(b) Cumulative Cash Dividends.........................................................................14
(c) Dividends Cumulative From Date of Original Issue..................................................14
(d) Dividend Payment Dates and Adjustment Thereof.....................................................14
(e) Dividend Rates and Calculation of Dividends.......................................................15
(f) Curing a Failure to Deposit.......................................................................17
(g) Dividend Payments by Fund to Auction Agent........................................................17
(h) Auction Agent as Trustee of Dividend Payments by Fund.............................................17
(i) Dividends Paid to Holders.........................................................................17
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends..............................17
(k) Dividends Designated as Exempt-Interest Dividends.................................................17
3. Gross-Up Payments...........................................................................................17
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or Fewer.....................18
(b) Special Rate Periods of More Than 28 Rate Period Days.............................................18
(c) No Gross-Up Payments in the Event of a Reallocation...............................................18
4. Designation of Special Rate Periods.........................................................................18
(a) Length of and Preconditions for Special Rate Period...............................................18
(b) Adjustment of Length of Special Rate Period.......................................................18
(c) Notice of Proposed Special Rate Period............................................................19
iii
(d) Notice of Special Rate Period.....................................................................19
(e) Failure to Deliver Notice of Special Rate Period..................................................20
5. Voting Rights...............................................................................................20
(a) One Vote Per Share of MuniPreferred...............................................................20
(b) Voting for Additional Trustees....................................................................20
(c) Holders of MuniPreferred to Vote on Certain Other Matters.........................................21
(d) Board May Take Certain Actions Without Shareholder Approval.......................................23
(e) Voting Rights Set Forth Herein Are Sole Voting Rights.............................................23
(f) No Preemptive Rights or Cumulative Voting.........................................................23
(g) Voting For Trustees Sole Remedy For Fund's Failure To Pay Dividends...............................24
(h) Holders Entitled To Vote..........................................................................24
6. 1940 Act MuniPreferred Asset Coverage.......................................................................24
7. MuniPreferred Basic Maintenance Amount......................................................................24
8. [Reserved]..................................................................................................26
9. Restrictions on Dividends and Other Distributions...........................................................26
(a) Dividends on Preferred Shares Other Than MuniPreferred............................................26
(b) Dividends and Other Distributions With Respect to Common Shares Under the 1940 Act................26
(c) Other Restrictions on Dividends and Other Distributions...........................................26
10. Rating Agency Restrictions..................................................................................27
11. Redemption..................................................................................................28
(a) Optional Redemption...............................................................................28
(b) Mandatory Redemption..............................................................................29
(c) Notice of Redemption..............................................................................30
(d) No Redemption Under Certain Circumstances.........................................................30
(e) Absence of Funds Available For Redemption.........................................................30
(f) Auction Agent as Trustee of Redemption Payments by Fund...........................................31
(g) Shares For Which Notice of Redemption Has Been Given Are No Longer Outstanding....................31
(h) Compliance With Applicable Law....................................................................31
(i) Only Whole Shares of MuniPreferred May Be Redeemed................................................31
12. Liquidation Rights..........................................................................................31
(a) Ranking...........................................................................................31
(b) Distributions Upon Liquidation....................................................................31
(c) Pro Rata Distributions............................................................................32
(d) Rights of Junior Shares...........................................................................32
(e) Certain Events Not Constituting Liquidation.......................................................32
13. Miscellaneous...............................................................................................32
(a) Amendment of Appendix A to Add Additional Series..................................................32
(b) Appendix A Incorporated By Reference..............................................................32
(c) No Fractional Shares..............................................................................32
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise Acquired by the Fund...........33
(e) Board May Resolve Ambiguities.....................................................................33
(f) Headings Not Determinative........................................................................33
(g) Notices...........................................................................................33
Part II ......................................................................................................................33
1. Orders......................................................................................................33
2. Submission of Orders by Broker-Dealers to Auction Agent.....................................................35
iv
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.............................37
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares...............38
5. Notification of Allocations.................................................................................40
6. Auction Agent...............................................................................................41
7. Transfer of Shares of MuniPreferred.........................................................................41
8. Global Certificate..........................................................................................41
Appendix A......................................................................................................................A-1
Section 1. Designation as to Series.............................................................................A-1
Section 2. Number of Authorized Shares Per Series...............................................................A-1
Section 3. Exceptions to Certain Definitions....................................................................A-1
Section 4. Certain Definitions..................................................................................A-1
Section 5. Initial Rate Periods.................................................................................A-8
Section 6. Date For Purposes of Paragraph (zzz) Contained Under the Heading "Definitions" in This Statement.....A-8
Section 7. Party Named for Purposes of the Definition of "Rate Multiple" in This Statement......................A-8
Section 8. Additional Definitions...............................................................................A-8
Section 9. Dividend Payment Dates...............................................................................A-8
Section 10. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this Statement..................A-8
Section 11. Redemption Provisions Applicable To Initial Rate Periods.............................................A-8
Section 12. Applicable Rate For Purposes of Subparagraph (B)(III) of Section 3 of Part II of this Statement......A-8
Section 13. Certain Other Restrictions and Requirements..........................................................A-9
v
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2, a Massachusetts
business trust (the "Fund"), certifies that:
First: Pursuant to authority expressly vested in the Board of
Trustees of the Fund by Article IV of the Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time is, together with this
Statement, herein called the "Declaration"), the Board of Trustees has, by
resolution, authorized the issuance of shares of the Fund's authorized Preferred
Shares liquidation preference $25,000 per share, having such designation or
designations as to series as is set forth in Section 1 of Appendix A hereto and
such number of shares per such series as is set forth in Section 2 of Appendix A
hereto.
Second: The preferences, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of redemption, of the
shares of each series of MuniPreferred described in Section 1 of Appendix A
hereto are as follows (each such series being referred to herein as a series of
MuniPreferred, and shares of all such series being referred to herein
individually as a share of MuniPreferred and collectively as shares of
MuniPreferred):
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Appendix A
hereto, as used in Parts I and II of this Statement, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
(a) "AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate
Period of shares of a series of MuniPreferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by S&P or the
equivalent of such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day next preceding such date; or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a
1
discount basis (a "discount rate") for commercial paper of a given days'
maturity shall be equal to the quotient (rounded upwards to the next higher
one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction, the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors, or executive officers of which is a trustee of the
Fund be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Fund.
(d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "ALL HOLD ORDER" shall have the meaning specified in Section 12
of Appendix A of this Statement.
(f) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs),
Grant Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation
Notes (BANs) that are rated by S&P.
(g) "APPLICABLE RATE" shall have the meaning specified in
subparagraph (e)(i) of Section 2 of Part I of this Statement.
(h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of a series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
(j) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part II of
this Statement.
(k) "AUCTION DATE" with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(l) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.
(m) "AVAILABLE MUNIPREFERRED" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(n) "BENCHMARK RATE" shall have the meaning specified in Section 12
of Appendix A hereto.
2
(o) "BENEFICIAL OWNER" with respect to shares of a series of
MuniPreferred, means a customer of a Broker-Dealer who is listed on the records
of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of
shares of such series.
(p) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement; provided,
however, that neither the Fund nor any affiliate thereof shall be permitted to
be a Bidder in an Auction, except that any Broker-Dealer that is an affiliate of
the Fund may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
(r) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Fund
or any duly authorized committee thereof.
(s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of this Statement, that is a member of, or a
participant in, the Securities Depository or is an affiliate of such member or
participant, has been selected by the Fund and has entered into a Broker-Dealer
Agreement that remains effective.
(t) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund,
the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of this Statement.
(u) "BUSINESS DAY" shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday, Sunday nor any
other day on which banks in The City of New York, New York, are authorized by
law to close.
(v) "CODE" means the Internal Revenue Code of 1986, as amended.
(w) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer.
(x) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.01 per share, of the Fund.
(y) "CURE DATE" shall mean the MuniPreferred Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.
(a) "DATE OF ORIGINAL ISSUE" with respect to shares of a series of
MuniPreferred, shall mean the date on which the Fund initially issued such
shares.
(aa) "DECLARATION" shall have the meaning specified on the first page
of this Statement.
(bb) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least A-l+ or SP-l+ by S&P, except that, for purposes of subparagraph
(a)(v) of Section 11 of Part I of this Statement, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.
(cc) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i)
with respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor
3
and (ii)(a) with respect to a Moody's Eligible Asset that is not currently
callable as of such Valuation Date at the option of the issuer thereof, the
quotient of the Market Value thereof divided by the applicable Moody's Discount
Factor, or (b) with respect to a Moody's Eligible Asset that is currently
callable as of such Valuation Date at the option of the issuer thereof, the
quotient of (1) the lesser of the Market Value or call price thereof, including
any call premium, divided by (2) the applicable Moody's Discount Factor.
(dd) [Reserved]
(ee) [Reserved]
(ff) "DIVIDEND PAYMENT DATE," with respect to shares of a series of
MuniPreferred, shall mean any date on which dividends are payable on shares of
such series pursuant to the provisions of paragraph (d) of Section 2 of Part I
of this Statement.
(gg) "DIVIDEND PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the period from and including the Date of Original
Issue of shares of such series to but excluding the initial Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series.
(hh) "EXISTING HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Fund) that is listed on the records of the Auction Agent as a
holder of shares of such series.
(ii) "FAILURE TO DEPOSIT," with respect to shares of a series of
MuniPreferred, shall mean a failure by the Fund to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
notice of redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of this Statement; provided, however, that the foregoing clause (B) shall not
apply to the Fund's failure to pay the Redemption Price in respect of shares of
MuniPreferred when the related Notice of Redemption provides that redemption of
such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
(jj) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Moody's Volatility Factor."
(kk) "FUND" shall mean the entity named on the first page of this
Statement, which is the issuer of the shares of MuniPreferred.
(ll) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4
of Appendix A hereto.
(mm) "HOLD ORDER" and "HOLD ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.
(nn) "HOLDER," with respect to shares of a series of MuniPreferred,
shall mean the registered holder of such shares as the same appears on the
record books of the Fund.
4
(oo) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
(pp) "INITIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified with respect to shares of such
series in Section 5 of Appendix A hereto.
(qq) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
(rr) "ISSUE TYPE CATEGORY," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(ss) "KENNY INDEX" shall have the meaning specified in the definition
of "Taxable Equivalent of the Short-Term Municipal Bond Rate."
(tt) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of this Statement.
(uu) "LIQUIDATION PREFERENCE," with respect to a given number of
shares of MuniPreferred, means $25,000 times that number.
(vv) "MARKET VALUE" of any asset of the Fund shall mean the market
value thereof determined by the pricing service designated from time to time by
the Board of Trustees. Market Value of any asset shall include any interest
accrued thereon. The pricing service values portfolio securities at the mean
between the quoted bid and asked price or the yield equivalent when quotations
are readily available. Securities for which quotations are not readily available
are valued at fair value as determined by the pricing service using methods
which include consideration of: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications as
to value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques or a matrix system, or both, to
determine valuations.
(ww) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any
Valuation Date, shall mean the aggregate amount of Gross-up Payments that would
be due if the Fund were to make Taxable Allocations, with respect to any taxable
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Gross-up Payments are fully taxable.
(xx) "MAXIMUM RATE," for shares of a series of MuniPreferred on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the
Auction Date immediately prior to the first day of any proposed
Special Rate Period designated by the Fund pursuant to Section 4 of
Part I of this Statement, the product of (A) the Reference Rate on
such Auction Date for the next Rate Period of shares of such series
and (B) the Rate Multiple on such Auction Date, unless shares of such
series have or had a Special Rate Period (other than a Special Rate
Period of 28 Rate Period Days or fewer) and an Auction at which
Sufficient Clearing Bids existed has not yet occurred for a Minimum
Rate Period of shares of such series after such Special Rate Period,
in which case the higher of:
5
(A) the dividend rate on shares of such series for
the then-ending Rate Period; and
(B) the product of (1) the higher of (x) the
Reference Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to the then-ending
Rate Period of shares of such series, if such then-ending
Rate Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal
in length to such Special Rate Period of shares of such
series, if such Special Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to such Special Rate
Period, if such Special Rate Period was more than 364 Rate
Period Days and (2) the Rate Multiple on such Auction Date;
or (ii) in the case of any Auction Date which is the
Auction Date immediately prior to the first day of any
proposed Special Rate Period designated by the Fund
pursuant to Section 4 of Part I of this Statement, the
product of (A) the highest of (1) the Reference Rate on
such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was
more than 364 Rate Period Days, (2) the Reference Rate on
such Auction Date for the Special Rate Period for which the
Auction is being held if such Special Rate Period is 364
Rate Period Days or fewer or the Treasury Note Rate on such
Auction Date for the Special Rate Period for which the
Auction is being held if such Special Rate Period is more
than 364 Rate Period Days, and (3) the Reference Rate on
such Auction Date for Minimum Rate Periods and (B) the Rate
Multiple on such Auction Date.
(yy) [Reserved]
(zz) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days.
(aaa) "MOODY'S" shall mean Moody's Investors Service, Inc., a
Delaware corporation, and its successors.
(bbb) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(ccc) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(ddd) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
(eee) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation
Date, (i) in the case of any Minimum Rate Period, any Special Rate Period of 28
Rate Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or
more, a multiplicative factor equal to 275%, except as otherwise provided in the
last sentence of this definition; (ii) in the case of any Special Rate Period of
more than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal
to 203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but
6
fewer than 57 Rate Period Days, a multiplicative factor equal to 235%. If, as a
result of the enactment of changes to the Code, the greater of the maximum
marginal Federal individual income tax rate applicable to ordinary income and
the maximum marginal Federal corporate income tax rate applicable to ordinary
income will increase, such increase being rounded up to the next five percentage
points (the "Federal Tax Rate Increase"), until the effective date of such
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
FEDERAL TAX RATE VOLATILITY
INCREASE FACTOR
---------------- ----------
5%.................... 295%
10%................... 317%
15%................... 341%
20%................... 369%
25%................... 400%
30%................... 436%
35%................... 477%
40%................... 525%
(fff) "MUNICIPAL OBLIGATIONS" shall mean debt obligations issued by
states, cities and local authorities, and certain possessions and territories of
the United States, to obtain funds for various public purposes, including the
construction and maintenance of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include the refinancing of outstanding obligations and the obtaining of
funds for general operating expenses and for loans to other public institutions
and facilities. In addition, certain industrial development, private activity
and pollution control bonds may be included within the term Municipal
Obligations if the interest paid thereon qualifies as exempt from regular
Federal income tax. The two principal classifications of Municipal Obligations
are "general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds (e.g., industrial
development bonds) are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Also included within the
general category of Municipal Obligations are participations in lease
obligations or installment purchase contract obligations of municipal
authorities or entities. The Fund will invest its net assets in a diversified
portfolio of municipal bonds that are exempt from regular Federal and Georgia
income tax. Under normal market conditions, the Fund expects to be fully
invested (at least 95% of its assets) in such tax-exempt municipal bonds.
(ggg) "MUNIPREFERRED" shall have the meaning set forth on the first
page of this Statement.
