<PAGE> 1
As filed with the Securities and Exchange Commission on July 6, 1999
1933 Act File No. 333-80555
1940 Act File No. 811-9297
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOXES)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
x PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
x REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
x AMENDMENT NO. 5
NUVEEN DIVIDEND ADVANTAGE
MUNICIPAL FUND
Enter Name of Registrant as Specified in Charter
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(312) 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:
<TABLE>
<S> <C> <C>
David A. Sturms, Esq. Thomas S. Harman, Esq. Thomas A. DeCapo, Esq.
Vedder Price Kaufman & Kammholz Morgan, Lewis & Bockius, LLP Skadden, Arps, Slate,
222 N. LaSalle Street 1800 M Street, N.W. Meagher & Flom LLP
Chicago, IL 60601 Washington, D.C. 20036 One Beacon Street
Boston, MA 02108
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement
If any of the securities being registered on this Form will be 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. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
OFFERING PRICE
TITLE OF SECURITIES BEING AMOUNT BEING PER UNIT AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PRICE(1) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Auction Rate
Cumulative Preferred Shares 11,600
Series M, T, TH.............. shares $25,000 $290,000,000 $80,620*
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* 77,840 has been previously paid.
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(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.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT: (1) FOR PURPOSES OF
DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, THE INFORMATION
OMITTED FROM THE FORM OF PROSPECTUS FILED AS PART OF THIS REGISTRATION STATEMENT
IN RELIANCE UPON RULE 430A AND CONTAINED IN A FORM OF PROSPECTUS FILED BY THE
REGISTRANT PURSUANT TO RULE 424(b)(1) OR (4) OR 497(h) UNDER THE SECURITIES ACT
SHALL BE DEEMED TO BE PART OF THIS REGISTRATION STATEMENT AS OF THE TIME IT WAS
DECLARED EFFECTIVE. (2) 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 SUCH SECURITIES AT THAT TIME
SHALL BE DEEMED TO BE THE INITIAL BONA FIDE OFFERING THEREOF.
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- --------------------------------------------------------------------------------
<PAGE> 2
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 is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 6, 1999
PROSPECTUS
$290,000,000
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED(R)")
4,000 SHARES SERIES M
3,800 SHARES SERIES T
3,800 SHARES SERIES TH
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen Dividend Advantage Municipal Fund (the "Fund") is a closed-end,
diversified management investment company. The Fund's investment objectives are
to provide current income exempt from regular Federal 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 will invest its net assets in a diversified portfolio of municipal bonds
that are exempt from regular Federal income tax. Under normal market conditions,
the Fund expects to be fully invested in such tax-exempt municipal bonds. The
Fund will invest at least 80% of its net assets in investment grade quality
municipal bonds. Investment grade quality bonds are those rated by national
rating agencies with the four highest grades (Baa or BBB or better), or bonds
that are unrated but judged to be of comparable quality by the Fund's investment
adviser. Bonds rated below investment grade are regarded as having predominately
speculative characteristics with respect to capacity to pay interest and repay
principal, and are commonly referred to as junk bonds. No assurance can be given
that the Fund's investment objectives will be achieved.
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
, 1999 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission 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 31 of
this Prospectus, may be obtained without charge by calling the Fund at (800)
257-8787. In addition, the Securities and Exchange Commission 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 Commission.
The Fund is offering 4,000 shares of Series M MuniPreferred, 3,800 shares of
Series T MuniPreferred, and 3,800 shares of Series TH 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 has 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 periods will be %, % and % for
MuniPreferred Series M, Series T and Series TH, respectively. The initial rate
period for each series of MuniPreferred is the period from the date of issuance
through: , 1999 for Series M; , 1999
for Series T; and , 1999 for Series TH. 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.
Dividends on shares of MuniPreferred, to the extent payable from tax-exempt
income earned on the Fund's investments, will be exempt from regular Federal
income tax in the hands of owners of such shares. All or a portion of the Fund's
dividends may be subject to the Federal alternative minimum tax. The Fund is
required to allocate net capital gains and other taxable income, if any,
proportionately between common and preferred shares, based on the percentage of
total dividends distributed to each class for that year. The Fund, in the case
of the ordinary seven day rate periods or special rate periods of no more than
28 days, will give notice of the amount of any income taxable for federal income
tax purposes to be included in a dividend on a share of MuniPreferred in advance
of the related auction and may give advance notice to MuniPreferred shareholders
during longer rate periods.
---------------------
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
(R) Registered Trademark of John Nuveen & Co. Incorporated
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------------- ----------------
<S> <C> <C>
Public Offering Price $ 25,000 $ 290,000,000
---------------- ----------------
Sales Load $ $
---------------- ----------------
Proceeds to Fund (before expenses) $ $
================ ================
</TABLE>
Offering expenses payable by the Fund are estimated to be $ . The
Fund and Nuveen Advisory Corp. have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended.
---------------------
The Underwriters are offering the shares of the MuniPreferred subject to
various conditions. It is expected that the shares of MuniPreferred will be
delivered to the Underwriters through the facilities of The Depository Trust
Company on or about , 1999.
---------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
DEUTSCHE BANC ALEX. BROWN
GOLDMAN, SACHS & CO.
JOHN NUVEEN & CO. INCORPORATED
LEGG MASON WOOD WALKER
INCORPORATED
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
RAYMOND JAMES & ASSOCIATES, INC.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE 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 PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
<PAGE> 3
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 Dividend Advantage Municipal Fund (the "Fund") is a closed-end,
diversified management investment company. See "The Fund." The Fund's common
shares, $.01 par value ("Common Shares"), are traded on the New York Stock
Exchange under the symbol "NAD." See "Description of Common Shares." As of June
28, 1999, the Fund had 37,806,982 Common Shares outstanding and net assets of
$536,773,790.
INVESTMENT OBJECTIVES
The Fund's investment objectives are to provide current income exempt from
regular Federal 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 markets that are undervalued. The Fund will invest its net assets in a
diversified portfolio of municipal bonds that are exempt from regular Federal
income tax. Under normal market conditions, the Fund expects to be fully
invested in such tax-exempt municipal 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 within
the four highest grades (Baa or BBB or better by Moody's Investor Service, Inc.
("Moody's"), Standard & Poors Corporation ("S&P") or Fitch IBCA, Inc.
("Fitch")), or bonds that are unrated but judged to be of comparable quality by
the Fund's investment adviser. 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 the
Fund's investment adviser. Bonds of below investment grade quality are regarded
as having predominant speculative characteristics with respect to capacity to
pay interest and repay principal, and are commonly referred to as junk bonds.
The Fund cannot assure you that it will attain its investment objectives. See
"The Fund's Investments."
INVESTMENT ADVISER
Nuveen Advisory Corp. ("Nuveen Advisory" or the "Adviser") acts as the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of John
Nuveen & Co. Incorporated, an investment banking firm that has engaged in the
underwriting and distribution of tax-exempt securities throughout its history.
See "Management of the Fund" and "Underwriting."
THE OFFERING
The Fund is offering 4,000 shares of Series M MuniPreferred, 3,800 shares
of Series T MuniPreferred, and 3,800 shares of Series TH MuniPreferred, each at
a purchase price of $25,000 per share. However, the offering of each series is
independent of the offering of each other series, and no offering is contingent
upon the closing of any other offering. Certain information presented in this
Prospectus assumes that each offering is made and effected as contemplated, but
there can be no assurance that this will be the case. Shares of MuniPreferred
are being offered by the Underwriters listed under "Underwriting." Except as
otherwise described below, the rights and preferences of each series of
MuniPreferred are identical.
1
<PAGE> 4
RISK FACTORS SUMMARY
Risk is inherent in all investing. Therefore, before investing you should
consider certain risks carefully when you invest in the Fund. 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; and
- in extraordinary circumstances the Fund may not earn sufficient income
from its investments to pay dividends;
- if long-term rates rise, the value of the Fund's investment portfolio
will decline, reducing the asset coverage for the Muni Preferred shares;
and
- if an issuer of a municipal bond in which the Fund invests defaults,
there may be a negative impact on the income and asset value of the
Fund's portfolio.
For additional risks of investing in the Fund, see "Risk Factors" below.
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 table below shows the first auction date for each Series of
MuniPreferred and the day on which each subsequent auction will normally be held
for each Series of MuniPreferred. The first auction date for each Series of
MuniPreferred will be the business day before the dividend payment date for the
initial rate period for each Series of MuniPreferred. The start date for
subsequent rate periods normally will be the business day following the dividend
payment 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.
<TABLE>
<CAPTION>
SERIES FIRST AUCTION DATE* SUBSEQUENT AUCTION
------ ------------------- ------------------
<S> <C> <C>
M..........................................
T..........................................
TH.........................................
</TABLE>
- ------------
* All dates are 1999.
DIVIDENDS AND RATE PERIODS
The table below shows the dividend rate for the initial rate period on each
Series of 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 -- Dividends and
Dividend Periods -- General."
2
<PAGE> 5
The table below also shows for each Series of MuniPreferred 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 the day on which dividends otherwise would
be paid is not a business day, then your dividends will be paid on the first
business day that falls after that day.
Finally, the table below shows number of days of the initial rate period
for each Series of 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 -- Dividends and Dividend Periods -- Designation
of Special Rate Periods."