(hhh) "MUNIPREFERRED BASIC MAINTENANCE AMOUNT," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of shares of MuniPreferred outstanding on such date multiplied by $25,000
(plus the product of the number of shares of any other series of Preferred
Shares outstanding on such date multiplied by the liquidation preference of such
shares), plus any redemption premium applicable to shares of MuniPreferred (or
other Preferred Shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective Applicable Rates (whether
or not earned or declared) to (but not including) the first respective Dividend
Payment Dates for shares of MuniPreferred outstanding that follow such Valuation
Date (plus the aggregate amount of dividends, whether or not earned or declared,
that will have accumulated in respect of other outstanding Preferred Shares to,
but not including, the first respective dividend payment dates for such other
shares that follow such Valuation Date); (C) the aggregate amount of dividends
that
7
would accumulate on shares of each series of MuniPreferred outstanding from
such first respective Dividend Payment Date therefor through the 56th day after
such Valuation Date, at the Maximum Rate (calculated as if such Valuation Date
were the Auction Date for the Rate Period commencing on such Dividend Payment
Date) for a Minimum Rate Period of shares of such series to commence on such
Dividend Payment Date, assuming, solely for purposes of the foregoing, that if
on such Valuation Date the Fund shall have delivered a Notice of Special Rate
Period to the Auction Agent pursuant to Section 4(d)(i) of this Part I with
respect to shares of such series, such Maximum Rate shall be the higher of (a)
the Maximum Rate for the Special Rate Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum
Rate Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Fund shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to Section 4(d)(i) of this Part I with respect to shares
of such series designating a Special Rate Period consisting of 56 Rate Period
Days or more, the Volatility Factor applicable to a Special Rate Period of that
length (plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other Preferred Shares outstanding from
such respective dividend payment dates through the 56th day after such Valuation
Date, as established by or pursuant to the respective statements establishing
and fixing the rights and preferences of such other Preferred Shares) (except
that (1) if such Valuation Date occurs at a time when a Failure to Deposit (or,
in the case of Preferred Shares other than MuniPreferred, a failure similar to a
Failure to Deposit) has occurred that has not been cured, the dividend for
purposes of calculation would accumulate at the current dividend rate then
applicable to the shares in respect of which such failure has occurred and (2)
for those days during the period described in this subparagraph (C) in respect
of which the Applicable Rate in effect immediately prior to such Dividend
Payment Date will remain in effect (or, in the case of Preferred Shares other
than MuniPreferred, in respect of which the dividend rate or rates in effect
immediately prior to such respective dividend payment dates will remain in
effect), the dividend for purposes of calculation would accumulate at such
Applicable Rate (or other rate or rates, as the case may be) in respect of those
days); (D) the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of the Fund's Maximum
Potential Gross-up Payment Liability in respect of shares of MuniPreferred (and
similar amounts payable in respect of other Preferred Shares pursuant to
provisions similar to those contained in Section 3 of Part I of this Statement)
as of such Valuation Date; and (F) any current liabilities as of such Valuation
Date to the extent not reflected in any of (i)(A) through (i)(E) (including,
without limitation, any payables for Municipal Obligations purchased as of such
Valuation Date and any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the value (i.e., for purposes of current
Moody's guidelines, the face value of cash, short-term Municipal Obligations
rated MIG-1, VMIG-1 or P-1, and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such securities
mature on or prior to the date upon which any of (i)(A) through (i)(F) become
payable, otherwise the Moody's Discounted Value) (i.e., for the purposes of the
current S&P guidelines, the face value of cash, short-term Municipal Obligations
rated SP-1 or A-1 or Municipal Obligations rated A, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise the S&P Discounted Value) of any of the Fund's
assets irrevocably deposited by the Fund for the payment of any of (i)(A)
through (i)(F).
(iii) "MUNIPREFERRED BASIC MAINTENANCE CURE DATE," with respect to
the failure by the Fund to satisfy the MuniPreferred Basic Maintenance Amount
(as required by paragraph (a) of Section 7 of Part I of this Statement) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.
(jjj) "MUNIPREFERRED BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer or any Senior Vice President or Vice
President of the Fund which sets forth, as of the related Valuation Date, the
assets of the Fund, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), and the MuniPreferred Basic Maintenance Amount.
8
(kkk) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.
(lll) "1940 ACT CURE DATE," with respect to the failure by the Fund
to maintain the 1940 Act MuniPreferred Asset Coverage (as required by Section 6
of Part I of this Statement) as of the last Business Day of each month, shall
mean the last Business Day of the following month.
(mmm) "1940 ACT MUNIPREFERRED ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Fund which are shares of
beneficial interest, including all outstanding shares of MuniPreferred (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares or stock of
a closed-end investment company as a condition of declaring dividends on its
common shares or stock).
(nnn) "NOTICE OF REDEMPTION" shall mean any notice with respect to
the redemption of shares of MuniPreferred pursuant to paragraph (c) of Section
11 of Part I of this Statement.
(ooo) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with
respect to a Special Rate Period of shares of MuniPreferred pursuant to
subparagraph (d)(i) of Section 4 of Part I of this Statement.
(ppp) "ORDER" and "ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(qqq) "ORIGINAL ISSUE INSURANCE," if defined in Section 4 of Appendix
A hereto, shall have the meaning specified in that section.
(rrr) "OTHER ISSUES," if defined in Section 4 of Appendix A hereto,
shall have the meaning specified in that section.
(sss) "OUTSTANDING" shall mean, as of any Auction Date with respect
to shares of a series of MuniPreferred, the number of shares of such series
theretofore issued by the Fund except, without duplication, (i) any shares of
such series theretofore cancelled or delivered to the Auction Agent for
cancellation or redeemed by the Fund, (ii) any shares of such series as to which
the Fund or any Affiliate thereof shall be an Existing Holder and (iii) any
shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Fund.
(ttt) "PERMANENT INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(uuu) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(vvv) "PORTFOLIO INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(www) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a
series of MuniPreferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
9
(xxx) "POTENTIAL HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Fund) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
(yyy) "PREFERRED SHARES" shall mean the preferred shares of the Fund,
and includes the shares of MuniPreferred.
(zzz) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each February, May, August and November of each year, commencing on the date set
forth in Section 6 of Appendix A hereto.
(aaaa) "RATE MULTIPLE" shall have the meaning specified in Section 4
of Appendix A hereto.
(bbbb) "RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the Initial Rate Period, and any Transitional Rate
Period, of shares of such series and any Subsequent Rate Period, including any
Special Rate Period, of shares of such series.
(cccc) "RATE PERIOD DAYS," for any Rate Period or Dividend Period,
means the number of days that would constitute such Rate Period or Dividend
Period but for the application of paragraph (d) of Section 2 of Part I of this
Statement or paragraph (b) of Section 4 of Part I of this Statement.
(dddd) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A)
for purposes of calculation of Moody's Eligible Assets as of any Valuation Date,
no more than the aggregate of the following: (i) the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date, and if the
trades which generated such receivables are (x) settled through clearing house
firms with respect to which the Fund has received prior written authorization
from Moody's or (y) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations
sold as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculation of S&P Eligible Assets as of any Valuation Date, the
book value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.
(eeee) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.
(ffff) "REFERENCE RATE" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer, (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
(gggg) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(hhhh) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
10
(iiii) "S&P DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(jjjj) "S&P ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(kkkk) "S&P EXPOSURE PERIOD" shall mean the maximum period of time
following a Valuation Date that the Fund has under this Statement to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the MuniPreferred Basic Maintenance Amount (as
described in paragraph (a) of Section 7 of Part I of this Statement).
(llll) "S&P VOLATILITY FACTOR" shall mean, as of any Valuation Date,
a multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
(mmmm) "SECONDARY MARKET INSURANCE," if defined in Section 4 of
Appendix A hereto, shall have the meaning specified in that section.
(nnnn) "SECURITIES DEPOSITORY" shall mean The Depository Trust
Company and its successors and assigns or any other securities depository
selected by the Fund which agrees to follow the procedures required to be
followed by such securities depository in connection with shares of
MuniPreferred.
(oooo) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.
(pppp) "SPECIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified in paragraph (a) of Section 4 of
Part I of this Statement.
(qqqq) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning
specified in subparagraph (a)(i) of Section 11 of Part I of this Statement.
(rrrr) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.
(ssss) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(tttt) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(uuuu) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(vvvv) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(wwww) "SUBSEQUENT RATE PERIOD," with respect to shares of a series
of MuniPreferred, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding the
next Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period
11
is also a Special Rate Period, such term shall mean the period commencing on the
first day of such Special Rate Period and ending on the last day of the last
Dividend Period thereof.
(xxxx) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean The First
Boston Company or Morgan Stanley & Co. Incorporated or their respective
affiliates or successors, if such entity is a commercial paper dealer; provided,
however, that none of such entities shall be a Commercial Paper Dealer.
(yyyy) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean The
First Boston Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
(zzzz) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(aaaaa) "TAXABLE ALLOCATION" shall have the meaning specified in
Section 3 of Part I of this Statement.
(bbbbb) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE,"
on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Kenny S&P 30 day High
Grade Index or any successor index (the "Kenny Index") (provided, however, that
any such successor index must be approved by Moody's (if Moody's is then rating
the shares of MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred)), made available for the Business Day immediately preceding such
date but in any event not later than 8:30 A.M., New York City time, on such date
by Kenny S&P Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds the interest on which is excludable
for regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny S&P Evaluation Services or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57 (a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
(ccccc) "TAXABLE INCOME" shall have the meaning specified in Section
12 of Appendix A hereto.
(ddddd) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
(eeeee) "TREASURY BILL RATE," on any date for any Rate Period, shall
mean (i) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
12
quoted in The Wall Street Journal on such date for the Business Day next
preceding such date; or (ii) in the event that any such rate is not published in
The Wall Street Journal, then the bond equivalent yield, calculated in
accordance with prevailing industry convention, as calculated by reference to
the arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of such
Rate Period, as determined by bid price quotations as of the close of business
on the Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
(fffff) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.
(ggggg) "TREASURY NOTE RATE," on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent. If any U.S. Government Securities Dealer does not quote a rate required
to determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Fund to provide such rate or rates not being supplied by
any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
(hhhhh) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc
and Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer.
(iiiii) "VALUATION DATE" shall mean, for purposes of determining
whether the Fund is maintaining the MuniPreferred Basic Maintenance Amount, each
Business Day.
(jjjjj) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility Factor.
(kkkkk) "VOTING PERIOD" shall have the meaning specified in paragraph
(b) of Section 5 of Part I of this Statement.
(lllll) "WINNING BID RATE" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 8 of
Appendix A hereto shall be incorporated herein and made Part hereof by reference
thereto.
13
PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting a series of MuniPreferred shall be as set forth with respect to
such series in Section 2 of Appendix A hereto.
2. DIVIDENDS.
(a) RANKING. The shares of a series of MuniPreferred shall rank on a
parity with each other, with shares of any other series of MuniPreferred and
with shares of any other series of Preferred Shares as to the payment of
dividends by the Fund.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of MuniPreferred
of any series shall be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration and applicable law, cumulative cash dividends at the Applicable
Rate for shares of such series, determined as set forth in paragraph (e) of this
Section 2, and no more (except to the extent set forth in Section 3 of this Part
I), payable on the Dividend Payment Dates with respect to shares of such series
determined pursuant to paragraph (d) of this Section 2. Holders of shares of
MuniPreferred shall not be entitled to any dividend, whether payable in cash,
property or shares, in excess of full cumulative dividends, as herein provided,
on shares of MuniPreferred. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on shares of
MuniPreferred which may be in arrears, and, except to the extent set forth in
subparagraph (e)(i) of this Section 2, no additional sum of money shall be
payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
shares of MuniPreferred of any series shall accumulate at the Applicable Rate
for shares of such series from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The Dividend Payment
Dates with respect to shares of a series of MuniPreferred shall be as set forth
with respect to shares of such series in Section 9 of Appendix A hereto;
provided, however, that:
(i) in the case of a series of MuniPreferred designated as
"Series F MuniPreferred" or "Series M MuniPreferred" in Section 1 of
Appendix A hereto, if the Monday or Tuesday, as the case may be, on
which dividends would otherwise be payable on shares of such series is
not a Business Day, then such dividends shall be payable on such shares
on the first Business Day that falls after such Monday or Tuesday, as
the case may be, and (B) in the case of a series of MuniPreferred
designated as "Series T MuniPreferred," "Series W MuniPreferred" or
"Series TH MuniPreferred" in Section 1 of Appendix A hereto, if the
Wednesday, Thursday or Friday, as the case may be, on which dividends
would otherwise be payable on shares of such series is not a Business
Day, then such dividends shall be payable on such shares on the first
Business Day that falls prior to such Wednesday, Thursday or Friday, as
the case may be; and
(ii) notwithstanding Section 9 of Appendix A hereto, the Fund
in its discretion may establish the Dividend Payment Dates in respect
of any Special Rate Period of shares of a series of MuniPreferred
consisting of more than 28 Rate Period Days; provided, however, that
such dates shall be set forth in the Notice of Special Rate Period
relating to such Special Rate Period, as delivered to the Auction
Agent, which Notice of Special Rate Period shall be filed with the
Secretary of the Fund; and further provided that (1) any such Dividend
Payment Date shall be a Business Day and (2) the last Dividend Payment
Date in respect of such Special Rate Period shall be the Business Day
immediately following the last day thereof, as such last day is
determined in accordance with paragraph (b) of Section 4 of this Part
I.
14
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on shares of
MuniPreferred of any series during the period from and after the Date
of Original Issue of shares of such series to and including the last
day of the Initial Rate Period of shares of such series shall be equal
to the rate per annum set forth with respect to shares of such series
under "Designation" in Section 1 of Appendix A hereto. For each
Subsequent Rate Period of shares of such series thereafter, the
dividend rate on shares of such series shall be equal to the rate per
annum that results from an Auction for shares of such series on the
Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate Period is
not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent
Rate Period will be the Maximum Rate for shares of such series
on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not
been cured), but, prior to 12:00 Noon, New York City time, on
the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall
have been cured in accordance with paragraph (f) of this
Section 2 and the Fund shall have paid to the Auction Agent a
late charge ("Late Charge") equal to the sum of (1) if such
Failure to Deposit consisted of the failure timely to pay to
the Auction Agent the full amount of dividends with respect to
any Dividend Period of the shares of such series, an amount
computed by multiplying (x) 200% of the Reference Rate for the
Rate Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a
fraction, the numerator of which shall be the number of days
for which such Failure to Deposit has not been cured in
accordance with paragraph (f) of this Section 2 (including the
day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which
shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of
such series and (2) if such Failure to Deposit consisted of
the failure timely to pay to the Auction Agent the Redemption
Price of the shares, if any, of such series for which Notice
of Redemption has been mailed by the Fund pursuant to
paragraph (c) of Section 11 of this Part I, an amount computed
by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the
redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit
is not cured in accordance with paragraph (f) of this Section
2 (including the day such Failure to Deposit occurs and
excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the
outstanding shares of such series to be redeemed, no Auction
will be held in respect of shares of such series for the
Subsequent Rate Period thereof and the dividend rate for
shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date
for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period
15
consisting of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period consisting of more
than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured), and, prior to 12:00 Noon,
New York City time, on the third Business Day next succeeding
the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance
with paragraph (f) of this Section 2 or the Fund shall not
have paid the applicable Late Charge to the Auction Agent, no
Auction will be held in respect of shares of such series for
the first Subsequent Rate Period thereof thereafter (or for
any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (2) the
Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures
such Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares
of such series for each such Subsequent Rate Period shall be a
rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be
"Below "ba3"/BB2"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate Period
thereof consisting of more than 364 Rate Period Days, or
during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with paragraph (f) of this
Section 2 or, in the event Moody's is then rating such shares,
the Fund shall not have paid the applicable Late Charge to the
Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference
Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than
365 Rate Period Days and (y) commencing on the date on which
the Rate Period during which Failure to Deposit occurs
commenced), no Auction will be held in respect of shares of
such series for such Subsequent Rate Period (or for any Rate
Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (2) the
Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures
such Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares
of such series for each such Subsequent Rate Period shall be a
rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be
"Below "ba3"/BB2") (the rate per annum at which dividends are
payable on shares of a series of MuniPreferred for any Rate
Period thereof being herein referred to as the "Applicable
Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per
share payable on shares of a series of MuniPreferred on any date on
which dividends shall be payable on shares of such series shall be
computed by multiplying the Applicable Rate for shares of such series
in effect for such Dividend Period or Dividend Periods or Part thereof
for which dividends have not
16
been paid by a fraction, the numerator of which shall be the number of
days in such Dividend Period or Dividend Periods or Part thereof and
the denominator of which shall be 365 if such Dividend Period consists
of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with
respect to shares of a series of MuniPreferred shall have been cured (if such
Failure to Deposit is not solely due to the willful failure of the Fund to make
the required payment to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Fund shall have paid to the Auction
Agent (A) all accumulated and unpaid dividends on shares of such series and (B)
without duplication, the Redemption Price for shares, if any, of such series for
which Notice of Redemption has been mailed by the Fund pursuant to paragraph (c)
of Section 11 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of shares of MuniPreferred when the related Redemption Notice provides
that redemption of such shares is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall
pay to the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
MuniPreferred, an aggregate amount of funds available on the next Business Day
in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All
moneys paid to the Auction Agent for the payment of dividends (or for the
payment of any Late Charge) shall be held in trust for the payment of such
dividends (and any such Late Charge) by the Auction Agent for the benefit of the
Holders specified in paragraph (i) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Fund at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of
MuniPreferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Fund on the Business
Day next preceding such Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DIVIDENDS. Any dividend payment made on shares of MuniPreferred shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the record books of the Fund on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
Dividends on shares of MuniPreferred shall be designated as exempt-interest
dividends up to the amount of tax-exempt income of the Fund, to the extent
permitted by, and for purposes of, Section 852 of the Code.