<TABLE>
<CAPTION>
DATE OF DIVIDEND PAYMENT SUBSEQUENT NUMBER OF
ACCUMULATION AT DATE FOR INITIAL DIVIDEND DAYS OF INITIAL
SERIES INITIAL DIVIDEND RATE INITIAL RATE* RATE PERIOD* PAYMENT DAY RATE PERIOD
------ --------------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
M.................... %
T.................... %
TH................... %
</TABLE>
- ------------
* All dates are 1999.
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, the income you receive will ordinarily be similarly exempt. Your
income may be subject to state and local taxes. 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 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 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 Investors Service, Inc. ("Moody's") and "AAA" from Standard &
Poor's Corporation ("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 -- Rating Agency Guidelines."
REDEMPTION
Although the Fund does 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 to correct a failure to meet a rating agency
guideline in a timely manner. The Fund voluntarily may redeem MuniPreferred
shares in certain conditions. See "Description of MuniPreferred -- Redemption"
and "Description of MuniPreferred -- Rating Agency Guidelines."
LIQUIDATION PREFERENCE
The liquidation preference of the shares of each series of MuniPreferred
will be $25,000 per share plus accumulated but unpaid dividends, if any,
thereon. See "Description of MuniPreferred -- Liquidation."
3
<PAGE> 6
VOTING RIGHTS
The holders of 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 shares of Common Shares and shares of 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 -- Voting Rights" and "Certain Provisions
in the Declaration of Trust."
FINANCIAL HIGHLIGHTS
(UNAUDITED)
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 operations
on May 26, 1999 until June 28, 1999. Since the Fund was recently organized and
commenced operations on May 26, 1999, the table covers less than five weeks of
operations, during which a substantial portion of the Fund's portfolio was held
in temporary investments 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.
<TABLE>
<S> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period...................... $ 14.33
--------
Net Investment Income.................................. .05
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... (.16)
--------
Total From Investment Operations.................. (.11)
--------
Organization and Offering Costs........................... (.02)
--------
Net Asset Value, End of Period............................ $ 14.20
========
Per Share Market Value, End of Period..................... $15.0625
Total Return on Net Asset Value........................... (.91)%
Total Investment Return on Market Value................... .42%
Ratios/Supplemental Data:
Net Assets, End of Period (In Thousands).................. $536,774
Ratio of Expenses to Average Net Assets Before Expense
Reimbursement.......................................... .68%*
Ratio of Net Investment Income to Average Net Assets
Before Expense Reimbursement........................... 3.44%*
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... .38%*
Ratio of Net Investment Income to Average Net Assets After
Reimbursement.......................................... 3.74%*
Portfolio Turnover Rate................................... --%
</TABLE>
- ------------
* Annualized
4
<PAGE> 7
THE FUND
Nuveen Dividend Advantage Municipal Fund, Inc. (the "Fund") is a recently
organized closed-end, diversified management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund was
organized as a Massachusetts business trust on January 15, 1999 pursuant to a
Declaration of Trust governed by the laws of the Commonwealth of Massachusetts
(the "Declaration"). In , 1999, the Fund issued an
aggregate of common shares of beneficial interest, par value $.01
per share ("Common Shares"), pursuant to the initial public offering thereof and
commenced its operations. On June 18, 1999 and July 6, 1999, the Fund issued an
additional 2,500,000 Common Shares and 1,306,228 Common Shares, respectively, in
connection with the partial exercises by the Underwriters of the over-allotment
option. The Fund's Common Shares are traded on the New York Stock Exchange (the
"Exchange") under the symbol "NAD." The Fund's principal office is located at
333 West Wacker Drive, Chicago, Illinois 60606, and its telephone number is
(800) 257-8787.
The following provides information about the Fund's outstanding shares as
of June 28, 1999:
<TABLE>
<CAPTION>
AMOUNT HELD BY THE
FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT AMOUNT OUTSTANDING
- -------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Common.................................... Unlimited 0 37,806,982
MuniPreferred............................. Unlimited 0 0
Series M................................ 10,000 0 0
Series T................................ 10,000 0 0
Series TH............................... 10,000 0 0
</TABLE>
USE OF PROCEEDS
The net proceeds of this offering will be approximately $286,819,880 after
payment of the sales load and estimated offering costs.
The net proceeds of the offering will be invested in accordance with the
Fund's investment objective 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 that objective and these policies at or
shortly (within six to eight weeks) after the completion of the offering. To the
extent that all of the proceeds cannot be so invested, pending such investment,
they will be invested in: other open- or closed-end investment companies that
invest primarily in municipal bonds of the types in which the Fund may invest
directly; in high quality, short-term tax-exempt money market securities; or in
high quality municipal bonds with relatively low volatility (such as
pre-refunded and intermediate term securities). If necessary to invest fully the
net proceeds of the offerings immediately, the Fund may also purchase, as
temporary investments, short-term taxable investments of the type described in
the Statement of Additional Information under "Investment Objective and
Policies -- Portfolio Investments," the income on which is subject to regular
Federal income tax.
5
<PAGE> 8
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of the Fund as of June
28, 1999, and as adjusted to give effect to the issuance of the shares of
MuniPreferred offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no
shares issued; 11,600 shares issued, as adjusted,
respectively).......................................... $ -- $290,000,000
Common Shares, $.01 par value per share; unlimited shares
authorized, 37,806,982 shares outstanding*............. 378,070 378,070
Paid-in surplus........................................... 540,450,951 537,270,831
Balance of undistributed net investment income............ 1,734,045 1,734,045
Accumulated net realized gain (loss) from investment
transactions........................................... (7,800) (7,800)
Net unrealized appreciation (depreciation) of
investments............................................ (5,781,476) (5,781,476)
------------ ------------
Net assets................................................ $536,773,790 $823,593,670
============ ============
</TABLE>
- ------------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of June 28, 1999, approximately 79.43% of the market value of the Fund's
portfolio was invested in long-term municipal bonds and approximately 20.57% of
the market value of the Fund's portfolio was invested in short-term municipal
bonds. The following table sets forth certain information with respect to the
composition of the Fund's investment portfolio as of June 28, 1999.
<TABLE>
<CAPTION>
CREDIT RATING VALUE PERCENT
- ------------- ------------ -------
<S> <C> <C>
Aaa/AAA*........................................... $344,943,683 55.49%
Aa/AA.............................................. 87,701,062 14.11
A/A................................................ 1,886,320 .30
Baa/BBB............................................ 29,197,665 4.70
Unrated............................................ 30,028,205 4.83
Short-term......................................... 127,880,000 20.57
------------ ------
TOTAL.............................................. $621,636,935 100.0%
============ ======
</TABLE>
- ------------
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of
principal and interest.
6
<PAGE> 9
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objectives are:
- to provide current income exempt from regular Federal 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 holders of Common Shares.
The Fund will invest its net assets in a diversified portfolio of municipal
bonds that are exempt from regular Federal 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. 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. 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 predominantly 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. The Fund may also invest in securities of other open-or closed-end
investment companies that invest primarily in municipal bonds of the types in
which the Fund may invest directly. See "-- Other Investment Companies" and
" -- Initial Portfolio Composition."
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from insurers
with a claims-paying ability rated Aaa by Moody's
7
<PAGE> 10
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 are being invested, the Fund may 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 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 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. A "majority of
the outstanding," 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 -- 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
gains distributions will be subject to capital gains taxes. See "Tax Matters."
MUNICIPAL BONDS
Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Fund will only
purchase municipal bonds representing lease obligations where Nuveen Advisory
believes the issuer has a strong incentive to continue making appropriations
until maturity.
The municipal bonds in which the Fund will invest are generally issued by
states, cities and local authorities and certain possessions and territories of
the United States (such as Puerto Rico or Guam), 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
income tax, although the interest may be subject to the Federal alternative
minimum tax.
The yields on municipal bonds are dependent 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.
8
<PAGE> 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 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, since bonds are subject to market fluctuations, the value of the bonds at
the 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 shareholder in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's management, advisory
and administrative fees with respect to assets so invested. Common Shareholders
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. Nuveen Advisory will take expenses into
account when evaluating the investment merits of an investment in the investment
company relative to available municipal bond investments. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks described herein. As described
in the Prospectus in the section entitled "Risks," the net asset value and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
INITIAL PORTFOLIO COMPOSITION
If current market conditions persist, the Fund expects that approximately
85% 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 national rating agencies within the four highest grades of the
investment grade category or are unrated but judged to be of comparable quality
by Nuveen Advisory (approximately 50% in Aaa/AAA; 15% in A; and 20% in Baa/BBB).
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."
Subject to market availability, the Fund would likely seek to invest
approximately 15% 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."
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 Preferred Shares including shares of MuniPreferred, voting together
as a single class, and of the holders of a majority of the outstanding Preferred
Shares, including shares of MuniPreferred, voting as a separate class:
1. 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;
2. 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);
9
<PAGE> 12
3. 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;
4. 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;
5. 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;
6. 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);
7. 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;
8. Invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to bonds issued by the
United States Government, its agencies and instrumentalities or to the
investment of 25% of its total assets.
See "Investment Objective and Policies -- Investment Restrictions" in the
Statement of Additional Information for a description of additional fundamental
and non-fundamental policies of the Fund.
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.