3. GROSS-UP PAYMENTS. Holders of shares of MuniPreferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor, dividends in an amount equal to the aggregate
Gross-up Payments as follows:
17
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE
PERIOD DAYS OR FEWER. If, in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net capital
gains or other income taxable for Federal income tax purposes to a dividend paid
on shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as provided in Section 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of MuniPreferred or the
liquidation of the Fund, the Fund shall, prior to the end of the calendar year
in which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Fund's dividend disbursing agent to send such notice with a Gross-up
Payment to each Holder of such shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or last
appeared on the record books of the Fund.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If,
in the case of any Special Rate Period of more than 28 Rate Period Days, the
Fund makes a Taxable Allocation to a dividend paid on shares of MuniPreferred,
the Fund shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each Holder of
shares that was entitled to such dividend payment during such calendar year at
such Holder's address as the same appears or last appeared on the record books
of the Fund.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The
Fund shall not be required to make Gross-up Payments with respect to any net
capital gains or other taxable income determined by the Internal Revenue Service
to be allocable in a manner different from that allocated by the Fund.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The
Fund, at its option, may designate any succeeding Subsequent Rate Period of
shares of a series of MuniPreferred as a Special Rate Period consisting of a
specified number of Rate Period Days evenly divisible by seven and not more than
1,820, subject to adjustment as provided in paragraph (b) of this Section 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with paragraph (c) and subparagraph
(d)(i) of this Section 4, (B) an Auction for shares of such series shall have
been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction, and (C) if any Notice of Redemption
shall have been mailed by the Fund pursuant to paragraph (c) of Section 11 of
this Part I with respect to any shares of such series, the Redemption Price with
respect to such shares shall have been deposited with the Auction Agent. In the
event the Fund wishes to designate any succeeding Subsequent Rate Period for
shares of a series of MuniPreferred as a Special Rate Period consisting of more
than 28 Rate Period Days, the Fund shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Fund wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event
the Fund wishes to designate a Subsequent Rate Period as a Special Rate Period,
but the day following what would otherwise be the last day of such Special Rate
Period is not (a) a Tuesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series M MuniPreferred" in Section 1 of Appendix A
hereto, (b) a Wednesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series T
18
MuniPreferred" in Section 1 of Appendix A hereto, (c) a Thursday that is a
Business Day in the case of a series of MuniPreferred designated as "Series W
MuniPreferred" in Section 1 of Appendix A hereto, (d) a Friday that is a
Business Day in the case of a series of MuniPreferred designated as "Series TH
MuniPreferred" in Section 1 of Appendix A hereto, or (e) a Monday that is a
Business Day in the case of a series of MuniPreferred designated as "Series F
MuniPreferred" in Section 1 of Appendix A hereto, then the Fund shall designate
such Subsequent Rate Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately preceding Rate
Period and ending (a) on the first Monday that is followed by a Tuesday that is
a Business Day preceding what would otherwise be such last day, in the case of
Series M MuniPreferred, (b) on the first Tuesday that is followed by a Wednesday
that is a Business Day preceding what would otherwise be such last day, in the
case of Series T MuniPreferred, (c) on the first Wednesday that is followed by a
Thursday that is a Business Day preceding what would otherwise be such last day,
in the case of Series W MuniPreferred, (d) on the first Thursday that is
followed by a Friday that is a Business Day preceding what would otherwise be
such last day, in the case of Series TH MuniPreferred, and (e) on the first
Sunday that is followed by a Monday that is a Business Day preceding what would
otherwise be such last day, in the case of Series F MuniPreferred.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund
proposes to designate any succeeding Subsequent Rate Period of shares of a
series of MuniPreferred as a Special Rate Period pursuant to paragraph (a) of
this Section 4, not less than 20 (or such lesser number of days as may be agreed
to from time to time by the Auction Agent) nor more than 30 days prior to the
date the Fund proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Fund in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Fund will, by 11:00
A.M., New York City time, on the second Business Day next preceding such date
(or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M.,
New York City time, on the second Business Day next preceding the first day of
any proposed Special Rate Period of shares of a series of MuniPreferred as to
which notice has been given as set forth in paragraph (c) of this Section 4 (or
such later time or date, or both, as may be agreed to by the Auction Agent), the
Fund shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period")
stating (A) that the Fund has determined to designate the next
succeeding Rate Period of shares of such series as a Special Rate
Period, specifying the same and the first day thereof, (B) the Auction
Date immediately prior to the first day of such Special Rate Period,
(C) that such Special Rate Period shall not commence if (1) an Auction
for shares of such series shall not be held on such Auction Date for
any reason or (2) an Auction for shares of such series shall be held on
such Auction Date but Sufficient Clearing Bids for shares of such
series shall not exist in such Auction, (D) the scheduled Dividend
Payment Dates for shares of such series during such Special Rate Period
and (E) the Special Redemption Provisions, if any, applicable to shares
of such series in respect of such Special Rate Period, such notice to
be accompanied by a MuniPreferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P Eligible Assets
19
(if S&P is then rating such series) each have an aggregate Discounted
Value at least equal to the MuniPreferred Basic Maintenance Amount as
of such Business Day (assuming for purposes of the foregoing
calculation that (a) the Maximum Rate is the Maximum Rate on such
Business Day as if such Business Day were the Auction Date for the
proposed Special Rate Period, and (b) the Moody's Discount Factors
applicable to Moody's Eligible Assets are determined by reference to
the first Exposure Period longer than the Exposure Period then
applicable to the Fund, as described in the definition of Moody's
Discount Factor herein); or
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Rate Period of shares
of such series and that the next succeeding Rate Period of shares of
such series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the
Fund fails to deliver either of the notices described in subparagraphs (d)(i) or
(d)(ii) of this Section 4 (and, in the case of the notice described in
subparagraph (d)(i) of this Section 4, a MuniPreferred Basic Maintenance Report
to the effect set forth in such subparagraph (if either Moody's or S&P is then
rating the series in question)) with respect to any designation of any proposed
Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this Section 4. In the event the Fund delivers to the
Auction Agent a notice described in subparagraph (d)(i) of this Section 4, it
shall file a copy of such notice with the Secretary of the Fund, and the
contents of such notice shall be binding on the Fund. In the event the Fund
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Fund will provide Moody's (if Moody's is then rating the series
in question) and S&P (if S&P is then rating the series in question) a copy of
such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF MUNIPREFERRED. Except as otherwise
provided in the Declaration of Trust or as otherwise required by law, (i) each
Holder of shares of MuniPreferred shall be entitled to one vote for each share
of MuniPreferred held by such Holder on each matter submitted to a vote of
shareholders of the Fund, and (ii) the holders of outstanding Preferred Shares,
including each share of MuniPreferred, and of Common Shares shall vote together
as a single class; provided, however, that, at any meeting of the shareholders
of the Fund held for the election of trustees, the holders of outstanding
Preferred Shares, including MuniPreferred, represented in person or by proxy at
said meeting, shall be entitled, as a class, to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of the Fund,
to elect two trustees of the Fund, each Preferred Share, including each share of
MuniPreferred, entitling the holder thereof to one vote. Subject to paragraph
(b) of this Section 5, the holders of outstanding Common Shares and Preferred
Shares, including MuniPreferred, voting together as a single class, shall elect
the balance of the trustees.
(b) Voting for Additional Trustees.
(i) Voting Period. During any period in which any one
or more of the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein
as a "Voting Period"), the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that,
when added to the two trustees elected exclusively by the holders of
Preferred Shares, including shares of MuniPreferred, would constitute a
majority of the Board of Trustees as so increased by such smallest
number; and the holders of Preferred Shares, including MuniPreferred,
shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other
20
securities and classes of shares of beneficial interest of the Fund),
to elect such smallest number of additional trustees, together with the
two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any
dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share,
including MuniPreferred, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the
Auction Agent for the payment of such accumulated dividends;
or
(B) if at any time holders of Preferred
Shares are entitled under the 1940 Act to elect a majority of
the trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described
in this subparagraph (b)(i) shall cease, subject always, however, to the
revesting of such voting rights in the Holders upon the further occurrence of
any of the events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as
practicable after the accrual of any right of the holders of Preferred
Shares to elect additional trustees as described in subparagraph (b)(i)
of this Section 5, the Fund shall notify the Auction Agent and the
Auction Agent shall call a special meeting of such holders, by mailing
a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 20 days after the date of mailing
of such notice. If the Fund fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business
Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of Preferred Shares held
during a Voting Period at which trustees are to be elected, such
holders, voting together as a class (to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of
the Fund), shall be entitled to elect the number of trustees prescribed
in subparagraph (b)(i) of this Section 5 on a one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms
of office of all persons who are trustees of the Fund at the time of a
special meeting of Holders and holders of other Preferred Shares to
elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees
that they are entitled to elect, and the persons so elected by the
Holders and such other holders, together with the two incumbent
trustees elected by the Holders and such other holders of Preferred
Shares and the remaining incumbent trustees elected by the holders of
the Common Shares and Preferred Shares, shall constitute the duly
elected trustees of the Fund.
(iv) Terms of Office of Certain Trustees to Terminate
Upon Termination of Voting Period. Simultaneously with the termination
of a Voting Period, the terms of office of the additional trustees
elected by the Holders and holders of other Preferred Shares pursuant
to subparagraph (b)(i) of this Section 5 shall terminate, the remaining
trustees shall constitute the trustees of the Fund and the voting
rights of the Holders and such other holders to elect additional
trustees pursuant to subparagraph (b)(i) of this Section 5 shall cease,
subject to the provisions of the last sentence of subparagraph (b)(i)
of this Section 5.
(c) Holders of MuniPreferred to Vote on Certain Other Matters.
21
(i) Increases in Capitalization. So long as any
shares of MuniPreferred are outstanding, the Fund shall not, without
the affirmative vote or consent of the Holders of at least a majority
of the shares of MuniPreferred outstanding at the time, in person or by
proxy, either in writing or at a meeting, voting as a separate class:
(a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with shares of MuniPreferred with respect to
the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, or
authorize, create or issue additional shares of any series of
MuniPreferred (except that, notwithstanding the foregoing, but subject
to the provisions of paragraph (c) of Section 10 of this Part I, the
Board of Trustees, without the vote or consent of the Holders of
MuniPreferred, may from time to time authorize and create, and the Fund
may from time to time issue additional shares of, any series of
MuniPreferred, or classes or series of Preferred Shares ranking on a
parity with shares of MuniPreferred with respect to the payment of
dividends and the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund; provided, however, that if
Moody's or S&P is not then rating the shares of MuniPreferred, the
aggregate liquidation preference of all Preferred Shares of the Fund
outstanding after any such issuance, exclusive of accumulated and
unpaid dividends, may not exceed the amount set forth in Section 10 of
Appendix A hereto) or (b) amend, alter or repeal the provisions of the
Declaration, or this Statement, whether by merger, consolidation or
otherwise, so as to affect any preference, right or power of such
shares of MuniPreferred or the Holders thereof; provided, however, that
(i) none of the actions permitted by the exception to (a) above will be
deemed to affect such preferences, rights or powers, (ii) a division of
a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect
the Holders of shares of MuniPreferred and (iii) the authorization,
creation and issuance of classes or series of shares ranking junior to
shares of MuniPreferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Fund, will be deemed to affect such preferences,
rights or powers only if Moody's or S&P is then rating shares of
MuniPreferred and such issuance would, at the time thereof, cause the
Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage or the
MuniPreferred Basic Maintenance Amount. So long as any shares of
MuniPreferred are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least 66 2/3% of the
shares of MuniPreferred outstanding at the time, in person or by proxy,
either in writing or at a meeting, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Fund is solvent
and does not foresee becoming insolvent. If any action set forth above
would adversely affect the rights of one or more series (the "Affected
Series") of MuniPreferred in a manner different from any other series
of MuniPreferred, the Fund will not approve any such action without the
affirmative vote or consent of the Holders of at least a majority of
the shares of each such Affected Series outstanding at the time, in
person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is
provided for in the Declaration, (A) the affirmative vote of the
Holders of at least a majority of the Preferred Shares, including
MuniPreferred, outstanding at the time, voting as a separate class,
shall be required to approve any conversion of the Fund from a
closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding Preferred
Shares," including MuniPreferred, 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. The affirmative vote of
the Holders of a "majority of the outstanding Preferred Shares,"
including MuniPreferred, voting as a separate class, shall be required
to approve any action not described in the first sentence of this
Section 5(c)(ii) requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act. For purposes of the foregoing, "majority
of the outstanding
22
Preferred Shares" means (i) 67% or more of such shares present at a
meeting, if the Holders of more than 50% of such shares are present or
represented by proxy, or (ii) more than 50% of such shares, whichever
is less. In the event a vote of Holders of MuniPreferred is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund
shall, not later than ten Business Days prior to the date on which such
vote is to be taken, notify Moody's (if Moody's is then rating the
shares of MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred) that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken. The Fund shall,
not later than ten Business Days after the date on which such vote is
taken, notify Moody's (if Moody's is then rating the shares of
MuniPreferred) of the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER
APPROVAL. The Board of Trustees, without the vote or consent of the shareholders
of the Fund, may from time to time amend, alter or repeal any or all of the
definitions of the terms listed below, or any provision of this Statement viewed
by Moody's or S&P as a predicate for any such definition, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of MuniPreferred or the Holders thereof; provided,
however, that the Board of Trustees receives written confirmation from Moody's
(such confirmation being required to be obtained only in the event Moody's is
rating the shares of MuniPreferred and in no event being required to be obtained
in the case of the definitions of (x) Deposit Securities, Discounted Value,
Receivables for Municipal Obligations Sold, Issue Type Category and Other Issues
as such terms apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and S&P (such
confirmation being required to be obtained only in the event S&P is rating the
shares of MuniPreferred and in no event being required to be obtained in the
case of the definitions of (x) Discounted Value, Receivables for Municipal
Obligations Sold, Issue Type Category and Other Issues as such terms apply to
Moody's Eligible Assets, and (y) Moody's Discount Factor, Moody's Eligible
Asset, Moody's Exposure Period and Moody's Volatility Factor) that any such
amendment, alteration or repeal would not impair the ratings then assigned by
Moody's or S&P, as the case may be, to shares of MuniPreferred:
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act MuniPreferred Asset Coverage
Issue Type Category Other Issues
Market Value Quarterly Valuation Date
Maximum Potential Gross-up Payment Liability Receivables for Municipal Obligations Sold
MuniPreferred Basic Maintenance Amount S&P Discount Factor
MuniPreferred Basic Maintenance Cure Date S&P Eligible Asset
MuniPreferred Basic Maintenance Report S&P Exposure Period
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Asset Valuation Date
Moody's Exposure Period Volatility Factor
Section 13 of Appendix A hereto
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS.