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. The Fund believes this event is
unlikely. 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
10
<PAGE> 13
of return on your shares than the market rate. See "Description of
MuniPreferred" 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, though probably with higher resulting dividend rates. If a rating agency
downgrades 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 -- Asset Maintenance
and Rating Agency Guidelines" for a description of the asset maintenance tests
the Fund must meet.
INFLATION RISK
Inflation is the reduction in the purchasing power of money resulting from
the increase in the price of goods and services. Inflation risk is the risk that
the inflation adjusted (or "real") value of your MuniPreferred investment or the
income from that investment will be worth less in the future. 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.
CREDIT RISK
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of credit risk. If
rating agencies lower their ratings of municipal bonds in the Fund's portfolio,
the value of those bonds could decline, which could jeopardize the rating
agencies' ratings of the MuniPreferred. Because the primary source of income for
the Fund is the interest and principal payments on the municipal bonds in which
it invests, any default by an issuer of a municipal bond could have a negative
impact on the Fund's ability to pay dividends on the MuniPreferred shares and
could result in the redemption of some or all of the MuniPreferred shares. In
addition, 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 Nuveen Advisory. 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 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.
INCOME RISK
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short- and long-term. If interest
rates drop, the Fund's income available over time to make dividend
11
<PAGE> 14
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.
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.
YEAR 2000 RISK
Nuveen Advisory relies on computer systems to manage the Fund's
investments, process shareholder transactions, and maintain shareholder
accounts. Because of the way computers historically have stored dates, some of
these systems currently may not be able to process activity occurring in the
year 2000. Nuveen Advisory is working with the Fund's service providers to adapt
their systems to address this "Year 2000" issue. Although there can be no
absolute assurance, Nuveen Advisory and the Fund expect that the necessary work
will be completed on a timely basis. In addition, Year 2000 issues may affect
the ability of municipal issuers to meet their interest and principal payment
obligations to their bond holders, and may adversely affect the bonds' credit
ratings and values. It is generally conceded that municipal issuers may have
greater Year 2000 risks than other issuers. Nuveen Advisory is requesting
information from municipal issuers so that Nuveen Advisory can take the issuers'
Year 2000 readiness, if make available, into account in making investment
decisions. There can be no assurance that issuers will provide this information
to Nuveen Advisory, or that issuers will begin or complete the work necessary to
address any Year 2000 issues on a timely basis.
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. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined in
the 1940 Act) and six of whom are not "interested persons." 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 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 $35 billion in assets under
management. See the Statement of Additional Information under "Management of the
Fund -- Investment Adviser."
Overall investment management strategy and operating policies for the Fund
are set by the Investment Management Committee of John Nuveen & Co. Incorporated
("Nuveen"), subject to the ultimate oversight and supervision of the Board of
Trustees. Nuveen Advisory places orders for the purchase and sale of portfolio
securities for the Fund. Consistent with Rule 10f-3 under the 1940 Act,
portfolio securities may be purchased from Nuveen or its affiliates. The
Investment Management Committee is comprised of several principal executive
officers and portfolio managers of Nuveen and Nuveen Advisory. Day to day
operations and execution of specific investment strategies is the responsibility
of Nuveen Advisory. Since , 1999, the Fund's commencement of
operations, Nuveen Advisory has managed the Fund using a team of analysts and
portfolio managers that focus on a specific group of funds. Stephen S. Peterson
has been the portfolio manager of the Fund and will provide daily oversight for,
and execution of, the Fund's investment activities. Mr. Peterson currently
manages nine municipal bond funds for Nuveen Advisory with assets
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<PAGE> 15
aggregating more than $2.8 billion. He is a Chartered Financial Analyst and a
Vice President of Nuveen Advisory.
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have
over $60 billion of net assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay an annual management fee for the services
and facilities provided by Nuveen Advisory, payable on a monthly basis,
according to the following schedule:
<TABLE>
<CAPTION>
DAILY TOTAL NET ASSETS* MANAGEMENT FEE
----------------------- --------------
<S> <C>
For the first $125 million.................................. .6500%
For the next $125 million................................... .6375%
For the next $250 million................................... .6250%
For the next $500 million................................... .6125%
For the next $1 billion..................................... .6000%
For assets over $2 billion.................................. .5750%
</TABLE>
- ------------
* Including net assets attributable to MuniPreferred shares.
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 and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
For the first ten years of the Fund's operation, Nuveen Advisory has agreed
to reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF YEAR ENDING (AS A PERCENTAGE OF
JULY 31, AVERAGE DAILY NET ASSETS) JULY 31, AVERAGE DAILY NET ASSETS)
- ----------- ------------------------- ----------- -------------------------
<S> <C> <C> <C>
1999* .30% 2005 .25%
2000 .30% 2006 .20%
2001 .30% 2007 .15%
2002 .30% 2008 .10%
2003 .30% 2009 .05%
2004 .30%
</TABLE>
- ------------
* From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond July 31, 2009.
LEGAL PROCEEDINGS
A lawsuit 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 is currently pending in federal district court. The
plaintiffs allege 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' trustees and Nuveen Advisory and various misrepresentations and omissions
in prospectuses and shareholder reports relating to the use of leverage through
the issuance and
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<PAGE> 16
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 cases.
The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the court
granted most of the defendants' motion to dismiss and denied plaintiffs' motion
to certify defendant and plaintiff classes. The court dismissed all claims
against the funds, the funds' trustees and Nuveen. The court dismissed these
claims without prejudice (which means that the plaintiffs can re-file the claims
if they can correct the defect that led to the claim being dismissed) on the
ground that the claims should have been brought as derivative claims on behalf
of the funds. The only remaining claim is brought under Section 36(b) of the
1940 Act against Nuveen Advisory, and relates solely to advisory fees Nuveen
Advisory received from the six relevant funds. While the Fund cannot assure that
the litigation will be decided in Nuveen Advisory's favor, Nuveen Advisory
believes a decision, if any, against the defendants would have no material
effect on the Fund or the ability of Nuveen Advisory to perform its duties under
the investment management agreement.
DESCRIPTION OF MUNIPREFERRED
The following is a brief description of the terms of the shares of
MuniPreferred. 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 shares of MuniPreferred in 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.
GENERAL
The Fund's Declaration 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
common shareholders. The Statement currently authorizes the issuance of shares
of MuniPreferred as follows: Series M -- 10,000; Series T -- 10,000; and Series
TH -- 10,000. All shares of MuniPreferred will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared).
The shares of MuniPreferred 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 shares of MuniPreferred 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 non-assessable and have
no preemptive, conversion or rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
General. The initial Rate Period of shares of a series of MuniPreferred of
a particular series will be a period consisting of (a) days in
the case of Series M, (b) days in the case of Series T, and (c)
days in the case of Series TH. 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, including the Statement, and applicable law, on
shares of (a) MuniPreferred, Series M, on , , and
thereafter on each ; (b) MuniPreferred, Series T, on
, , and thereafter on each ; and
(c) MuniPreferred, Series TH, on , , 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,
14
<PAGE> 17
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 %, %, and % per annum for Series M, T and TH,
respectively. 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
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
15
<PAGE> 18
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'/BB-").
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'/BB-").
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.
16
<PAGE> 19
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 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 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, 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 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 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 regular Federal individual income tax rate
applicable to ordinary income 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.
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 call for redemption, redeem, purchase or
otherwise acquire for consideration any of Common 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), 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; (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; and (c) 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.
17
<PAGE> 20
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 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 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.
REDEMPTION
Mandatory Redemption. 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 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 number of shares of MuniPreferred
necessary to restore the required Discounted Value or the 1940 Act MuniPreferred
Asset Coverage, as the case may be.
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 500 shares of such series would remain outstanding
and (ii) 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
18
<PAGE> 21
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.
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 other
corporation nor the merger or consolidation of any other 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 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 senior securities which are shares, 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 June 28,
1999, 1940 Act MuniPreferred Asset Coverage with respect to shares of
MuniPreferred, assuming the issuance on the date thereof of all shares of
19
<PAGE> 22
MuniPreferred offered hereby and giving effect to the deduction of sales load
and offering costs related thereto estimated at $2,890,120, would have been
computed as follows:
<TABLE>
<C> <C> <C> <C> <S>
Value of Fund assets less liabilities
not constituting senior securities $823,593,670
------------------------------------------------------------ = ------------ = 284%
Senior securities representing indebtedness plus liquidation
value of $290,000,000
the shares of MuniPreferred
</TABLE>
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 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 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, 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, 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, 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, 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
20
<PAGE> 23
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, 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 (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.
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, 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; provided, however, that if Moody's or S&P is
not then rating the shares of MuniPreferred, the aggregate liquidation
preference of all Preferred Stock 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 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 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). 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, outstanding
at the time, voting
21
<PAGE> 24
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 preceding
sentence requiring a vote of security holders of the Fund under Section 13(a) of
the 1940 Act.
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 New 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,
Bankers Trust Company) 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.
22
<PAGE> 25
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 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.
23
<PAGE> 26
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 Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning a 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 M, Series T and Series TH
will normally be held every , , and
, respectively, and each Subsequent Rate Period of shares of such
series will normally begin on the following , ,
and , respectively.
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 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
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
24
<PAGE> 27
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 (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 shares of MuniPreferred, the Declaration authorizes the
issuance of an unlimited number of Common Shares, par value $.01 per share. All
Common Shares have equal rights to the payment of dividends and the distribution
of assets upon liquidation. Common Shares are fully paid and, subject to matters
discussed in "Certain Provisions in the Declaration of Trust," non-assessable
when issued and have no preemptive, conversion rights or rights to cumulative
voting. So long as any shares of MuniPreferred are outstanding, the Fund is not
permitted to declare dividends on, make any distributions with respect to, or
purchase its Common Shares unless, at the time of such declaration, distribution
or purchase, as applicable (and after giving effect thereto), all accumulated
dividends on Preferred Shares have been paid.
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 of 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
very 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 Fund, or a series or class of the Fund, or (5)
removal of trustees, 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. 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
25
<PAGE> 28
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 Securities and
Exchange Commission 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
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 closed-end
investment companies may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. The Fund cannot assure you that
its Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers will actually reduce market discount.
If the Fund converted to an open-end 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 New York 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 company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Fund Shares; Conversion
to Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The Fund intends 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. Substantially all of the Fund's dividends to the Common
Shareholders and MuniPreferred shareholders
26
<PAGE> 29
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 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, proportionately among the Common Shares and
MuniPreferred shares. 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 -- Dividends and Dividend
Periods -- Gross-Up Payments." 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. Present law taxes both long-term and short-term capital gains
of corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, under current law short-term capital gains and ordinary income will
be taxed at a maximum rate of 39.6% while long-term capital gains will generally
be taxed at a maximum rate of 20%. Because of certain limitations on itemized
deductions and the deduction for personal exemptions applicable to higher income
taxpayers, the effective rate of tax may be higher in certain circumstances.
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 with respect to such shares.
A shareholder's holding period is 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 shares 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. The Statement of Additional Information contains a more
detailed summary of the Federal 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 adviser about Federal income tax
matters.
STATE AND LOCAL TAX MATTERS
While exempt-interest dividends are exempt from regular Federal income tax,
they may not be exempt from state or local income or other taxes. Some states
exempt from state income tax that portion of any exempt-interest dividend that
is derived from interest a regulated investment company receives on its holdings
of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income the Fund earned during the preceding year on
tax-exempt obligations and the Fund will indicate, on a state-by-state basis,
the source of this income. You should consult with your tax adviser about state
and local tax matters.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND
REDEMPTION AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is Chase Global Funds Services Company, P.O.
Box 5186, Bowling Green Station, New York, NY 10275-0672 (regular mail) or 4 New
York Plaza, 6th Floor, New York, NY 10004 (for overnight courier). Bankers Trust
Company, 4 Albany Street, New York, New York 10006, 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.
27
<PAGE> 30
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated the
date hereof, each underwriter named below has severally agreed to purchase, and
the Fund has agreed to sell to such underwriter, the number of MuniPreferred
shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------
NAME SERIES M SERIES T SERIES TH
---- -------- -------- ---------
<S> <C> <C> <C>
Salomon Smith Barney Inc .....................
A.G. Edwards & Sons, Inc. ....................
Deutsche Bank Securities Inc..................
Goldman, Sachs & Co. .........................
John Nuveen & Co. Incorporated................
Legg Mason Wood Walker, Incorporated..........
PaineWebber Incorporated......................
Prudential Securities Incorporated............
Raymond James & Associates, Inc. .............
Total....................................
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to the
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, for whom Salomon Smith Barney Inc. is acting as
representative, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this Prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $
per 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 share on sales to
certain other dealers. After the initial public offering, the underwriters may
change the public offering price; and the concession. Investors must pay for any
MuniPreferred shares purchased in the initial public offering on or before
, 1999.
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 makes in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund,
John Nuveen & Co. Incorporated 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 as set
forth under "The Auction."
John Nuveen & Co. Incorporated, 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 1933 Act,
or to contribute payments to the underwriters may be required to make for any of
those liabilities.
LEGAL OPINIONS
Certain legal matters in connection with the shares of MuniPreferred
offered hereby will be passed upon for the Fund by Vedder, Price, Kaufman &
Kammholz, Chicago, Illinois, and for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, Boston, Massachusetts. Vedder, Price, Kaufman & Kammholz
will rely as to certain matters of Massachusetts law on the opinion of Bingham
Dana, LLP, Boston, Massachusetts.
28
<PAGE> 31
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, the 1940 Act and are 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 at the SEC's New York Regional Office, Seven World
Trade Center, New York, New York 10048 and Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the Funds can
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
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.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.
29
<PAGE> 32
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... S-1
Investment Policies and Techniques.......................... S-3
Other Investment Policies and Techniques.................... S-8
Management of the Fund...................................... S-9
Portfolio Transactions...................................... S-14
Net Asset Value............................................. S-15
Additional Information Concerning the Auctions for
MuniPreferred............................................. S-15
Certain Provisions in the Declaration of Trust.............. S-17
Repurchase of Common Shares; Conversion to Open-End Fund.... S-17
Tax Matters................................................. S-19
Certain Owners of Record.................................... S-23
Experts..................................................... S-23
Financial Statements........................................ F-1
Report of Independent Auditors.............................. 1
Statement Establishing and Fixing the Rights and Preferences
of Municipal Auction Rate Cumulative Preferred Shares..... A-2
Ratings of Investments...................................... B-1
Hedging Strategies and Risks................................ C-1
</TABLE>
30
<PAGE> 33
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 Federal tax-free yield on a
municipal investment. To assist you to more easily compare municipal investments
like MuniPreferred shares with taxable alternative investments, the table below
presents the taxable equivalent yields for a range of hypothetical Federal
tax-free yields and tax rates:
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
TAX FREE YIELD
<TABLE>
<CAPTION>
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00%
-------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
28.0%.......................................... 5.56% 6.25% 6.94% 7.64% 8.33%
31.0%.......................................... 5.80% 6.52% 7.25% 7.97% 8.70%
36.0%.......................................... 6.25% 7.03% 7.81% 8.59% 9.38%
39.6%.......................................... 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
A-1
<PAGE> 34
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................... 1
Financial Highlights................. 4
The Fund............................. 5
Use of Proceeds...................... 5
Capitalization....................... 6
Portfolio Composition................ 7
The Fund's Investments............... 8
Risk Factors......................... 11
Management of the Fund............... 14
Description of MuniPreferred......... 15
The Auction.......................... 24
Description of Common Shares......... 27
Certain Provisions in the Declaration
of Trust........................... 27
Repurchase of Common Shares;
Conversion to Open-End Fund........ 28
Tax Matters.......................... 28
Custodian, Transfer Agent, Dividend
Disbursing Agent and Redemption
Agent.............................. 29
Underwriting......................... 29
Legal Opinions....................... 30
Available Information................ 30
Special Note Regarding Forward
Looking Statements................. 31
Table of Contents for the Statement
of Additional Information.......... 32
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$290,000,000
NUVEEN
DIVIDEND ADVANTAGE
MUNICIPAL FUND
MUNICIPAL AUCTION
RATE CUMULATIVE
PREFERRED SHARES
MUNIPREFERRED(R)
4,000 SHARES SERIES M
3,800 SHARES SERIES T
3,800 SHARES SERIES TH
------------
PROSPECTUS
------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
BT ALEX. BROWN
GOLDMAN, SACHS & CO.
JOHN NUVEEN & CO. INCORPORATED
LEGG MASON WOOD WALKER
INCORPORATED
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES
RAYMOND JAMES & ASSOCIATES, INC.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 35
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
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JULY 6, 1999
NUVEEN DIVIDEND ADVANTAGE
MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relating to this offering does
not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated , 1999 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing shares of MuniPreferred in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained without charge
by calling (800) 257-8787. Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies...............................................................................S-1
Investment Policies and Techniques..............................................................................S-3
Other Investment Policies and Techniques........................................................................S-8
Management of the Fund..........................................................................................S-9
Portfolio Transactions.........................................................................................S-14
Net Asset Value................................................................................................S-15
Additional Information Concerning the Auctions for MuniPreferred...............................................S-15
Certain Provisions in the Declaration of Trust.................................................................S-17
Repurchase of Common Shares; Conversion to Open-End Fund.......................................................S-17
Tax Matters....................................................................................................S-19
Certain Owners of Record.......................................................................................S-23
Experts ......................................................................................................S-23
Financial Statements............................................................................................F-1
Report of Independent Auditors....................................................................................1
Statement Establishing and Fixing the Rights and Preferences of
Municipal Auction Rate Cumulative Preferred Shares..............................................................A-2
Ratings of Investments..........................................................................................B-1
Hedging Strategies and Risks....................................................................................C-1
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS , 1999.
<PAGE> 36
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt
from regular Federal income tax and enhance portfolio value relative to the
municipal bond market by investing in tax-exempt municipal bonds that Nuveen
Advisory Corp. ("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. Municipal bonds may be underrated because
of the time that has elapsed since their rating was assigned or reviewed, or
because of positive factors that may not have been fully taken into account by
rating agencies, or for other similar reasons. 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 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 reflect their
true creditworthiness. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds,
regardless of which 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. 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 an investment in MuniPreferred shares 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 each
such investor's 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 voting together as a single class, and of the
holders of a majority of the outstanding MuniPreferred shares voting as a
separate class:
1. 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;
2. 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);
3. 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-1
<PAGE> 37
4. 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;
5. Purchase or sell real estate, but this shall not prevent
the Fund from investing in municipal bonds secured real estate or
interests therein or foreclosing upon and selling such security;
6. 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);
7. 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;
8. Invest more than 5% of its total assets in securities of
any one issuer, except that this limitation shall not apply to bonds
issued by the United States Government, its agencies and
instrumentalities or to the investment of 25% of its total assets.