Unless otherwise required by law, the Holders of shares of MuniPreferred shall
not have any relative rights or preferences or other special rights other than
those specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of
shares of MuniPreferred shall have no preemptive rights or rights to cumulative
voting.
23
(g) VOTING FOR TRUSTEES SOLE REMEDY FOR FUND'S FAILURE TO PAY
DIVIDENDS. In the event that the Fund fails to pay any dividends on the shares
of MuniPreferred, the exclusive remedy of the Holders shall be the right to vote
for trustees pursuant to the provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any
rights of the Holders to vote on any matter, whether such right is created by
this Statement, by the other provisions of the Declaration, by statute or
otherwise, no Holder shall be entitled to vote any share of MuniPreferred and no
share of MuniPreferred shall be deemed to be "outstanding" for the purpose of
voting or determining the number of shares required to constitute a quorum if,
prior to or concurrently with the time of determination of shares entitled to
vote or shares deemed outstanding for quorum purposes, as the case may be, the
requisite Notice of Redemption with respect to such shares shall have been
mailed as provided in paragraph (c) of Section 11 of this Part I and the
Redemption Price for the redemption of such shares shall have been deposited in
trust with the Auction Agent for that purpose. No share of MuniPreferred held by
the Fund or any affiliate of the Fund (except for shares held by a Broker-Dealer
that is an affiliate of the Fund for the account of its customers) shall have
any voting rights or be deemed to be outstanding for voting or other purposes.
6. 1940 ACT MUNIPREFERRED ASSET COVERAGE. The Fund shall maintain, as
of the last Business Day of each month in which any share of MuniPreferred is
outstanding, the 1940 Act MuniPreferred Asset Coverage.
7. MUNIPREFERRED BASIC MAINTENANCE AMOUNT.
(a) So long as shares of MuniPreferred are outstanding, the
Fund shall maintain, on each Valuation Date, and shall verify to its
satisfaction that it is maintaining on such Valuation Date, (i) S&P Eligible
Assets having an aggregate Discounted Value equal to or greater than the
MuniPreferred Basic Maintenance Amount (if S&P is then rating the shares of
MuniPreferred) and (ii) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the MuniPreferred Basic Maintenance Amount (if
Moody's is then rating the shares of MuniPreferred).
(b) On or before 5:00 P.M., New York City time, on the third
Business Day after a Valuation Date on which the Fund fails to satisfy the
MuniPreferred Basic Maintenance Amount, and on the third Business Day after the
MuniPreferred Basic Maintenance Cure Date with respect to such Valuation Date,
the Fund shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred), Moody's (if Moody's is then rating the shares of MuniPreferred)
and the Auction Agent (if either S&P or Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the date of such
failure or such MuniPreferred Basic Maintenance Cure Date, as the case may be,
which will be deemed to have been delivered to the Auction Agent if the Auction
Agent receives a copy or telecopy, telex or other electronic transcription
thereof and on the same day the Fund mails to the Auction Agent for delivery on
the next Business Day the full MuniPreferred Basic Maintenance Report. The Fund
shall also deliver a MuniPreferred Basic Maintenance Report to (i) the Auction
Agent (if either Moody's or S&P is then rating the shares of MuniPreferred) as
of (A) the fifteenth day of each month (or, if such day is not a Business Day,
the next succeeding Business Day) and (B) the last Business Day of each month,
(ii) Moody's (if Moody's is then rating the shares of MuniPreferred) and S&P (if
S&P is then rating the shares of MuniPreferred) as of any Quarterly Valuation
Date, in each case on or before the third Business Day after such day, and (iii)
S&P, if and when requested for any Valuation Date, on or before the third
Business Day after such request. A failure by the Fund to deliver a
MuniPreferred Basic Maintenance Report pursuant to the preceding sentence shall
be deemed to be delivery of a MuniPreferred Basic Maintenance Report indicating
the Discounted Value for all assets of the Fund is less than the MuniPreferred
Basic Maintenance Amount, as of the relevant Valuation Date.
24
(c) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to a Quarterly Valuation Date, the Fund shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other MuniPreferred Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Fund during the quarter ending on such Quarterly Valuation Date), (ii) that,
in such Report (and in such randomly selected Report), the Fund determined in
accordance with this Statement whether the Fund had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly-selected Report), S&P
Eligible Assets (if S&P is then rating the shares of MuniPreferred) of an
aggregate Discounted Value at least equal to the MuniPreferred Basic Maintenance
Amount and Moody's Eligible Assets (if Moody's is then rating the shares of
MuniPreferred) of an aggregate Discounted Value at least equal to the
MuniPreferred Basic Maintenance Amount (such confirmation being herein called
the "Accountant's Confirmation"), (iii) with respect to the S&P ratings on
Municipal Obligations, the issuer name, issue size and coupon rate listed in
such Report, that the Independent Accountant has requested that S&P verify such
information and the Independent Accountant shall provide a listing in its letter
of any differences, (iv) with respect to the Moody's ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that such information has been verified by Moody's (in the event such
information is not verified by Moody's, the Independent Accountant will inquire
of Moody's what such information is, and provide a listing in its letter of any
differences), (v) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Fund's assets to the Fund for purposes of valuing securities in
the Fund's portfolio, the Independent Accountant has traced the price used in
such Report to the bid or mean price listed in such Report as provided to the
Fund and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) and (vi) with respect to such confirmation to Moody's and
S&P, that the Fund has satisfied the requirements of Section 13 of this
Statement (such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to any Valuation Date on which the Fund failed to satisfy the
MuniPreferred Basic Maintenance Amount, and relating to the MuniPreferred Basic
Maintenance Cure Date with respect to such failure to satisfy the MuniPreferred
Basic Maintenance Amount, the Fund shall cause the Independent Accountant to
provide to S&P (if S&P is then rating the shares of MuniPreferred), Moody's (if
Moody's is then rating the shares of MuniPreferred) and the Auction Agent (if
either S&P or Moody's is then rating the shares of MuniPreferred) an
Accountant's Confirmation as to such MuniPreferred Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to
paragraph (c) or (d) of this Section 7 shows that an error was made in the
MuniPreferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of MuniPreferred) or Moody's Eligible Assets
(if Moody's is then rating the shares of MuniPreferred), as the case may be, of
the Fund was determined by the Independent Accountant, the calculation or
determination made by such Independent Accountant shall be final and conclusive
and shall be binding on the Fund, and the Fund shall accordingly amend and
deliver the MuniPreferred Basic Maintenance Report to S&P (if S&P is then rating
the shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) promptly following receipt by the Fund of such
Accountant's Confirmation.
25
(f) On or before 5:00 p.m., New York City time, on the first
Business Day after the Date of Original Issue of any shares of MuniPreferred,
the Fund shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) and Moody's (if Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Fund shall cause the Independent Accountant to confirm in
writing to S&P (if S&P is then rating the shares of MuniPreferred) (i) the
mathematical accuracy of the calculations reflected in such Report and (ii) that
the Discounted Value of S&P Eligible Assets reflected thereon equals or exceeds
the MuniPreferred Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third
Business Day after either (i) the Fund shall have redeemed Common Shares or (ii)
the ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value
of Moody's Eligible Assets to the MuniPreferred Basic Maintenance Amount is less
than or equal to 105% or (iii) whenever requested by Moody's and S&P, the Fund
shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) or Moody's (if Moody's is then rating the shares of
MuniPreferred), as the case may be, a MuniPreferred Basic Maintenance Report as
of the date of either such event.
8. [RESERVED].
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON PREFERRED SHARES OTHER THAN MUNIPREFERRED.
Except as set forth in the next sentence, no dividends shall be declared or paid
or set apart for payment on the shares of any class or series of shares of
beneficial interest of the Fund ranking, as to the payment of dividends, on a
parity with shares of MuniPreferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
each series of MuniPreferred through its most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of each series of MuniPreferred
through its most recent Dividend Payment Date or upon the shares of any other
class or series of shares of beneficial interest of the Fund ranking on a parity
as to the payment of dividends with shares of MuniPreferred through their most
recent respective dividend payment dates, all dividends declared upon shares of
MuniPreferred and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with shares of
MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares of beneficial interest shall in all cases bear to each other the same
ratio that accumulated dividends per share on the shares of MuniPreferred and
such other class or series of shares of beneficial interest bear to each other
(for purposes of this sentence, the amount of dividends declared per share of
MuniPreferred shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON
SHARES UNDER THE 1940 ACT. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
For so long as any share of MuniPreferred is outstanding, and except as set
forth in paragraph (a) of this Section 9 and
26
paragraph (c) of Section 12 of this Part I, (A) the Fund shall not declare, pay
or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking junior
to the shares of MuniPreferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of the Common Shares or any other shares of the Fund ranking junior to or on a
parity with the shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to the shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), or any such parity shares (except by conversion into
or exchange for shares of the Fund ranking junior to or on a parity with
MuniPreferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends on
shares of each series of MuniPreferred through its most recently ended Dividend
Period shall have been paid or shall have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent and (ii) the Fund has
redeemed the full number of shares of MuniPreferred required to be redeemed by
any provision for mandatory redemption pertaining thereto, and (B) the Fund
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to shares of MuniPreferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
shares of MuniPreferred) and S&P Eligible Assets (if S&P is then rating the
shares of MuniPreferred) would each at least equal the MuniPreferred Basic
Maintenance Amount.
10. RATING AGENCY RESTRICTIONS. For so long as any shares of
MuniPreferred are outstanding and Moody's or S&P, or both, are rating such
shares, the Fund will not, unless it has received written confirmation from
Moody's or S&P, or both, as appropriate, that any such action would not impair
the ratings then assigned by such rating agency to such shares, engage in any
one or more of the following transactions:
(a) buy or sell futures or write put or call options except as
provided in Section 13 of Appendix A hereto;
(b) borrow money, except that the Fund may, without obtaining
the written confirmation described above, borrow money for the purpose of
clearing securities transactions if (i) the MuniPreferred Basic Maintenance
Amount would continue to be satisfied after giving effect to such borrowing and
(ii) such borrowing (A) is privately arranged with a bank or other person and is
evidenced by a promissory note or other evidence of indebtedness that is not
intended to be publicly distributed or (B) is for "temporary purposes," is
evidenced by a promissory note or other evidence of indebtedness and is in an
amount not exceeding 5 per centum of the value of the total assets of the Fund
at the time of the borrowing; for purposes of the foregoing, "temporary purpose"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) issue additional shares of any series of MuniPreferred or
any class or series of shares ranking prior to or on a parity with shares of
MuniPreferred with respect to the payment of
27
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any shares of MuniPreferred previously purchased or
redeemed by the Fund;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently J.J. Kenny) referred
to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of MuniPreferred of any series may be
redeemed, at the option of the Fund, as a whole or from time to time in
part, on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available therefor, at
a redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of a series of
MuniPreferred may not be redeemed in Part if after such partial
redemption fewer than 250 shares of such series remain outstanding; (2)
unless otherwise provided in Section 11 of Appendix A hereto, shares of
a series of MuniPreferred are redeemable by the Fund during the Initial
Rate Period thereof only on the second Business Day next preceding the
last Dividend Payment Date for such Initial Rate Period; and (3)
subject to subparagraph (ii) of this paragraph (a), the Notice of
Special Rate Period relating to a Special Rate Period of shares of a
series of MuniPreferred, as delivered to the Auction Agent and filed
with the Secretary of the Fund, may provide that shares of such series
shall not be redeemable during the whole or any Part of such Special
Rate Period (except as provided in subparagraph (iv) of this paragraph
(a)) or shall be redeemable during the whole or any Part of such
Special Rate Period only upon payment of such redemption premium or
premiums as shall be specified therein ("Special Redemption
Provisions").
(ii) A Notice of Special Rate Period relating to
shares of a series of MuniPreferred for a Special Rate Period thereof
may contain Special Redemption Provisions only if the Fund's Board of
Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of shares of such series, determines that
such Special Redemption Provisions are in the best interest of the
Fund.
(iii) If fewer than all of the outstanding shares of
a series of MuniPreferred are to be redeemed pursuant to subparagraph
(i) of this paragraph (a), the number of shares of such series to be
redeemed shall be determined by the Board of Trustees, and such shares
shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of any series of MuniPreferred may be
redeemed, at the option of the Fund, as a whole but not in part, out of
funds legally available therefor, on the first day following any
Dividend Period
28
thereof included in a Rate Period consisting of more than 364 Rate
Period Days if, on the date of determination of the Applicable Rate for
shares of such series for such Rate Period, such Applicable Rate
equaled or exceeded on such date of determination the Treasury Note
Rate for such Rate Period, at a redemption price per share equal to the
sum of $25,000 plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the
date fixed for redemption.
(v) The Fund may not on any date mail a Notice of
Redemption pursuant to paragraph (c) of this Section 11 in respect of a
redemption contemplated to be effected pursuant to this paragraph (a)
unless on such date (a) the Fund has available Deposit Securities with
maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of shares of
MuniPreferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the shares of MuniPreferred) and the
Discounted Value of S&P Eligible Assets (if S&P is then rating the
shares of MuniPreferred) each at least equal the MuniPreferred Basic
Maintenance Amount, and would at least equal the MuniPreferred Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date. For purposes of determining in
clause (b) of the preceding sentence whether the Discounted Value of
Moody's Eligible Assets at least equals the MuniPreferred Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Fund, as
described in the definition of Moody's Discount Factor herein.