For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund, means (i) 67% of 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 (8) 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 total assets in the aggregate in shares of other investment
companies and only up to 5% of its total 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
shareholder in any investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Common Shareholders would therefore be subject to duplicative expenses
to the extent the Fund invests in other investment companies. In addition, the
securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks described herein.
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.
S-2
<PAGE> 38
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 and 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.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
Prospectus.
INVESTMENT IN MUNICIPAL BONDS
PORTFOLIO INVESTMENTS
The Fund will invest its net assets in a diversified portfolio of
municipal bonds that are exempt from regular Federal income tax. Under normal
market conditions, 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. The Fund will invest at least 80% of its net assets
in investment grade quality municipal bonds rated as such at the time of
investment. Investment grade quality means that such bonds are rated 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, at the time of
investment, rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as "junk bonds." 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. The
foregoing policies are fundamental policies of the Fund. 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
predominantly 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,
S-3
<PAGE> 39
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.
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 may be shortened from time to time 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 cash on
hand fully invested, including the period during which the net proceeds of the
offering are being invested, the Fund may invest any percentage of its assets in
short-term investments including high quality, short-term securities which may
be either tax-exempt or taxable and securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund intends to invest in taxable
short-term investments only in the event that suitable tax-exempt temporary
investments are not available at reasonable prices and yields. Tax-exempt
temporary 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 temporary investments
which are U.S. Government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. See Appendix A for
a general description of Moody's, S&P's and Fitch's ratings of securities in
such categories. Taxable temporary 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 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. The Fund
expects that a substantial portion of the current income it produces will be
included 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 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
S-4
<PAGE> 40
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 provide 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.
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 are being invested, the Fund may 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. 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 may also invest 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 total assets in cash equivalents
and short-term taxable fixed-income securities, although the Fund intends to
invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and
yields. Short-term taxable fixed income investments are defined to include,
without limitation, the following:
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Under current FDIC regulations, the
maximum insurance
S-5
<PAGE> 41
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 value of the
collateral declines after the agreement is entered into, and 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
investment adviser does so in an effort to determine that the value of
the collateral always equals or exceeds the agreed-upon repurchase
prices 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. The investment adviser will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) 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
S-6
<PAGE> 42
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 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 or 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 indexes.
While the various types of notes described above as a group represent
the major portion of the 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 of
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 the 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 a 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.
S-7
<PAGE> 43
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 only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
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 type 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 shareholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses, and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Nuveen Advisory will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available municipal bond investments.
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 Securities and Exchange Commission to maintain in a separate
account liquid assets, consisting of cash, cash equivalents or liquid securities
having a market value at all times of at least equal to the amount of the
S-8
<PAGE> 44
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 and
will be distributed as taxable distributions to shareholders. 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 dates; 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 equal 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. 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. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
Board of Trustees. The number of trustees of the Fund is currently set at seven,
one of whom is an "interested person" (as the term "interested persons" is
defined in the Investment Company Act of 1940) and six of whom are not
"interested persons." 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 below, with those trustees who are
"interested persons" of the Fund indicated by an asterisk.
S-9
<PAGE> 45
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------- --------------------------------------------
<S> <C> <C>
Timothy R. Schwertfeger*, 50 Chairman and Trustee Chairman since July 1, 1996 of The John Nuveen
333 West Wacker Drive Company, John Nuveen & Co. Incorporated,
Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.; prior thereto, Executive Vice
President and Director of The John Nuveen
Company, John Nuveen & Co. Incorporated,
Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.; Chairman and Director (since
January 1997) of Nuveen Asset Management, Inc.;
Director (since 1996) of Institutional Capital
Corporation.
Robert P. Bremner, 58 Trustee Private Investor and Management Consultant.
3725 Huntington Street, N.W.
Washington, D.C. 20015
Lawrence H. Brown, 64 Trustee Retired (August 1989) as Senior Vice President of
201 Michigan Avenue The Northern Trust Company
Highwood, IL 60040
Anne E. Impellizzeri, 66 Trustee Executive Director of Manitoga (Center for Russel
5 Peter Cooper Road Wright's Design with Nature); formerly President
New York, NY 10010 and Chief Executive Officer of Blanton-Peale
Institute.
Peter R. Sawers, 66 Trustee Adjunct Professor of Business and Economics,
22 The Landmark University of Dubuque, Iowa; Adjunct Professor,
Northfield, IL 60093 Lake Forest Graduate School of Management, Lake
Forest, Illinois; Chartered Financial Analyst;
Certified Management Consultant.
William J. Schneider, 54 Trustee Senior Partner, Miller-Valentine Partners, Vice
4000 Miller-Valentine Court President, Miller-Valentine Group.
P.O. Box 744
Dayton, OH 45401
Judith M. Stockdale, 51 Trustee Executive Director, Gaylord and Dorothy
35 East Wacker Drive Donnelley Foundation (since 1994); prior thereto,
Suite 2600 Executive Director, Great Lakes Protection Fund
Chicago, IL 60601 (from 1990 to 1994).
Alan G. Berkshire, 38 Vice President and Vice President and General Counsel (since
333 West Wacker Drive Assistant Secretary September 1997) and Secretary (since May 1998)
Chicago, IL 60606 of The John Nuveen Company, John Nuveen & Co.
Incorporated, Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp., prior thereto, Partner
in the law firm of Kirkland & Ellis.
Peter H. D'Arrigo, 31 Vice President and Vice President of John Nuveen & Co. Incorporated
333 West Wacker Drive Treasurer (January 1999), prior thereto, Assistant Vice
Chicago, IL 60606 President (January 1997); formerly, Associate of
John Nuveen & Co. Incorporated; Chartered
Financial Analyst.
</TABLE>
S-10
<PAGE> 46
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------- --------------------------------------------
<S> <C> <C>
Michael S. Davern, 41 Vice President Vice President of Nuveen Advisory Corp. (since
333 West Wacker Drive January 1997); prior thereto, Vice President and
Chicago, IL 60606 Portfolio Manager of Flagship Financial.
Lorna C. Ferguson, 53 Vice President Vice President of John Nuveen & Co.
333 West Wacker Drive Incorporated; Vice President (since January 1998)
Chicago, IL 60606 of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
William M. Fitzgerald, 35 Vice President Vice President of Nuveen Advisory Corp. (since
333 West Wacker Drive December 1995); Assistant Vice President of
Chicago, IL 60606 Nuveen Advisory Corp. (from September 1992 to
December 1995), prior thereto, Assistant Portfolio
Manager of Nuveen Advisory Corp.; Chartered
Financial Analyst.
Stephen D. Foy, 44 Vice President and Vice President of John Nuveen & Co.
333 West Wacker Drive Controller Incorporated; Certified Public Accountant.
Chicago, IL 60606
J. Thomas Futrell, 43 Vice President Vice President of Nuveen Advisory Corp.;
333 West Wacker Drive Chartered Financial Analyst.
Chicago, IL 60606
Richard A. Hubert, 36 Vice President Vice President of Nuveen Institutional Advisory
333 West Wacker Drive Corp. (since March 1998) and Nuveen Advisory
Chicago, IL 60606 Corp. (since January 1997); prior thereto, Vice
President and Portfolio Manager of Flagship
Financial.
Steven J. Krupa, 41 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
Larry W. Martin, 47 Vice President and Vice President, Assistant Secretary and Assistant
333 West Wacker Drive Assistant Secretary General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; Vice President and Assistant
Secretary of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Vice President and
Assistant Secretary (since January 1997) of Nuveen
Asset Management, Inc.; Assistant Secretary of
The John Nuveen Company.
Edward F. Neild, IV, 33 Vice President Vice President (since September 1996); previously
333 West Wacker Drive Assistant Vice President (since December 1993) of
Chicago, IL 60606 Nuveen Advisory Corp., Portfolio Manager prior
thereto; Vice President (since September 1996),
previously Assistant Vice President (since May
1995), of Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto; Chartered
Financial Analyst.
</TABLE>
S-11
<PAGE> 47
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME, AGE AND ADDRESS WITH FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------- --------------------------------------------
<S> <C> <C>
Stephen S. Peterson, 41 Vice President Vice President (since September 1997), previously
333 West Wacker Drive Assistant Vice President (since September 1996) of
Chicago, IL 60606 Nuveen Advisory Corp., Portfolio Manager prior
thereto; Chartered Financial Analyst.
Stuart W. Rogers, 42 Vice President Vice President of John Nuveen & Co. Incorporated.
333 West Wacker Drive
Chicago, IL 60606
Thomas C. Spalding, Jr., 47 Vice President Vice President of Nuveen Advisory Corp. and
333 West Wacker Drive Nuveen Institutional Advisory Corp.; Chartered
Chicago, IL 60606 Financial Analyst.
William S. Swanson, 33 Vice President Vice President of John Nuveen & Co. Incorporated
333 West Wacker Drive (since October 1997), prior thereto, Assistant Vice
Chicago, IL 60606 President (since September 1996); formerly,
Associate of John Nuveen & Co. Incorporated);
Chartered Financial Analyst.
Gifford R. Zimmerman, 42 Vice President and Vice President, Assistant Secretary and Associate
333 West Wacker Drive Secretary General Counsel of John Nuveen & Co.
Chicago, IL 60606 Incorporated; Vice President and Assistant
Secretary of Nuveen Advisory Corp., Vice
President and Assistant Secretary of Nuveen
Institutional Advisory Corp.; Assistant Secretary,
The John Nuveen Company (since May 1994);
Chartered Financial Analyst.
</TABLE>
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees. 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.
Mr. Schwertfeger is also a director or trustee, as the case may be, of
100 Nuveen open-end and closed-end funds advised by Nuveen Advisory and Nuveen
Institutional Advisory Corp.
The other trustees of the Fund are directors or trustees, as the case
may be, of 36 open-end funds and 53 Nuveen closed-end funds advised by Nuveen
Advisory.
At the next annually meeting, 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.
The following table sets forth compensation to be paid by the Fund
projected through the end of the Fund's first full fiscal year. The Fund has no
retirement or pension plans. The officers and trustees affiliated with Nuveen
serve without any compensation from the Fund.
S-12
<PAGE> 48
<TABLE>
<CAPTION>
ESTIMATED AGGREGATE ESTIMATED TOTAL COMPENSATION
NAME OF TRUSTEE COMPENSATION FROM FUND* FROM FUND AND FUND COMPLEX**
--------------- ----------------------- ----------------------------
<S> <C> <C>
Robert P. Bremner $330 $68,000(1)
Lawrence H. Brown $359 $74,000
Anne E. Impellizzeri $330 $68,000(2)
Peter R. Sawers $330 $68,000(2)
William J. Schneider $330 $68,000(2)
Judith M. Stockdale $330 $68,000(3)
</TABLE>
- ------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception to the fiscal year ending 10/31/99
for services to the trust.
** Based on the estimated compensation paid to the trustees for the one year
period ending 12/31/99 for services to the open-end and closed-end funds
advised by Nuveen Advisory.
(1) Includes $7,871 in estimated deferred compensation.
(2) Includes $52,470 in estimated deferred compensation.
(3) Includes $13,118 in estimated deferred compensation.
The Fund has no employees. Its officers are compensated by Nuveen
Advisory or Nuveen.
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
Prospectus.
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (57) and
fund assets under management ($26 billion). Overall, Nuveen and its affiliates
manage more than $55 billion in assets in a variety of products. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is approximately 78% 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.
S-13
<PAGE> 49
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:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
----------------------------- --------------
<S> <C>
For the first $125 million........ .6500%
For the next $125 million......... .6375%
For the next $250 million......... .6250%
For the next $500 million......... .6125%
For the next $1 billion........... .6000%
For assets over $2 billion........ .5750%
</TABLE>
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, Nuveen Advisory has
agreed to reduce the Fund's operating expenses by waiving the percentage of its
management fee set forth below:
<TABLE>
<CAPTION>
YEAR ENDING PERCENTAGE YEAR ENDING PERCENTAGE
JULY 31 REIMBURSED JULY 31 REIMBURSED
(as a percentage (as a percentage
of average daily of average daily
net assets) net assets)
--------- ---------- --------- ----------
<S> <C> <C> <C>
1999 .30% 2005 .25%
2000 .30% 2006 .20%
2001 .30% 2007 .15%
2002 .30% 2008 .10%
2003 .30% 2009 .05%
2004 .30%
</TABLE>
- ------------------
* 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 July 31,
2009.
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. Purchase 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.
It is the policy of Nuveen Advisory to seek the best execution under the
circumstances of each trade. Nuveen Advisory evaluates price as the primary
consideration, with the financial condition, reputation and responsiveness of
the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be Nuveen Advisory's practice to select dealers
which, in addition, furnish research information (primarily credit analysis 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
S-14
<PAGE> 50
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, and
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, 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
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.
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,
Bankers Trust Company) 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 with respect to shares of each
series of MuniPreferred. One certificate for all of the shares of each
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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-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 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.
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
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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 the 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 very remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and MuniPreferred Shares, voting together as a single class, except as
described below, to authorize (1) a conversion of the Fund from a closed-end to
an open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, 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. 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 company or to approve transactions constituting a plan
of reorganization which investment 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 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 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
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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 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 the 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 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 New York Stock Exchange, or (b) impair the Fund's status as a
regulated investment company under 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 New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States 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 may
in the future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and MuniPreferred
Shares outstanding at the time, voting together as a single class, and of the
holders of at least two-thirds of the Fund's MuniPreferred Shares outstanding at
the time, voting as a separate class, provided, however, that such separate
class vote shall be a majority vote if the action in question has previously
been approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of trustees fixed in accordance with the Declaration or
By-laws. See the Prospectus under "Certain Provisions in the Declaration of
Trust" for a discussion of voting requirements applicable to conversion of the
Fund to an open-end company. If the Fund converted to an open-end company, it
would be required to redeem all MuniPreferred Shares then outstanding, and the
Fund's Common Shares would no longer be listed on the New York Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge, if
any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
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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 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 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.
TAX MATTERS
The following is based upon the advice of Vedder, Price, Kaufman &
Kammholz, counsel to the Fund.
The Fund intends 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 alternative minimum tax.
To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to its
shareholders 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 and
(b) diversify its holdings so that, at the end of each fiscal quarter of the
Fund (i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities and 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 issue, 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). 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 Objective and Policies" 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 year's required distribution, is liable for a 4% excise tax on the portion
of the undistributed amount of such income that is less than the required amount
for such distributions. To avoid the imposition of this excise tax, the Fund
generally makes 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.
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The Fund intends to qualify to pay "exempt-interest" dividends on its
Common Shares and shares of MuniPreferred as defined under the Code. Under the
Code, at the close of each quarter of its taxable year, if at least 50% of the
value of its total assets consists of municipal bonds, the Fund will be
qualified to pay exempt-interest dividends to its shareholders. 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. Distributions to
shareholders by the Fund of net income received, if any, from taxable temporary
investments and net short-term capital gains, if any, realized by the Fund will
be taxable to its shareholders as ordinary income. Distributions by the Fund of
net capital gains, 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 gains or other taxable income, the Fund anticipates that all other
dividends paid on shares of its MuniPreferred will constitute 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 share and, after that basis has been reduced to zero, will
constitute capital gains 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 for corporations.
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 gains 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, and may, in the case of any other Special Rate Period, notify the
Auction Agent of the amount of any net capital gains or other income taxable for
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 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 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 gains or other taxable income for
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-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.
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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-Dividends and Dividend Periods-Restrictions on Dividends and Other
Distributions" in the Prospectus. This may prevent the Fund from distributing at
least 90% of its investment company taxable income and 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 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 shareholders who are
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
"non-exempt 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
common shares ownership of the Fund will be taken into account.
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 gains. To the extent received by foreign investors, exempt-interest
dividends, distributions of net long-term capital gains and gain from the sale
or other disposition of the shares of MuniPreferred generally are exempt from
U.S. 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.
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.
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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 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 will normally result in capital gain or loss to
shareholders. 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, under current law short-term capital gains and ordinary
income will be taxed at a maximum rate of 39.6% while long-term capital gains
generally will be taxed at a maximum rate of 20%. However, because of the
limitations on itemized deductions and the deduction for personal exemptions
applicable to higher income taxpayers, the effective rate of tax may be higher
in certain circumstances. 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 with respect to such shares. A shareholder's holding period is
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 shares 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 both
corporations and individuals. 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 31% of
taxable dividends and certain other payments paid to non-corporate 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 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.
S-22
<PAGE> 58
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 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 advisers for more
detailed information concerning the Federal income tax consequences of
purchasing, holding and disposing of Fund Shares.
CERTAIN OWNERS OF RECORD
As of _________, __, 1998, no person is known to the Fund to own of
record or beneficially five percent or more of the outstanding Common Shares or
MuniPreferred.
EXPERTS
The Statement of Net Assets of the Fund as of May 21, 1999 appearing in
this Statement of Additional Information has been audited by Ernst & Young LLP,
Sears Tower, 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 audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's Federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
S-23
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Nuveen Dividend Advantage Municipal Fund
We have audited the accompanying statement of net assets of the Nuveen Dividend
Advantage Municipal Fund (the Fund) as of May 21, 1999. This statement of net
assets is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of net assets is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of net assets. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
net assets presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of the Fund at May 21, 1999,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
May 21, 1999
<PAGE> 60
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
STATEMENT OF NET ASSETS
May 21, 1999
<TABLE>
<S> <C>
ASSETS:
Cash................................................................. $ 100,021
---------
NET ASSETS............................................................. $ 100,021
=========
NET ASSETS REPRESENTS:
Cumulative preferred shares, $.01 par value; unlimited number of
shares authorized, no shares outstanding......................... $ --
Common Shares, $.01 par value; unlimited number of shares
authorized, shares outstanding................................... 70
Paid-in surplus.................................................... 99,951
---------
$ 100,021
=========
Net asset value per Common Share outstanding ($100,021 divided by
6,982.238 Common Shares outstanding)................................. $ 14.325
=========
</TABLE>
- ---------------
NOTES--
The Fund was organized as a Massachusetts business trust on January 15, 1999
and has been inactive since that date except for matters relating to its
organization and registration as a closed-end, diversified management
investment company under the Investment Company Act of 1940, as amended, and
the Securities Act of 1933, as amended, and the sale of 6,982.238 Common
Shares to Nuveen Advisory Corp. (the Adviser), the Fund's investment
adviser. All organization costs (approximately $10,000) and offering costs,
limited to $0.02 per Common Share, incurred by the Fund in connection with
the initial seeding will be absorbed by Nuveen. All other offering costs
relating to the Fund's offering of Common Shares, limited to $0.02 per
Common Share, will be reflected as a reduction of net assets at the time of
the public offering of Common Shares. All offering costs (other than sales
load) that exceed $0.02 per Common Share will be absorbed by Nuveen.