(b) MANDATORY REDEMPTION. The Fund shall redeem, at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not including) the
date fixed by the Board of Trustees for redemption, certain of the shares of
MuniPreferred, if the Fund fails to have either Moody's Eligible Assets with a
Discounted Value or S&P Eligible Assets with a Discounted Value greater than or
equal to the MuniPreferred Basic Maintenance Amount or fails to maintain the
1940 Act MuniPreferred Asset Coverage, in accordance with the requirements of
the rating agency or agencies then rating the shares of MuniPreferred, and such
failure is not cured on or before the MuniPreferred Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be. The number of shares of
MuniPreferred to be redeemed shall be equal to the lesser of (i) the minimum
number of shares of MuniPreferred, together with all other Preferred Shares
subject to redemption or retirement, the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, would
have resulted in the Fund's having both Moody's Eligible Assets with a
Discounted Value and S&P Eligible Assets with a Discounted Value greater than or
equal to the MuniPreferred Basic Maintenance Amount or maintaining the 1940 Act
MuniPreferred Asset Coverage, as the case may be, on such Cure Date (provided,
however, that if there is no such minimum number of shares of MuniPreferred and
other Preferred Shares the redemption or retirement of which would have had such
result, all shares of MuniPreferred and Preferred Shares then outstanding shall
be redeemed), and (ii) the maximum number of shares of MuniPreferred, together
with all other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor in accordance
with the Declaration and applicable law. In determining the shares of
MuniPreferred required to be redeemed in accordance with the foregoing, the Fund
shall allocate the number required to be redeemed to satisfy the MuniPreferred
Basic Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, as the
case may be, pro rata among shares of MuniPreferred and other Preferred Shares
(and, then, pro rata among each series of MuniPreferred) subject to redemption
or retirement. The Fund shall effect such redemption on the date fixed by the
Fund therefor, which date shall not be earlier than 20 days nor later than 40
days after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of
29
MuniPreferred and other Preferred Shares which are subject to redemption or
retirement or the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those shares of
MuniPreferred and other Preferred Shares which it was unable to redeem on the
earliest practicable date on which it is able to effect such redemption. If
fewer than all of the outstanding shares of a series of MuniPreferred are to be
redeemed pursuant to this paragraph (b), the number of shares of such series to
be redeemed shall be redeemed pro rata from the Holders of shares of such series
in proportion to the number of shares of such series held by such Holders.
(c) NOTICE OF REDEMPTION. If the Fund shall determine or be
required to redeem shares of a series of MuniPreferred pursuant to paragraph (a)
or (b) of this Section 11, it shall mail a Notice of Redemption with respect to
such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Fund on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than 20
nor more than 45 days prior to the date fixed for redemption. Each such Notice
of Redemption shall state: (i) the redemption date; (ii) the number of shares of
MuniPreferred to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of MuniPreferred held
by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of shares of such series to be redeemed from such
Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
the provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of MuniPreferred (whether or not earned or declared) are in
arrears, no shares of such series shall be redeemed unless all outstanding
shares of such series are simultaneously redeemed, and the Fund shall not
purchase or otherwise acquire any shares of such series; provided, however, that
the foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent
that any redemption for which Notice of Redemption has been mailed is not made
by reason of the absence of legally available funds therefor in accordance with
the Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of MuniPreferred shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit in trust with the Auction Agent the Redemption
Price with respect to any shares for which such Notice of Redemption has been
mailed; provided, however, that the foregoing shall not apply in the case of the
Fund's failure to deposit in trust with the Auction Agent the Redemption Price
with respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed shares of
MuniPreferred for which a Notice of Redemption has been
30
mailed, dividends may be declared and paid on shares of MuniPreferred and shall
include those shares of MuniPreferred for which a Notice of Redemption has been
mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND.
All moneys paid to the Auction Agent for payment of the Redemption Price of
shares of MuniPreferred called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE
NO LONGER OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant
to paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the shares of MuniPreferred that are the subject of such
notice, dividends on such shares shall cease to accumulate and such shares shall
no longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I and in Section 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of shares of
MuniPreferred subject to redemption. In the case that fewer than all of the
shares represented by any such certificate are redeemed, a new certificate shall
be issued, representing the unredeemed shares, without cost to the Holder
thereof. The Fund shall be entitled to receive from the Auction Agent, promptly
after the date fixed for redemption, any cash deposited with the Auction Agent
in excess of (i) the aggregate Redemption Price of the shares of MuniPreferred
called for redemption on such date and (ii) all other amounts to which Holders
of shares of MuniPreferred called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of 90 days from such redemption date
shall, to the extent permitted by law, be repaid to the Fund, after which time
the Holders of shares of MuniPreferred so called for redemption may look only to
the Fund for payment of the Redemption Price and all other amounts to which they
may be entitled. The Fund shall be entitled to receive, from time to time after
the date fixed for redemption, any interest on the funds so deposited.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any
redemption pursuant to this Section 11, the Fund shall use its best efforts to
comply with all applicable conditions precedent to effecting such redemption
under the 1940 Act and any applicable Massachusetts law, but shall effect no
redemption except in accordance with the 1940 Act and any applicable
Massachusetts law.
(i) ONLY WHOLE SHARES OF MUNIPREFERRED MAY BE REDEEMED. In the
case of any redemption pursuant to this Section 11, only whole shares of
MuniPreferred shall be redeemed, and in the event that any provision of the
Declaration would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are redeemed.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of MuniPreferred shall
rank on a parity with each other, with shares of any other series of
MuniPreferred and with shares of any other series of Preferred Shares as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution,
liquidation or winding up of the affairs of the Fund, whether voluntary or
involuntary, the Holders of shares of MuniPreferred then outstanding shall be
entitled to receive and to be paid out of the assets of the Fund available for
31
distribution to its shareholders, before any payment or distribution shall be
made on the Common Shares or on any other class of shares of the Fund ranking
junior to the MuniPreferred upon dissolution, liquidation or winding up, an
amount equal to the Liquidation Preference with respect to such shares plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same day funds, together with any payments required to be made pursuant to
Section 3 of this Part I in connection with the liquidation of the Fund. After
the payment to the Holders of the shares of MuniPreferred of the full
preferential amounts provided for in this paragraph (b), the Holders of
MuniPreferred as such shall have no right or claim to any of the remaining
assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the
Fund available for distribution to the Holders of shares of MuniPreferred upon
any dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with the shares of MuniPreferred
with respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of MuniPreferred, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the
holders of shares of any series or class or classes of shares ranking on a
parity with the shares of MuniPreferred with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund,
after payment shall have been made in full to the Holders of the shares of
MuniPreferred as provided in paragraph (b) of this Section 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of MuniPreferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund shall, subject
to the respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the Holders
of the shares of MuniPreferred shall not be entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the
sale of all or substantially all the property or business of the Fund, nor the
merger or consolidation of the Fund into or with any Massachusetts business
trust or corporation nor the merger or consolidation of any Massachusetts
business trust or corporation into or with the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this Section 12.
13. MISCELLANEOUS.
(a) AMENDMENT OF APPENDIX A TO ADD ADDITIONAL SERIES. Subject
to the provisions of paragraph (c) of Section 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval (except
as otherwise provided by this Statement or required by applicable law), amend
Appendix A hereto to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of MuniPreferred or additional
shares of a series of MuniPreferred (and terms relating thereto) to the series
and shares of MuniPreferred theretofore described thereon. Each such additional
series and all such additional shares shall be governed by the terms of this
Statement.
(b) APPENDIX A INCORPORATED BY REFERENCE. Appendix A hereto is
incorporated in and made a Part of this Statement by reference thereto.
(c) NO FRACTIONAL SHARES. No fractional shares of
MuniPreferred shall be issued.
32
(d) STATUS OF SHARES OF MUNIPREFERRED REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE FUND. Shares of MuniPreferred which are redeemed,
exchanged or otherwise acquired by the Fund shall return to the status of
authorized and unissued Preferred Shares without designation as to series.
(e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of MuniPreferred
prior to the issuance of shares of such series.
(f) HEADINGS NOT DETERMINATIVE. The headings contained in this
Statement are for convenience of reference only and shall not affect the meaning
or interpretation of this Statement.
(g) NOTICES. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or this Statement, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for
shares of a series of MuniPreferred:
(i) each Beneficial Owner of shares of such series
may submit to its Broker-Dealer by telephone or otherwise information
as to:
(A) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for shares of such series for the next
succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell if the Applicable Rate for
shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on such lists to
determine the number of shares, if any, of such series which each such
Potential Beneficial Owner offers to purchase if the Applicable Rate
for shares of such series for the next succeeding Rate Period of shares
of such series shall not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in
33
clause (i)(A), (i), (B), (i), (C) or (ii) of this paragraph (a) is hereinafter
referred to as an "Order" and collectively as "Orders" and each Beneficial Owner
and each Potential Beneficial Owner placing an Order with a Broker-Dealer, and
such Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing the
information referred to in clause (i)(A) of this paragraph (a) is hereinafter
referred to as a "Hold Order" and collectively as "Hold Orders"; an Order
containing the information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
(a) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of MuniPreferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such series
determined on such Auction Date shall be less than the rate specified
therein;
(B) such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause (iv) of
paragraph (a) of Section 4 of this Part II if the Applicable Rate for
shares of such series determined on such Auction Date shall be equal to
the rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be higher
than the Maximum Rate for shares of such series, or such number or a
lesser number of Outstanding shares of such series to be determined as
set forth in clause (iii) of paragraph (b) of Section 4 of this Part II
if the rate specified therein shall be higher than the Maximum Rate for
shares of such series and Sufficient Clearing Bids for shares of such
series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of a series of MuniPreferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (iii) of
paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of MuniPreferred shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Fund) with the provisions of Section 7 of this Part II or (2) such Broker-Dealer
has informed the Auction Agent pursuant to the terms of its Broker-Dealer
Agreement that, according to such Broker-Dealer's records, such Broker-Dealer
believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a
Potential Holder of shares of a series of MuniPreferred
subject to an Auction on any Auction Date shall constitute an
irrevocable offer to purchase:
34
(A) the number of Outstanding shares of such
series specified in such Bid if the Applicable Rate for shares
of such series determined on such Auction Date shall be higher
than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (v)
of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of shares of MuniPreferred other
than whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction
Agent prior to the Submission Deadline on each Auction Date all Orders for
shares of MuniPreferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series
that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing
Holder of shares of such series:
(A) the number of shares, if any, of such
series subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such
series subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such
series subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder
of shares of such series, the rate and number of shares of such series
specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of MuniPreferred of a series held by any Existing Holder is not submitted
to the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders
35
covering all of the Outstanding shares of such series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Rate Period consisting of more than 28 Rate
Period Days, the Auction Agent shall deem a Sell Order to have been submitted by
or on behalf of such Existing Holder covering the number of outstanding shares
of such series held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted
to the Auction Agent covering in the aggregate more than the number of
Outstanding shares of MuniPreferred of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the following
order of priority:
(i) all Hold Orders for shares of such series shall
be considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) any Bid for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
number of shares of such series subject to any Hold Orders referred to
in clause (i) above;
(A) subject to subclause (A), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such
Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject to
each Bid with the same rate shall be reduced pro rata to cover
the number of shares of such series equal to such excess;
(B) subject to subclauses (A) and (B), if
more than one Bid of an Existing Holder for shares of such
series is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such
excess; and
(C) in any such event, the number, if any,
of such Outstanding shares of such series subject to any
portion of Bids considered not valid in whole or in Part under
this clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall
be considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
MuniPreferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
36
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction
Date for shares of a series of MuniPreferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of
such series over the number of Outstanding shares of such series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available MuniPreferred" of such series);
(ii) from the Submitted Orders for shares of such
series whether:
(A) the number of Outstanding shares of such
series subject to Submitted Bids of Potential Holders
specifying one or more rates equal to or lower than the
Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such
series subject to Submitted Bids of Existing Holders
specifying one or more rates higher than the Maximum Rate for
shares of such series; and
(C) the number of Outstanding shares of such
series subject to Submitted Sell Orders in the event such
excess or such equality exists (other than because the number
of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), such Submitted Bids in
subclause (A) above being hereinafter referred to collectively
as "Sufficient Clearing Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to
hold the shares of such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Potential Holders specifying lower rates
were accepted;
would result in such Existing Holders described in subclause
(A) above continuing to hold an aggregate number of
Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be purchased by
such Potential Holders
37
described in subclause (B) above, would equal not less than
the Available MuniPreferred of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Fund of the Maximum Rate for shares of the series of
MuniPreferred for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for the
next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such
series exist, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be equal to the
Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such
series do not exist (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Maximum Rate for shares of
such series; or
(iii) if all of the Outstanding shares of such series
are subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be as set forth in Section 12 of Appendix A hereto.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
MuniPreferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph (a) of Section 3 of this Part II, the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the
Auction Agent and the Auction Agent shall take such other action as set forth
below:
(a) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of paragraphs
(d) and (e) of this Section 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is higher than the Winning Bid
Rate for shares of such series shall be accepted, thus requiring each
such Existing Holder to sell the shares of MuniPreferred subject to
such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares
of such series specifying a rate that is equal to the Winning Bid Rate
for shares of such series shall be rejected, thus entitling such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bid, unless the number of Outstanding shares of
MuniPreferred subject to all such Submitted Bids shall be greater than
the number of shares of MuniPreferred ("remaining
38
shares") in the excess of the Available MuniPreferred of such series
over the number of shares of MuniPreferred subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of MuniPreferred subject to such Submitted Bid, but only in an
amount equal to the number of shares of MuniPreferred of such series
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding shares of
MuniPreferred held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the aggregate number of
Outstanding shares of MuniPreferred subject to such Submitted Bids made
by all such Existing Holders that specified a rate equal to the Winning
Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares
of such series specifying a rate that is equal to the Winning Bid Rate
for shares of such series shall be accepted but only in an amount equal
to the number of shares of such series obtained by multiplying the
number of shares in the excess of the Available MuniPreferred of such
series over the number of shares of MuniPreferred subject to Submitted
Bids described in clauses (ii) through (iv) of this paragraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares of MuniPreferred subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding
shares of MuniPreferred subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of paragraph (d) of this Section 4, Submitted Orders for shares of
such series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the shares of
MuniPreferred subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares
of such series specifying any rate that is higher than the Maximum Rate
for shares of such series and the Submitted Sell Orders for shares of
such series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted
any such Submitted Bid or Submitted Sell Order to sell the shares of
such series subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of
MuniPreferred are subject to Submitted Hold Orders, all Submitted Bids for
shares of such series shall be rejected.
39
(d) If, as a result of the procedures described in clause (iv)
or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
MuniPreferred on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of shares of
MuniPreferred of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of MuniPreferred.
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of MuniPreferred on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of MuniPreferred of such series for
purchase among Potential Holders so that only whole shares of MuniPreferred of
such series are purchased on such Auction Date as a result of such procedures by
any Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing shares of MuniPreferred of such series on such Auction
Date.
(f) Based on the results of each Auction for shares of a
series of MuniPreferred, the Auction Agent shall determine the aggregate number
of shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, shares of
MuniPreferred of such series. Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event an
Existing Holder or Beneficial Owner of shares of a series of MuniPreferred with
respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for such
shares that was accepted in whole or in part, or submitted or is deemed to have
submitted a Sell Order for such shares that was accepted in whole or in part,
fails to instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of shares of MuniPreferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in Part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of
MuniPreferred of any series or to pay for shares of MuniPreferred of any series
sold or purchased pursuant to the Auction Procedures or otherwise.
5. NOTIFICATION OF ALLOCATIONS. Whenever the Fund intends to include
any net capital gains or other income taxable for Federal income tax purposes in
any dividend on shares of MuniPreferred, the Fund shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Fund,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of MuniPreferred believed by it to be interested in submitting an Order
in the Auction to be held on such Auction Date.
40
6. AUCTION AGENT. For so long as any shares of MuniPreferred are
outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its affiliates (which however, may engage or have
engaged in business transactions with the Fund or its affiliates) and at no time
shall the Fund or any of its affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any shares of MuniPreferred are
outstanding, the Board of Trustees shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Agent. The Auction Agent's registry
of Existing Holders of shares of a series of MuniPreferred shall be conclusive
and binding on the Broker- Dealers. A Broker-Dealer may inquire of the Auction
Agent between 3:00 p.m. on the Business Day preceding an Auction for shares of a
series of MuniPreferred and 9:30 a.m. on the Auction Date for such Auction to
ascertain the number of shares of such series in respect of which the Auction
Agent has determined such Broker-Dealer to be an Existing Holder. If such
Broker-Dealer believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-Dealer's inquiry,
such Broker-Dealer may so inform the Auction Agent of that belief. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares of such
series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF SHARES OF MUNIPREFERRED. Unless otherwise permitted by
the Fund, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of MuniPreferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described in this Part II or to a Broker-Dealer, provided,
however, that (a) a sale, transfer or other disposition of shares of
MuniPreferred from a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 7 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period,
(i) all of the shares of a series of MuniPreferred outstanding from time to time
shall be represented by one global certificate registered in the name of the
Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of MuniPreferred shall be made on the books of the Fund to
any Person other than the Securities Depository or its nominee.
SIGNATURE PAGE FOLLOWS
41
IN WITNESS WHEREOF, NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND
2, has caused these presents to be signed on _______________, 2002 in its name
and on its behalf by its Assistant Vice President and attested by its Assistant
Secretary. The Fund's Declaration of Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts, and the said officers of the Fund
have executed this Statement as officers and not individually, and the
obligations and rights set forth in this Statement are not binding upon any such
officers, or the trustees or shareholders of the Fund, individually, but are
binding only upon the assets and property of the Fund.
NUVEEN GEORGIA DIVIDEND ADVANTAGE
MUNICIPAL FUND 2
By:
------------------------------
Gifford R. Zimmerman
Vice President
ATTEST:
----------------------------------
Virginia O'Neal
Assistant Secretary
42
APPENDIX A
NUVEEN GEORGIA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
SECTION 1. DESIGNATION AS TO SERIES.
SERIES ___: A series of ____ Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series __." Each of the ____ shares of
Series __ MuniPreferred issued on _________, 2002 shall, for purposes hereof, be
deemed to have a Date of Original Issue of _______, 2002; have an Applicable
Rate for its Initial Rate Period equal to _______% per annum; have an initial
Dividend Payment Date of _________, 2002; and have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Declaration of Trust applicable to Preferred
Shares of the Fund, as set forth in Part I and Part II of this Statement. Any
shares of Series ___ MuniPreferred issued thereafter shall be issued on the
first day of a Rate Period of the then outstanding shares of Series ___
MuniPreferred, shall have, for such Rate Period, an Applicable Rate equal to the
Applicable Rate for shares of such series established in the first Auction for
shares of such series preceding the date of such issuance; and shall have such
other preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to Preferred Shares of the Fund, as set forth in Part I and Part II of this
Statement. The Series __ MuniPreferred shall constitute a separate series of
Preferred Shares of the Fund, and each share of Series __ MuniPreferred shall be
identical except as provided in Section 11 of Part I of this Statement.
SECTION 2. NUMBER OF AUTHORIZED SHARES PER SERIES. The number of
authorized shares constituting Series __ MuniPreferred is _____________.
SECTION 3. EXCEPTIONS TO CERTAIN DEFINITIONS. Notwithstanding the
definitions contained under the heading "Definitions" in this Statement, the
following terms shall have the following meanings for purposes of this
Statement:
Not applicable.
SECTION 4. CERTAIN DEFINITIONS. For purposes of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"ESCROWED BONDS" shall mean Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating. In the event that a defeased obligation which is an S&P Eligible
Asset does not meet the criteria of an Escrowed Bond, such Municipal Obligation
will be deemed to remain in the Issue Type Category into which it fell prior to
such defeasance.
"GROSS-UP PAYMENT" means payment to a Holder of shares of
MuniPreferred of an amount which, when taken together with the aggregate amount
of Taxable Allocations made to such Holder to which such Gross-up Payment
relates, would cause such Holder's dividends in dollars (after Federal and
Georgia income tax consequences) from the aggregate of such Taxable Allocations
and the related Gross-up Payment to be equal to the dollar amount of the
dividends which would have been received by such Holder if the amount of such
aggregate Taxable Allocations would have been excludable from the gross income
of such Holder. Such Gross-up Payment shall be calculated (i) without
consideration being given
A-1
to the time value of money; (ii) assuming that no Holder of shares of
MuniPreferred is subject to the Federal alternative minimum tax with respect to
dividends received from the Fund; and (iii) assuming that each Taxable
Allocation and each Gross-up Payment (except to the extent such Gross-up Payment
is designated as an exempt-interest dividend under Section 852(b)(5) of the Code
or successor provisions) would be taxable in the hands of each Holder of shares
of MuniPreferred at the maximum marginal combined regular Federal and Georgia
personal income tax rate applicable to ordinary income (taking into account the
Federal income tax deductibility of state and local taxes paid or incurred) or
net capital gains, as applicable, or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income or net capital gains, as
applicable, whichever is greater, in effect at the time such Gross-up Payment is
made.
"INVERSE FLOATER" shall mean trust certificates or other instruments
evidencing interests in one or more Municipal Obligations that qualify as S&P
Eligible Assets, the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating instruments have only one reset remaining until
maturity.
"ISSUE TYPE CATEGORY" shall mean, with respect to a Municipal
Obligation acquired by the Fund, (A) for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, one of the following categories into
which such Municipal Obligation falls based upon a good faith determination by
the Fund: health care issues (including issues related to teaching and
non-teaching hospitals, public or private); housing issues (including issues
related to single- and multi-family housing projects); educational facilities
issues (including issues related to public and private schools); student loan
issues; resource recovery issues; transportation issues (including issues
related to mass transit, airports and highways); industrial development bond
issues (including issues related to pollution control facilities); utility
issues (including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not falling within one of the aforementioned categories; and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, one of the
following categories into which such Municipal Obligation falls based upon a
good faith determination by the Fund: health care issues (including issues
related to teaching and non-teaching hospitals, public or private); housing
issues (including issues related to single- and multi-family housing projects);
educational facilities issues (including issues related to public and private
schools); student loan issues; transportation issues (including issues related
to mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); public power
utilities issues (including issues related to the provision of electricity,
either singly or in combination with the provision of other utilities, and
issues related only to the provision of gas); water and sewer utilities issues
(including issues related to the provision of water and sewers as well as
combination utilities not falling within the public power utilities category);
special utilities issues (including issues related to resource recovery, solid
waste and irrigation as well as other utility issues not falling within the
public power and water and sewer utilities categories); general obligation
issues; lease obligations (including certificates of participation); Escrowed
Bonds; and other issues ("Other Issues") not falling within one of the
aforementioned categories. The general obligation issue category includes any
issue that is directly or indirectly guaranteed by the State of Georgia or its
political subdivisions. Utility issues are included in the general obligation
issue category if the issue is directly or indirectly guaranteed by the State of
Georgia or its political subdivisions. Municipal Obligations in the utility
issue category will be classified within one of the three following
sub-categories: (i) electric, gas and combination issues (if the combination
issue includes an electric issue); (ii) water and sewer utilities and
combination issues (if the combination issue does not include an electric
issue); and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that Municipal Obligations
A-2
included in this sub-category (iii) must be rated by S&P in order to be included
in S&P Eligible Assets. Municipal Obligations in the transportation issue
category will be classified within one of the two following sub-categories: (i)
streets and highways, toll roads, bridges and tunnels, airports and
multi-purpose port authorities (multiple revenue streams generated by toll
roads, airports, real estate, bridges); (ii) mass transit, parking seaports and
others.
"MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
-----------------------------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BAA* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
--------------------------- ----- ---- --- ---- ------- ----------- --------- ------------
7 weeks 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than seven weeks 154 161 168 176 190 137 149 231
9 weeks or less but greater
than eight weeks 156 163 170 177 192 138 150 240
---------------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not
have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P,
which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB
by S&P or not rated by Moody's or S&P.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable, suspended by Moody's, and (iii)
is Part of an issue of Municipal Obligations of at least $5,000,000 except for
Municipal Obligations rated below A by Moody's, Municipal Obligations within the
healthcare Issue Type Category, in which case the minimum issue size is
$10,000,000. Except for general obligation bonds, Municipal Obligations issued
by any one issuer and rated BBB or lower by S&P, Ba or B by Moody's or not rated
by S&P and Moody's ("Other Securities") may comprise no more than 4% of total
Moody's Eligible Assets; such Other Securities, if any, together with any
Municipal Obligations issued by the same issuer and rated Baa by Moody's or A by
S&P, may comprise no more than 6% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated A by Moody's or AA by
S&P, may comprise no more than 10% of total Moody's Eligible Assets; and such
Other Securities, Baa, A and AA-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by the same issuer and rated Aa by Moody's
or AAA by S&P, may comprise no more than 20% of total Moody's Eligible Assets.
For purposes of the foregoing sentence, any Municipal Obligation backed by the
guaranty, letter of credit or insurance issued by a third party shall be deemed
to be issued by such third party if the issuance of such third party credit is
the sole determinant of the rating on such Municipal Obligation. Other
Securities falling within a particular Issue Type Category may comprise no more
than 12% of total
A-3
Moody's Eligible Assets; such Other Securities, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
Baa by Moody's or A by S&P, may comprise no more than 20% of total Moody's
Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations falling within a particular
Issue Type Category and rated A by Moody's or AA by S&P, may comprise no more
than 40% of total Moody's Eligible Assets; and such Other Securities, Baa, A and
AA-rated Municipal Obligations, if any, together with any Municipal Obligations
falling within a particular Issue Type Category and rated Aa by Moody's or AAA
by S&P, may comprise no more than 60% of total Moody's Eligible Assets. For
purposes of this definition, a Municipal Obligation shall be deemed to be rated
BBB by S&P if rated BBB or BBB+ by S&P. Notwithstanding any other provision of
this definition, (A) in the case of general obligation Municipal Obligations
only, Other Securities issued by issuers located within any one county may
comprise no more than 4% of Moody's Eligible Assets; such Other Securities, if
any, together with any Municipal Obligations issued by issuers located within
the same county and rated Baa by Moody's or A by S&P, may comprise no more than
6% of Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same county and rated A by Moody's or AA by S&P, may comprise
no more than 10% of Moody's Eligible Assets; and such Other Securities, Baa, A
and AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same county and rated Aa by
Moody's or AAA by S&P, may comprise no more than 20% of Moody's Eligible Assets;
and (B) in no event may (i) student loan Municipal Obligations comprise more
than 10% of Moody's Eligible Assets; (ii) resource recovery Municipal
Obligations comprise more than 10% of Moody's Eligible Assets; and (iii) Other
Issues comprise more than 10% of Moody's Eligible Assets. For purposes of
applying the foregoing requirements, a Municipal Obligation rated BBB- by S&P
shall not be considered to be rated BBB by S&P, Moody's Eligible Assets shall be
calculated without including cash, and Municipal Obligations rated MIG-1, VMIG-1
or P-1 or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, shall be
considered to have a long-term rating of A. When the Fund sells a Municipal
Obligation and agrees to repurchase such Municipal Obligation at a future date,
such Municipal Obligation shall be valued at its Discounted Value for purposes
of determining Moody's Eligible Assets, and the amount of the repurchase price
of such Municipal Obligation shall be included as a liability for purposes of
calculating the MuniPreferred Basic Maintenance Amount. When the Fund purchases
a Moody's Eligible Asset and agrees to sell it at a future date, such Eligible
Asset shall be valued at the amount of cash to be received by the Fund upon such
future date, provided that the counterparty to the transaction has a long-term
debt rating of at least A2 from Moody's and the transaction has a term of no
more than 30 days, otherwise such Eligible Asset shall be valued at the
Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Fund
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Fund by Nuveen Advisory Corp., JPMorgan Chase Bank or the
Auction Agent and (d) Liens by virtue of any repurchase agreement; or (ii)
deposited irrevocably for the payment of any liabilities for purposes of
determining the MuniPreferred Basic Maintenance Amount.
"OTHER ISSUES" shall have the respective meanings specified in the
definition of "Issue Type Category."
A-4
"RATE MULTIPLE," for shares of a series of MuniPreferred on any
Auction Date for shares of such series, shall mean the percentage, determined as
set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:
PREVAILING RATING PERCENTAGE
--------------------------------------------- ----------
"aa3"/AA-- or higher......................... 110%
"a3"/A--..................................... 125
"baa3"/BBB--................................. 150
"ba3"/BB--................................... 200
Below "ba3"/BB--............................. 250
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal combined regular Federal
and Georgia personal income tax rate applicable to ordinary income (taking into
account the Federal income tax deductibility of state and local taxes paid or
incurred) or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater.
For purposes of this definition, the "prevailing rating" of shares of
a series of MuniPreferred shall be (i) "aa3"/AA-- or higher if such shares have
a rating of "aa3" or better by Moody's and AA-- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA-- or
higher, then "a3"/A-- if such shares have a rating of "a3" or better by Moody's
and A-- or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA-- or higher or "a3"/A--, then "baa3"/BBB-- if such
shares have a rating of "baa3" or better by Moody's and BBB-- or better by S&P
or the equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iv) if not "aa3"/AA--
or higher, "a3"/A-- or "baa3"/BBB--, then "ba3"/BB-- if such shares have a
rating of "ba3" or better by Moody's and BB-- or better by S&P or the equivalent
of such ratings by such agencies or a substitute rating agency or substitute
rating agencies selected as provided below, and (v) if not "aa3"/AA-- or higher,
"a3"/A--, "baa3"/BBB--, or "ba3"/BB--, then Below "ba3"/BB--; provided, however,
that if such shares are rated by only one rating agency, the prevailing rating
will be determined without reference to the rating of any other rating agency.
The Fund shall take all reasonable action necessary to enable either S&P or
Moody's to provide a rating for shares of MuniPreferred. If neither S&P nor
Moody's shall make such a rating available, the party set forth in Section 7 of
Appendix A or its successor shall select at least one nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of shares of the series of MuniPreferred set forth
opposite such party's name in Section 7 of Appendix A and the Fund shall take
all reasonable action to enable such rating agency to provide a rating for such
shares.