The Fund is authorized by its Declaration of Trust to issue an unlimited
number of preferred shares having a par value of $.01 per share in one or
more classes or series, with dividend, liquidation preference and other
rights as determined by the Fund's Board of Trustees, by action of the Board
of Trustees without the approval of the Common Shareholders.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management
estimates. Actual results may differ from these estimates.
<PAGE> 61
STATEMENT OF NET ASSETS (UNAUDITED)
June 28, 1999
<TABLE>
<S> <C>
ASSETS
Investments in municipal securities, at market value $ 493,756,935
Temporary investments in short-term municipal securities
at amortized cost, which approximates market value 127,880,000
Interest receivable 4,506,334
Other assets 549
-------------
Total assets 626,143,818
-------------
LIABILITIES
Cash overdraft 2,150,165
Payable for investments purchased 86,380,039
Accrued expenses:
Management fees 60,638
Other 779,186
-------------
Total liabilities 89,370,028
-------------
Net assets $ 536,773,790
=============
Shares outstanding 37,806,982
=============
Net asset value per share outstanding (net assets
divided by shares outstanding) $ 14.20
=============
</TABLE>
<PAGE> 62
STATEMENT OF OPERATIONS (UNAUDITED)
For the Period May 26, 1999 (commencement of operations) through June 28, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME $ 1,910,341
-------------
EXPENSES
Management fees 291,979
Shareholders' servicing agent fees and expenses 2,112
Custodian's fees and expenses 5,332
Trustees' fees and expenses 342
Professional fees 1,768
Shareholders' reports - printing and mailing expenses 7,282
Stock exchange listing fees 2,127
Investor relations expense 3,156
Other expenses 517
-------------
Total expenses before expense reimbursement 314,615
Expense reimbursement (138,319)
-------------
Net expenses 176,296
-------------
Net investment income 1,734,045
-------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions (7,800)
Net change in unrealized appreciation or depreciation
of investments (5,781,476)
-------------
Net gain (loss) from investments (5,789,276)
-------------
Net increase (decrease) in net assets from operations $ (4,055,231)
</TABLE>
<PAGE> 63
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period May 26, 1999 (commencement of operations) through June 28, 1999
<TABLE>
<S> <C>
OPERATIONS
Net investment income $ 1,734,045
Net realized gain (loss) from investment transactions (7,800)
Net change in unrealized appreciation or depreciation
of investments (5,781,476)
-------------
Net increase (decrease) in net assets from operations (4,055,231)
-------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 540,729,000
-------------
Net increase in net assets 536,673,769
Net assets at beginning of period 100,021
-------------
Net assets at end of period $ 536,773,790
=============
Balance of undistributed net investment income at
end of period $ 1,734,045
=============
</TABLE>
<PAGE> 64
PORTFOLIO OF INVESTMENTS (Unaudited)
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND (NAD)
June 28,1999
<TABLE>
<CAPTION>
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
------------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C>
ALABAMA - 1.1%
$ 6,370,000 MONTGOMERY BAPTIST MEDICAL CENTER, SERIES 99A, 5.250%, 5/01/20 11/08 at 102 AAA $ 6,101,059
ALASKA - 1.6%
9,450,000 ALASKA ENERGY AUTHORITY, BRADLEY LAKE POWER
REVENUE BONDS, 5.000%, 7/01/21 7/09 at 101 AAA 8,833,955
CALIFORNIA - 0.5%
3,000,000 LOS ANGELES DEPARTMENT OF WATER AND POWER,
ELECTRIC PLANT, 5.250%, 6/15/19 (DD) 6/04 at 101 AAA 2,947,170
FLORIDA - 8.1%
2,000,000 BAKER COUNTY MEDICAL CENTER INC. LEASE, 5.300%, 12/01/23 12/08 at 102 A 1,886,320
34,535,000 JACKSONVILLE ELECTRIC AUTHORITY, WATER AND SEWER,
SERIES 99A, 5.375%, 10/01/29 (DD) 10/04 at 101 AA- 33,724,809
8,000,000 JACKSONVILLE HEALTH CHARITY OBLIGATION GROUP,
SERIES 99C, 5.375%, 8/15/23 (WI) 8/09 at 101 AA+ 7,726,880
GEORGIA - 0.4%
2,500,000 ATLANTA WATER AND WASTEWATER REVENUE, SERIES 99A, 5.000%, 11/01/29 5/09 at 101 AAA 2,318,100
ILLINOIS - 23.0%
10,000,000 CHICAGO BOARD OF EDUCATION, SCHOOL REFORM,
UNLIMITED TAX, 5.250%, 12/01/30 12/07 at 102 AAA 9,520,100
25,000,000 CHICAGO BOARD OF EDUCATION, SCHOOL REFORM,
SERIES 99A, 5.500%, 12/01/26 No Opt. Call AAA 25,229,000
1,000,000 CHICAGO MULTIFAMILY HOUSING, ARCHER COURTS, SERIES 99A, FHA/GNMA, 10/10 at 101 AAA 991,500
5.500%, 12/20/19 (Alternative Minimum Tax)
1,210,000 CHICAGO MULTIFAMILY HOUSING, ARCHER COURTS, SERIES 99A, FHA/GNMA, 10/10 at 101 AAA 1,197,755
5.600%, 12/20/29 (Alternative Minimum Tax)
1,925,000 CHICAGO MULTIFAMILY HOUSING, ARCHER COURTS, SERIES 99A, FHA/GNMA, 10/10 at 101 AAA 1,903,690
5.650%, 12/20/40 (Alternative Minimum Tax)
10,275,000 CHICAGO O'HARE AIRPORT, AMERICAN AIRLINES, 8.200%, 12/01/24 12/04 at 102 Baa2 11,884,065
12,650,000 CHICAGO WASTEWATER TRANSMISSION REVENUE, 5.125%, 1/01/25 1/06 at 102 AAA 11,847,358
24,835,000 ILLINOIS DEVELOPMENT FINANCE AUTHORITY, PRESBYTERIAN HOME -
LAKE FOREST PROJECT, 5.625%, 9/01/31 9/07 at 102 AAA 24,397,904
17,280,000 ILLINOIS HEALTH, HIGHLAND PARK HOSPITAL, 6.000%, 10/01/15 10/07 at 102 AAA 18,218,995
9,750,000 METROPOLITAN PIER/EXPOSITION AUTHORITY, MCCORMICK PLACE,
SERIES 96A, 0.000%, 12/15/22 No Opt. Call AAA 2,577,120
33,000,000 METROPOLITAN PIER/EXPOSITION AUTHORITY, MCCORMICK PLACE EXPANSION,
SERIES 96A, 0.000%, 12/15/24 No Opt. Call AAA 7,764,240
7,500,000 METROPOLITAN PIER/EXPOSITION AUTHORITY, MCCORMICK PLACE EXPANSION,
SERIES 98A, 5.500%, 6/15/29 No Opt. Call AAA 7,571,550
INDIANA - 2.4%
6,000,000 GARY MORTGAGE REVENUE, LAKESHORE DUNES - GNMA, SERIES 99A,
5.875%, 2/20/23 (Alternative Minimum Tax)(DD) 2/09 at 102 AAA 6,000,000
7,000,000 GARY MORTGAGE REVENUE, LAKESHORE DUNES - GNMA, SERIES 99A,
6.000%, 8/20/34 (Alternative Minimum Tax)(DD) 2/09 at 102 AAA 7,000,000
KANSAS - 0.6%
3,825,000 WICHITA WATER AND SEWER UTILITY REVENUE, 4.000%, 10/01/18 (WI) 10/06 at 101 AAA 3,126,746
KENTUCKY - 0.7%
3,750,000 LOUISVILLE METROPOLITAN SEWER DISTRICT REVENUE, 11/07 at 101 AAA 3,578,025
SERIES 97B, 5.200%, 5/15/25
MASSACHUSETTS - 7.5%
10,305,000 MASSACHUSETTS BAY TRANSPORTATION AUTHORITY, SERIES 97C, 3/07 at 101 AA- 9,540,987
5.000%, 3/01/24
20,775,000 MASSACHUSETTS PORT AUTHORITY, SERIES 98E, 5.000%, 7/01/28
(Alternative Minimum Tax) 7/08 at 101 AA- 18,818,618
11,000,000 MASSACHUSETTS PORT AUTHORITY, AIRPORT REVENUE, 7/09 at 101 AAA 10,648,220