A-5
"S&P DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
-----------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* HIGH YIELD
------------------------------------------- ----- ---- ---- ---- ----------
45 Business Days............................. 210% 215% 230% 270% 240%
25 Business Days............................. 190 195 210 250 240
10 Business Days............................. 175 180 195 235 240
7 Business Days.............................. 170 175 190 230 240
3 Business Days.............................. 150 155 170 210 240
---------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, or 120% so long as such Municipal
Obligations are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less or 125% if such Municipal Obligations are not
rated by S&P but are rated equivalent to A-1+ or SP-1+ by another nationally
recognized statistical rating organization, on a case by case basis; provided,
however, that any such non-S&P rated short-term Municipal Obligations which have
demand features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least A-1+ from S&P; and further
provided that such non-S&P rated short-term Municipal Obligations may comprise
no more than 50% of short-term Municipal Obligations that qualify as S&P
Eligible Assets; provided, however, that Municipal Obligations not rated by S&P
but rated equivalent to BBB or lower by another nationally recognized
statistical rating organization, rated BB+ or lower by S&P or non-rated (such
Municipal Obligations are hereinafter referred to as "High Yield Securities")
may comprise no more than 20% of the short-term Municipal Obligations that
qualify as S&P Eligible Assets; (ii) the S&P Discount Factor for Receivables for
Municipal Obligations Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the Municipal
Obligations sold; (iii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold if such receivables are due within
five Business Days of such Valuation Date; and (iv) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date. The Fund may adopt S&P
Discount Factors for Municipal Obligations other than Municipal Obligations
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the MuniPreferred. For purposes of
the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P,
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis, which do not mature or have a demand
feature at par exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash irrevocably
deposited by the Fund for the payment of any liabilities within the meaning of
MuniPreferred Basic Maintenance Amount),
A-6
Receivables for Municipal Obligations Sold or a Municipal Obligation owned by
the Fund that (i) is interest bearing and pays interest at least semi-annually;
(ii) is payable with respect to principal and interest in U.S. Dollars; (iii) is
publicly rated BBB or higher by S&P or, if not rated by S&P but rated equivalent
or higher to an A by another nationally recognized statistical rating
organization, on a case by case basis; (iv) is not subject to a covered call or
put option written by the Fund; (v) except for Inverse Floaters, is not Part of
a private placement of Municipal Obligations; and (vi) except for Inverse
Floaters, is Part of an issue of Municipal Obligations with an original issue
size of at least $5 million. Any Municipal Obligation that is a Part of an
original issue size of less than $10 million must carry a rating of at least A
by S&P or an equivalent rating by another nationally recognized statistical
rating organization and the Market Value of such Municipal Obligations may not
exceed 20% of the aggregate Market Value of S&P Eligible Assets. Solely for
purposes of this definition, the term "Municipal Obligation" means any
obligation the interest on which is exempt from regular Federal income taxation
and which is issued by any of the fifty United States, the District of Columbia
or any of the territories of the United States, their subdivisions, counties,
cities, towns, villages, school districts and agencies (including authorities
and special districts created by the states), and federally sponsored agencies
such as local housing authorities. Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds and
High Yield Securities) of any one issuer or guarantor (excluding bond
insurers) shall be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Obligations (including short-term
Municipal Obligations) does not exceed 10% of the aggregate Market
Value of S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the Market Value
of such Municipal Obligations exceeds 5% of the aggregate Market
Value of S&P Eligible Assets. High Yield Securities of any one issuer
shall be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 5% of the
aggregate Market Value of S&P Eligible Assets;
(2) Municipal Obligations (excluding Escrowed Bonds) of any
one Issue Type Category shall be considered S&P Eligible Assets only
to the extent the Market Value of such Municipal Obligations does not
exceed 25% of the aggregate Market Value of S&P Eligible Assets;
provided, however, that Municipal Obligations falling within the
utility Issue Type Category will be broken down into three
sub-categories and such Municipal Obligations will be considered S&P
Eligible Assets to the extent the Market Value of such Municipal
Obligations in each such sub-category does not exceed 25% of the
aggregate Market Value of S&P Eligible Assets per each sub-category
provided that the total utility Issue Type Category does not exceed
60% of the Aggregate Market Value of S&P Eligible Assets; provided,
however, that Municipal Obligations falling within the transportation
Issue Type Category will be broken down into two sub-categories and
such Municipal Obligations will be considered S&P Eligible Assets to
the extent the Market Value of such Municipal Obligations in both
sub-categories combined does not exceed 40% of the aggregate Market
Value of S&P Eligible Assets (exposure to transportation sub-category
(i) described in the definition of Issue Type Category is limited to
25% of the aggregate Market Value of S&P Eligible Assets, provided,
however, exposure to transportation sub-category (ii) can exceed the
25% limit to the extent that exposure to transportation sub-category
(i) is reduced, for a total exposure up to and not exceeding 40% of
the aggregate Market Value of S&P Eligible Assets for the
transportation Issue Type Category); and provided, however, that the
general obligation issues will be considered S&P Eligible Assets only
to the extent the Market Value of such general obligation issues does
not exceed 50% of the aggregate Market Value of S&P Eligible Assets;
(3) Municipal Obligations not rated by S&P shall be
considered S&P Eligible Assets only to the extent the Market Value of
such Municipal Obligations does not exceed 50% of the
A-7
aggregate Market Value of S&P Eligible Assets; provided, however,
that High Yield Securities shall be considered S&P Eligible Assets
only to the extent the Market Value of such Municipal Obligations
does not exceed 20% of the aggregate Market Value of S&P Eligible
Assets; and
(4) Out of State Bonds shall be considered S&P Eligible
Assets only to the extent that the Market Value of such Municipal
Obligations does not exceed 20% of the aggregate Market Value of S&P
Eligible Assets.
SECTION 5. INITIAL RATE PERIODS. The Initial Rate Period for shares
of Series __ MuniPreferred shall be the period from and including the Date of
Original Issue thereof to but excluding ___________, 2002.
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (ZZZ) CONTAINED UNDER THE
HEADING "DEFINITIONS" IN THIS STATEMENT. __________, 2002.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE
MULTIPLE" IN THIS STATEMENT.
PARTY SERIES OF MUNIPREFERRED
---------------------------------------------------- -----------------------
Salomon Smith Barney................................. Series ___
SECTION 8. ADDITIONAL DEFINITIONS.
"OUT OF STATE BONDS" shall mean "Out of State Bonds" as defined in
the Fund's Registration Statement.
SECTION 9. DIVIDEND PAYMENT DATES. Except as otherwise provided in
paragraph (d) of Section 2 of Part I of this Statement, dividends shall be
payable on shares of:
Series __ MuniPreferred, for the Initial Rate Period on ________,
______________, 2002, and on each ________ thereafter.
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (C)(I) OF SECTION 5
OF PART I OF THIS STATEMENT. ________________.
SECTION 11. REDEMPTION PROVISIONS APPLICABLE TO INITIAL RATE PERIODS.
Not applicable.
SECTION 12. APPLICABLE RATE FOR PURPOSES OF SUBPARAGRAPH (B)(III) OF
SECTION 3 OF PART II OF THIS STATEMENT. For purposes of subparagraph (b)(iii) of
Section 3 of Part II of this Statement, the Applicable Rate for shares of such
series for the next succeeding Rate Period of shares of such series shall be
equal to the lesser of the Kenny Index (if such Rate Period consists of fewer
than 183 Rate Period Days) or the product of (A)(I) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Rate Period, if such Rate
Period consists of fewer than 183 Rate Period Days; (II) the Treasury Bill Rate
on such Auction Date for such Rate Period, if such Rate Period consists of more
than 182 but fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on
such Auction Date for such Rate Period, if such Rate Period is more than 364
Rate Period Days (the rate described in the foregoing clause (A)(I), (II) or
(III), as applicable, being referred to herein as the "Benchmark Rate") and (B)
1 minus the maximum marginal combined regular Federal and Georgia personal
income tax rate applicable to ordinary income (taking into account the Federal
income tax deductibility of state and local taxes paid or incurred) or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to shares of such series in
such Rate Period any net capital gains or other income taxable for Federal
income
A-8
tax purposes ("Taxable Income"), the Applicable Rate for shares of such
series for such Rate Period will be (i) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if
the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal combined regular Federal and Georgia personal
income tax rate applicable to ordinary income (taking into account the Federal
income tax deductibility of state and local taxes paid or incurred) or the
maximum marginal regular Federal corporate income tax applicable to ordinary
income, whichever is greater, multiplied by the Taxable Yield Rate. For purposes
of the foregoing, Taxable Yield Rate means the rate determined by (a) dividing
the amount of Taxable Income available for distribution per such share of
MuniPreferred by the number of days in the Dividend Period in respect of which
such Taxable Income is contemplated to be distributed, (b) multiplying the
amount determined in (a) above by 365 (in the case of a Dividend Period of 7
Rate Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000.
SECTION 13. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any MuniPreferred are rated by S&P, the
Fund will not purchase or sell futures contracts, write, purchase or
sell options on futures contracts or write put options (except
covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P
that engaging in such transactions will not impair the ratings then
assigned to the MuniPreferred by S&P, except that the Fund may
purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "S&P Hedging Transactions"),
subject to the following limitations:
(i) the Fund will not engage in any S&P Hedging
Transaction based on the Municipal Index (other than
transactions which terminate a futures contract or option
held by the fund by the Fund's taking an opposite position
thereto ("Closing Transactions")), which would cause the
Fund at the time of such transaction to own or have sold
the least of (A) more than 1,000 outstanding futures
contracts based on the Municipal Index, (B) outstanding
futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the
Fund's total assets divided by $1,000 or (C) outstanding
futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging
Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of
such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds
exceeding in number 50% of the quotient of the Market Value
of the Fund's total assets divided by $100,000 ($200,000 in
the case of the two-year United States Treasury Note) or
(B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily
traded futures contracts based on Treasury Bonds in the 30
days preceding the time of effecting such transaction as
reported by The Wall Street Journal.
A-9
(iii) the Fund will engage in Closing
Transactions to close out any outstanding futures contract
which the Fund owns or has sold or any outstanding option
thereon owned by the Fund in the event (A) the Fund does
not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the MuniPreferred Basic
Maintenance Amount on two consecutive Valuation Dates and
(B) the Fund is required to pay Variation Margin on the
second such Valuation Date;
(iv) the Fund will engage in a Closing
Transaction to close out any outstanding futures contract
or option thereon in the month prior to the delivery month
under the terms of such futures contract or option thereon
unless the Fund holds the securities deliverable under such
terms; and
(v) when the fund writes a futures contract or
option thereon, it will either maintain an amount of cash,
cash equivalents or high grade (rated A or better by S&P),
fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the
account of or on behalf of the Fund's broker with respect
to such futures contract or option equals the Market Value
of the futures contract or option, or, in the event the
Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold
such underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the MuniPreferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
(b) For so long as any MuniPreferred are rated by Moody's,
the Fund will not buy or sell futures contracts, write, purchase or
sell call options on futures contracts or purchase put options on
futures contracts or write call options (except covered call options)
on portfolio securities unless it receives written confirmation from
Moody's that engaging in such transactions would not impair the
ratings then assigned to the MuniPreferred by Moody's, except that
the Fund may purchase or sell exchange-traded futures contracts based
on the Municipal Index or Treasury Bonds and purchase, write or sell
exchange-traded put options on such futures contracts and purchase,
write or sell exchange-traded call options on such futures contracts
(collectively, "Moody's Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any Moody's
Hedging Transaction based on the Municipal Index (other
than Closing Transactions), which would cause the Fund at
the time of such transaction to own or have sold (A)
outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily
traded futures contracts based on the Municipal Index in
the 30 days preceding the time of effecting such
transaction as reported by The Wall Street Journal or (B)
outstanding futures contracts based on the Municipal Index
having a Market Value exceeding 50% of the Market Value of
all Municipal Bonds constituting Moody's Eligible Assets
owned by the Fund (other than Moody's Eligible Assets
already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's
Hedging Transaction based on Treasury Bonds (other than
Closing Transactions) which would cause the Fund at
A-10
the time of such transaction to own or have sold (A)
outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 20% of the
aggregate Market Value of Moody's Eligible Assets owned by
the Fund and rated Aa by Moody's (or, if not rated by
Moody's but rated by S&P, rated AAA by S&P) or (B)
outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Municipal Bonds constituting
Moody's Eligible Assets owned by the Fund (other than
Moody's Eligible Assets already subject to a Moody's
Hedging Transaction) and rated Baa or A by Moody's (or, if
not rated by Moody's but rated by S&P, rated A or AA by
S&P) (for purposes of the foregoing clauses (i) and (ii),
the Fund shall be deemed to own the number of futures
contracts that underlie any outstanding options written by
the Fund);
(iii) the Fund will engage in Closing
Transactions to close out any outstanding futures contract
based on the Municipal Index if the amount of open interest
in the Municipal Index as reported by The Wall Street
Journal is less than 5,000;
(iv) the Fund will engage in a Closing
Transaction to close out any outstanding futures contract
by no later than the fifth Business Day of the month in
which such contract expires and will engage in a Closing
Transaction to close out any outstanding option on a
futures contract by no later than the first Business Day of
the month in which such option expires;
(v) the Fund will engage in Moody's Hedging
Transactions only with respect to futures contracts or
options thereon having the next settlement date or the
settlement date immediately thereafter;
(vi) the Fund will not engage in options and
futures transactions for leveraging or speculative purposes
and will not write any call options or sell any futures
contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase;
and
(vii) the Fund will not enter into an option or
futures transaction unless, after giving effect thereto,
the Fund would continue to have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than
the MuniPreferred Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of Moody's Eligible
Assets which the Fund is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (i) assets subject
to call options written by the Fund which are either exchange-traded and
"readily reversible" or which expire within 49 days after the date as of which
such valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Fund; (ii) assets
subject to call options written by the Fund not meeting the requirements of
clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Fund shall be valued at the lesser of (A) the exercise
price and (B) the Discounted Value of the subject security; (iv) futures
contracts shall be valued at the lesser of (A) settlement price and (B) the
Discounted Value of the subject security, provided that, if a contract matures
within 49 days after the date as of which such valuation is made, where the Fund
is the seller the contract may be valued at the settlement price and where the
Fund is the buyer the contract may be valued at the Discounted Value of the
subject securities; and (v) where delivery may be made to the Fund with any
security of a class of securities, the Fund shall assume that it will take
delivery of the security with the lowest Discounted Value.
A-11
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the following amounts shall be
subtracted from the aggregate Discounted Value of the Moody's Eligible Assets
held by the Fund: (i) 10% of the exercise price of a written call option; (ii)
the exercise price of any written put option; (iii) where the Fund is the seller
under a futures contract, 10% of the settlement price of the futures contract;
(iv) where the Fund is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Fund writes call options on a futures contract and does not own the
underlying contract.
(c) For so long as any MuniPreferred are rated by Moody's,
the Fund will not enter into any contract to purchase securities for
a fixed price at a future date beyond customary settlement time
(other than such contracts that constitute Moody's Hedging
Transactions that are permitted under Section 13(b) of this
Statement), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are
issued ("Forward Commitments"), subject to the following limitation:
(i) the Fund will maintain in a segregated
account with its custodian cash, cash equivalents or
short-term, fixed-income securities rated P-1, MTG-1 or
VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or
exceeds the amount of the Fund's obligations under any
Forward Commitments to which it is from time to time a
party or long-term fixed income securities with a
Discounted Value that equals or exceeds the amount of the
Fund's obligations under any Forward Commitment to which it
is from time to time a party; and
(ii) the Fund will not enter into a Forward
Commitment unless, after giving effect thereto, the Fund
would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the
MuniPreferred Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of all Forward
Commitments to which the Fund is a party and of all securities deliverable to
the Fund pursuant to such Forward Commitments shall be zero.
A-12
APPENDIX B
RATINGS OF INVESTMENTS
S&P Corporation -- A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
A S&P issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. 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 S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any credit rating and may, on
occasion, rely on unaudited financial information. Credit ratings may be
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term.
Short-term ratings are generally assigned to those obligations considered short
term in the relevant market. In the U.S., for example, that means obligations
with an original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
The issue 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 S&P. The obligor's capacity to meet
its financial commitment on the obligation is
extremely strong.
AA An obligation rated "AA" differs from the
highest-rated obligations only in small degree.
The obligor's capacity to meet its financial
commitment on the obligation is very strong.
B-1
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.
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.
B-2
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
S&P'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 S&P 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 S&P 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
B-3
- 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 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 S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is
extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations 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.
B-4
D A short-term obligation rated "D" is in payment default.
The "D" rating category is used when payments on an
obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of
a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A 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.
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.
B-5
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.
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.
B-6
-- 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.
-- 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 IBCA, Inc.-- A brief description of the applicable Fitch IBCA,
Inc. ("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
B-7
time; however, business or 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.
B-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.
B-9
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.
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.
C-1
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 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 susceptible
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.
D-1
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 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 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.
D-2
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-3
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Statement of Net Assets, ___________, 2002 (audited)
Statement of Net Assets, ___________, 2002 (unaudited)
Statement of Operations from ___________, 2002
(commencement of operations) to ______________, 2002
(unaudited)
Statement of Changes in Net Assets from ___________, 2002
(commencement of operations) to ______________, 2002
(unaudited)
Portfolio of Investments, _____________, 2002 (unaudited)
2. Exhibits:
a.1. Declaration of Trust dated October 26, 2001. Filed on July
12, 2002 as exhibit a to Registrant's Registration Statement on Form N-2 (File
No. 333-92282) and incorporated herein by reference.*
a.2. Form of Statement Establishing and Fixing the Rights and
Preferences of MuniPreferred Shares. Filed herewith as Appendix A to the
Statement of Additional Information contained herein.
b. By-Laws of Registrant. Filed on July 12, 2002 as exhibit b
to Registrant's Registration Statement on Form N-2 (File No. 333-92282) and
incorporated herein by reference.*
c. None.
d. Form of Share Certificate.**
e . Terms and Conditions of the Dividend Reinvestment Plan.
Filed on August 22, 2002 as Exhibit e to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2 (File No. 333-92282) and
incorporated herein by reference.*
f. None.
g. Investment Management Agreement between Registrant and
Nuveen Advisory Corp. dated July 30, 2002. Filed on August 22, 2002 as Exhibit g
to Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form
N-2 (File No. 333-92282) and incorporated herein by reference.*
h. Form of Underwriting Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation
Plan for Independent Directors and Trustees. Filed on August 22, 2002 as Exhibit
i to Pre-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-2 (File No. 333-92282) and incorporated herein by reference.*
Part C-1
j. Master Custodian Agreement between Registrant and State
Street Bank and Trust Company dated August 19, 2002, effective as of September
15, 2002. Filed on September 24, 2002 as Exhibit j to Pre-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-2 (File No. 222-92282)
and incorporated herein by reference.*
k.1 Transfer Agency and Service Agreement between Registrant
and State Street Bank and Trust Company dated September 20, 2002. Filed on
September 24, 2002 as Exhibit k.1 to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-2 (File No. 222-92282) and
incorporated herein by reference.*
k.2. Expense Reimbursement Agreement between Registrant and
Nuveen Advisory Corp. dated July 30, 2002. Filed on August 22, 2002 as Exhibit
k.2 to Pre-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-2 (File No. 333-92282) and incorporated herein by reference.*
k.3. Form of Auction Agency Agreement between the Registrant and
Deutsche Bank Trust Company Americas as to the Registrant's MuniPreferred
shares.**
k.4. Form of Broker-Dealer Agreement as to the Registrant's
MuniPreferred shares.**
k.5. Form of DTC Representation Letter as to the Registrant's
MuniPreferred shares.**
l.1. Opinion and consent of Vedder, Price, Kaufman & Kammholz.**
l.2. Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated
September 4, 2002. Filed on September 24, 2002 as Exhibit p to Pre-Effective
Amendment No. 2 to Registrant's Registration Statement on Form N-2 (File No.
222-92282) and incorporated herein by reference.*
q. None.
r. Code of Ethics of Nuveen Advisory Corp. Filed on August 22,
2002 as exhibit r to Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-2 (File No. 333-92282) and incorporated herein by
reference.*
s. Powers of Attorney. Filed on September 24, 2002 as
Exhibit s to Pre-Effective Amendment No. 2 to Registrant's Registration
Statement on Form N-2 (File No. 333-92282) and incorporated herein by
reference.*
---------------------
* Previously filed.
** To be filed by amendment.
Part C-2
ITEM 25: MARKETING ARRANGEMENTS
See Section __________ of the Underwriting Agreement to be filed as
Exhibit h to this Registration Statement.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees .................... $ *
Printing and engraving expenses ............................ *
Legal Fees ................................................. *
Accounting expenses ........................................ *
Miscellaneous expenses ..................................... *
-------
Total .................................................. $
=======
---------------------
* To be completed by amendment.
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At ________________, 2002
NUMBER OF
RECORD
TITLE OF CLASS HOLDERS
------------------------------ ---------
Common Shares, $0.01 par value
ITEM 29: INDEMNIFICATION
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section
4, every person who is, or has been, a Trustee, officer, employee or agent of
the Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders
by reason of a final adjudication by the court or other body before
which the proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have
been finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interests of the
Trust; or
Part C-3
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a) or (b))
and resulting in a payment by a Covered Person, unless there has been
either a determination that such Covered Person did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or
a reasonable determination, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that he did not
engage in such conduct:
(i) by a vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the
matter); or
(ii) by written opinion of independent legal
counsel.
The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured against
losses arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then
in office act on the matter) or independent legal counsel in a
written opinion shall determine, based upon a review of the readily
available facts (as opposed to a full trial-type inquiry), that there
is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who
is not an Interested Person of the Trust (including anyone, as such
Disinterested Trustee, who has been exempted from being an Interested Person by
any rule, regulation or order of the Commission), and (y) against whom none of
such actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment
Trust Directors and Officers and Errors and Omission policies in the aggregate
amount of $50,000,000 against liability and expenses of claims of wrongful acts
arising out of their position with the Registrant, except for matters which
involve willful acts, bad faith, gross negligence and willful disregard of duty
(i.e., where the insured did not act in good faith for a purpose he or she
reasonably believed to be in the best interest of Registrant or
Part C-4
where he or she had reasonable cause to believe this conduct was unlawful). The
policy has a $500,000 deductible, which does not apply to individual trustees or
officers.
Section __ of the Underwriting Agreement to be filed as Exhibit h to
this Registration Statement provides for each of the parties thereto, including
the Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Nuveen Advisory Corp. serves as investment adviser to the following
open-end management type investment companies: Nuveen Multistate Trust I, Nuveen
Multistate Trust II, Nuveen Multistate Trust III, Nuveen Multistate Trust IV and
Nuveen Municipal Trust. Nuveen Advisory Corp. also serves as investment adviser
to the following closed-end management type investment companies other than the
Registrant: Nuveen Municipal Value Fund, Inc., Nuveen California Municipal Value
Fund, Inc., Nuveen New York Municipal Value Fund, Inc., Nuveen Municipal Income
Fund, Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus
Municipal Fund, Inc., Nuveen California Performance Plus Municipal Fund, Inc.,
Nuveen New York Performance Plus Municipal Fund, Inc., Nuveen Municipal
Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen
California Municipal Market Opportunity Fund, Inc., Nuveen New York Municipal
Market Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund, Inc.,
Nuveen California Investment Quality Municipal Fund, Inc., Nuveen New York
Investment Quality Municipal Fund, Inc., Nuveen Insured Quality Municipal Fund,
Inc., Nuveen Florida Investment Quality Municipal Fund, Nuveen New Jersey
Investment Quality Municipal Fund, Inc., Nuveen Pennsylvania Investment Quality
Municipal Fund, Nuveen Select Quality Municipal Fund, Inc., Nuveen California
Select Quality Municipal Fund, Inc., Nuveen New York Select Quality Municipal
Fund, Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen Insured Municipal
Opportunity Fund, Inc., Nuveen Florida Quality Income Municipal Fund, Nuveen
Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio Quality Income
Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund, Nuveen
California Quality Income Municipal Fund, Inc., Nuveen New York Quality Income
Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen Premier
Insured Municipal Income Fund, Inc., Nuveen Insured California Premium Income
Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal Fund,
Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select Maturities
Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc., Nuveen
Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium Income
Municipal Fund, Inc., Nuveen Michigan Premium Income Municipal Fund, Inc.,
Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California Premium
Income Municipal Fund 2, Inc., Nuveen Insured New York Premium Income Municipal
Fund 2, Nuveen Michigan Premium Income Municipal Fund 2, Nuveen Pennsylvania
Premium Income Municipal Fund 2, Nuveen Maryland
Part C-5
Premium Income Municipal Fund, Nuveen Massachusetts Premium Income Municipal
Fund, Nuveen Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium
Income Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen
Missouri Premium Income Municipal Fund, Nuveen North Carolina Premium Income
Municipal Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured
Premium Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal
Fund, Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend
Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund,
Nuveen Connecticut Dividend Advantage Municipal Fund, Nuveen Maryland Dividend
Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal
Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, Nuveen Virginia
Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2,
Nuveen California Dividend Advantage Municipal Fund 2, Nuveen New York Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund,
Nuveen Ohio Dividend Advantage Municipal Fund, Nuveen Pennsylvania Dividend
Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 3, Nuveen
California Dividend Advantage Municipal Fund 3, Nuveen Georgia Dividend
Advantage Municipal Fund, Nuveen Maryland Dividend Advantage Municipal Fund 2,
Nuveen Michigan Dividend Advantage Municipal Fund, Nuveen Ohio Dividend
Advantage Municipal Fund 2, Nuveen North Carolina Dividend Advantage Municipal
Fund 2, Nuveen Virginia Dividend Advantage Municipal Fund 2, Nuveen Insured
Dividend Advantage Municipal Fund, Nuveen Insured California Dividend Advantage
Municipal Fund, Nuveen Insured New York Dividend Advantage Municipal Fund,
Nuveen Arizona Dividend Advantage Municipal Fund 2, Nuveen Connecticut Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund
2, Nuveen Pennsylvania Dividend Advantage Municipal Fund 2 and Nuveen Ohio
Dividend Advantage Municipal Fund 3.
Nuveen Advisory Corp. has no other clients or business at the present
time. For a description of other business, profession, vocation or employment of
a substantial nature in which any director or officer of the investment adviser
has engaged during the last two years for his account or in the capacity of
director, officer, employee, partner or trustee, see the descriptions under
"Management of the Fund" in Part A of this Registration Statement. Such
information for the remaining senior officers of Nuveen Advisory Corp. appears
below:
OTHER BUSINESS, PROFESSION, VOCATION OR
NAME AND POSITION WITH NAC EMPLOYMENT DURING PAST TWO YEARS
-------------------------- ---------------------------------------
John P. Amboian, President............................ President, formerly Executive Vice President of The John Nuveen
Company, Nuveen Investments, Nuveen Institutional Advisory Corp.,
Nuveen Asset Management, Inc. and Nuveen Senior Loan Asset
Management, Inc. and Executive Vice President and Director of
Rittenhouse Financial Services, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel......................... Senior Vice President and General Counsel (since 1997) and
Secretary (since 1998) of The John Nuveen Company, Nuveen
Investments, and Nuveen Institutional Advisory Corp. Senior Vice
President and Secretary (since 1999) of Nuveen Senior Loan Asset
Management Inc., prior thereto, Partner in the law firm of
Kirkland & Ellis.
Margaret E. Wilson, Senior Vice President,
Finance............................................... Senior Vice President, Finance, of The John Nuveen Company,
Nuveen Investments and Nuveen Institutional Advisory Corp. and
Senior Vice President and Controller of Nuveen Senior Loan Asset
Management, Inc.; formerly CFO of Sara Lee Corp., Bakery Division.
Part C-6
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois
60606, maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all advisory material
of the investment adviser.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Advisory Corp.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or
other means designed to ensure equally prompt delivery, within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
Part C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 1st day of
October, 2002.
NUVEEN GEORGIA DIVIDEND
ADVANTAGE MUNICIPAL FUND 2
/s/ Gifford R. Zimmerman
------------------------------
Gifford R. Zimmerman, Vice President
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller (Principal October 1, 2002
---------------------------- Financial and Accounting Officer)
Stephen D. Foy
Timothy R. Schwertfeger* Chairman of the Board and Trustee
(Principal Executive Officer)
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Anne E. Impellizzeri* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
By: /s/ Gifford R. Zimmerman
--------------------------
Gifford R. Zimmerman
Attorney-In-Fact
October 1, 2002
---------------------
* Original powers of attorney authorizing Gifford R. Zimmerman, among
others, to execute this Registration Statement, and Amendments thereto,
for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, have been executed and previously
filed as an exhibit.
INDEX TO EXHIBITS
a.1 Declaration of Trust dated October 26, 2001. Filed on July 12,
2002 as exhibit a to Registrant's Registration Statement on Form N-2 (File No.
333-92282) and incorporated herein by reference.*
a.2 Form of Statement Establishing and Fixing the Rights and
Preferences of MuniPreferred shares. Filed herewith as Appendix A to the
Statement of Additional Information contained herein.
b. By-Laws of Registrant. Filed on July 12, 2002 as exhibit b to
Registrant's Registration Statement on Form N-2 (File No. 333-92282) and
incorporated herein by reference.*
c. None.
d. Form of Share Certificate.**
e. Terms and Conditions of the Dividend Reinvestment Plan. Filed on
August 22, 2002 as Exhibit e to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-92282) and incorporated herein
by reference.*
f. None.
g. Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated July 30, 2002. Filed on August 22, 2002 as Exhibit g to
Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form N-2
(File No. 333-92282) and incorporated herein by reference.*
h. Form of Underwriting Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan
for Independent Directors and Trustees. Filed on August 22, 2002 as Exhibit i to
Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form N-2
(File No. 333-92282) and incorporated herein by reference.*
j. Master Custodian Agreement between Registrant and State Street
Bank and Trust Company dated August 19, 2002, effective as of September 15,
2002. Filed on September 24, 2002 as Exhibit j to Pre-Effective Amendment No. 2
to Registrant's Registration Statement on Form N-2 (File No. 222-92282) and
incorporated herein by reference.*
k.1 Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated September 20, 2002. Filed on September
24, 2002 as Exhibit k.1 to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-2 (File No. 222-92282) and incorporated herein
by reference.*
k.2 Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp. dated July 30, 2002. Filed on August 22, 2002 as Exhibit k.2 to
Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form N-2
(File No. 333-92282) and incorporated herein by reference.*
k.3 Form of Auction Agency Agreement between the Registrant and
Deutsche Bank Trust Company Americas as to the Registrant's MuniPreferred
shares.**
k.4 Form of Broker-Dealer Agreement as to the Registrant's
MuniPreferred shares.**
k.5 Form of DTC Representation Letter as to the Registrant's
MuniPreferred shares.**
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated September 4,
2002. Filed on September 24, 2002 as Exhibit p to Pre-Effective Amendment No. 2
to Registrant's Registration Statement on Form N-2 (File No. 222-92282) and
incorporated herein by reference.*
q. None.
r. Code of Ethics of Nuveen Advisory Corp. Filed on August 22, 2002
as exhibit r to Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-2 (File No. 333-92282) and incorporated herein by
reference.*
s. Powers of Attorney. Filed on September 24, 2002 as Exhibit s to
Pre-Effective Amendment No. 2 to Registrant's Registration Statement on Form N-2
(File No. 333-92282) and incorporated herein by reference.*
---------------------
* Previously filed.
** To be filed by amendment.