SERIES 99A, 5.125%, 7/01/17
1,150,000 MASSACHUSETTS PORT AUTHORITY, USAIR PROJECT SPECIAL FACILITIES, 9/06 at 102 AAA 1,179,394
SERIES 96A, 5.875%, 9/01/23 (Alternative Minimum Tax)
MICHIGAN - 1.7%
10,000,000 WAYNE STATE UNIVERSITY GENERAL REVENUE, 5.125%, 11/15/29 11/09 at 101 AAA 9,385,700
NEW JERSEY - 2.9%
15,600,000 NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, BRIDGEWATER No Opt. Call N/R 15,575,664
RESOURCES, SERIES 99B, SOLID WASTE REVENUE BONDS, 8.250%,
6/01/19 (Alternative Minimum Tax)
NEW YORK - 18.5%
25,455,000 LONG ISLAND POWER AUTHORITY, ELECTRIC SYSTEM GENERAL REVENUE,
SERIES 1998A, 5.125%, 12/01/22 6/08 at 101 AAA 24,253,524
$ 11,440,000 METROPOLITAN TRANSPORTATION AUTHORITY, NEW YORK,
DEDICATED TAX FUND, SERIES 99A, 5.250%, 4/01/23 4/09 at 101 AAA $11,143,590
7,005,000 NASSAU COUNTY, SERIES 99B, 5.250%, 6/01/19 6/09 at 102 AAA 6,839,822
7,005,000 NASSAU COUNTY, SERIES 99B, 5.250%, 6/01/20 6/09 at 102 AAA 6,826,793
7,005,000 NASSAU COUNTY, SERIES 99B, 5.250%, 6/01/21 6/09 at 102 AAA 6,810,962
7,005,000 NASSAU COUNTY, SERIES 99B, 5.250%, 6/01/22 6/09 at 102 AAA 6,799,403
2,000,000 NEW YORK CITY, SERIES E, 5.250%, 8/01/14 2/08 at 101 AAA 1,980,380
14,000,000 NEW YORK CITY, SERIES F, 5.375%, 8/01/19 2/08 at 101 AAA 13,880,440
6,775,000 NEW YORK CITY, SERIES J, 5.000%, 5/15/20 5/09 at 101 AAA 6,393,161
3,000,000 NEW YORK CITY HEALTH AND HOSPITAL CORPORATION, 5.000%, 2/15/20 2/09 at 101 AAA 2,832,000
2,500,000 NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY,
SERIES 99B, 5.000%, 6/15/29 6/09 at 101 AAA 2,315,675
5,000,000 NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, SERIES
98A FUTURE TAX SECURED BONDS, 5.000%, 8/15/27 8/07 at 101 AA 4,627,100
4,400,000 NEW YORK DORMITORY AUTHORITY, MENTAL HEALTH FACILITIES,
SERIES 965E, 5.250%, 2/15/18 2/07 at 102 AAA 4,305,092
OHIO - 2.7%
13,700,000 OHIO WATER DEVELOPMENT, BAY SHORE POWER ,
SERIES 98B, 6.625%, 9/01/20 9/09 at 102 N/R 14,452,541
TEXAS - 12.8%
3,000,000 BRAZOS POLLUTION CONTROL REVENUE, TEXAS UTILITIES ELECTRIC
COMPANY, SERIES 95C, 5.550%, 6/01/30 (Alternative Minimum Tax 4/08 at 102 AAA 2,924,160
8,000,000 CONROE INDEPENDENT SCHOOL DISTRICT, 5.250%, 2/15/21 2/07 at 100 AAA 7,714,000
5,130,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/20 (WI) 8/09 at 52 15/32 AAA 1,499,345
7,000,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/21 (WI) 8/09 at 49 15/32 AAA 1,926,680
7,340,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/22 (WI) 8/09 at 46 21/32 AAA 1,904,143
7,345,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/23 (WI) 8/09 at 44 AAA 1,795,853
7,000,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/24 (WI) 8/09 at 41 1/2 AAA 1,613,080
7,350,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/25 (WI) 8/09 at 39 1/8 AAA 1,596,347
7,000,000 COPPELL INDEPENDENT SCHOOL DISTRICT, 0.000%, 8/15/26 (WI) 8/09 at 36 29/32 AAA 1,431,780
16,000,000 DALLAS-FORT WORTH AIRPORT, AMERICAN AIRLINES, 7.250%, 11/01/30
(Alternative Minimum Tax) 11/02 at 102 Baa2 17,313,600
2,095,000 HARRIS COUNTY, TEXAS, CHILDRENS HOSPITAL, SERIES 99A,
5.375%, 10/01/14 10/09 at 101 AA 2,072,269
30,000,000 HOUSTON WATER AND SEWER SYSTEM, SERIES 98A, 0.000%, 12/01/22 No Opt. Call AAA 8,076,600
10,000,000 IRVINE INDEPENDENT SCHOOL DISTRICT, 5.000%, 2/15/21 2/07 at 100 AAA 9,365,400
10,000,000 TARRANT COUNTY, TEXAS, HEALTH SYSTEM , SERIES 97A, 5.250%, 2/15/17 2/08 at 102 AAA 9,681,000
UTAH - 0.6%
3,195,000 UTAH HOUSING FINANCE AGENCY, SINGLE FAMILY MORTGAGE, SERIES 99-C2, 1/10 at 101 1/2 AAA 3,203,499
5.700%, 7/01/19 (Alternative Minimum Tax) (DD)
WASHINGTON - 5.4%
16,580,000 WASHINGTON STATE, SERIES 99-S2, 0.000%, 1/01/17 No Opt. Call AAA 6,336,379
18,350,000 WASHINGTON STATE, SERIES 99-S2, 0.000%, 1/01/18 No Opt. Call AAA 6,590,403
17,650,000 WASHINGTON STATE, SERIES 99-S3, 0.000%, 1/01/20 No Opt. Call AA+ 5,629,820
18,470,000 WASHINGTON STATE, SERIES 99-S3, 0.000%, 1/01/21 No Opt. Call AA+ 5,560,577
4,800,000 WASHINGTON PUBLIC POWER SYSTEM, NUCLEAR PROJECT 3,
SERIES 97A, 5.250%, 7/01/16 7/07 at 102 AAA 4,702,223
WASHINGTON D.C. - 1.5%
7,865,000 WASHINGTON D.C. HOUSING FINANCE AUTHORITY, ROCKBURNE 2/09 at 102 AAA 7,864,370
ESTATES, SERIES 99A, GNMA COLLATERLIZED, 5.750%, 2/20/41
(Alternative Minimum Tax) (DD)
- ------------------------------------------------------------------------------------------------------------------------------
$640,145,000 Total Investments - (cost $499,538,411) - 92.0% 493,756,935
==================------------------------------------------------------------------------------------------------------------
Short-Term Investments - 23.8%
$ 4,500,000 NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY P-1 4,500,000
(NIAGARA MOHAWK POWER CORPORATION), SERIES B, VARIABLE RATE
DEMAND BONDS, 4.100%, 12/01/25+
4,700,000 NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY P-1 4,700,000
(NIAGARA MOHAWK POWER CORPORATION), SERIES C, VARIABLE RATE
DEMAND BONDS, 4.100%, 12/01/25+
2,500,000 NEW YORK ELECTRIC AND GAS CORPORATION, POLLUTION CONTROL A-1+ 2,500,000
REVENUE, SERIES 1994B, VARIABLE RATE DEMAND BONDS, 4.250%, 2/01/29+
6,900,000 NORTH CENTRAL, TEXAS, HEALTH FACILITIES DEVELOPMENT CORPORATION VMIG-1 6,900,000
(PRESBYTERIAN MEDICAL CENTER), VARIABLE RATE DEMAND BONDS,
4.300%, 12/01/15+
2,600,000 ORANGE COUNTY SANITATION DISTRICT, CERTIFICATES OF PARTICIPATION, A-1+ 2,600,000
VARIABLE RATE DEMAND BONDS, 4.150%, 8/01/17+
4,400,000 SABINE RIVER AUTHORITY OF TEXAS, COLLATERALIZED POLLUTION VMIG-1 4,400,000
CONTROL REVENUE REFUNDING BONDS (TEXAS UTILITIES ELECTRIC COMPANY
PROJECT), SERIES 1996A, 4.400%, 3/01/26+
4,400,000 SOUTHWEST HIGHER EDUCATION AUTHORITY, SOUTHERN METHODIST VMIG-1 4,400,000
UNIVERSITY, VARIABLE RATE DEMAND BONDS, 4.250%, 7/01/15+
4,100,000 UNIVERSITY ATHLETIC ASSOCIATION, INC. (FLORIDA), CAPITAL VMIG-1 4,100,000
IMPROVEMENT REVEUNE BONDS, SERIES 1990, VARIABLE RATE DEMAND
BONDS, 4.250%, 2/01/20+
$ 4,400,000 UNIVERSITY ATHLETIC ASSOCIATION INC. (FLORIDA), CAPITAL VMIG-1 $ 4,400,000
IMPROVEMENT REVENUE BONDS, SERIES 1990 (UNIVERSITY OF FLORIDA
REFUNDING PROJECT), VARIABLE RATE DEMAND BONDS, 4.250%, 2/01/20+
7,200,000 VALDEZ MARINE TERMINAL (EXXON PIPELINE COMPANY), VARIABLE A-1+ 7,200,000
RATE DEMAND BONDS, 4.200%, 10/01/25+
8,420,000 WASHINGTON HEALTH CARE FACILITIES AUTHORITY, SERIES B A-1+ 8,420,000
(VIRGINIA MASON MEDICAL CENTER), VARIABLE RATE DEMAND BONDS,
4.300%, 2/15/27+
4,800,000 LONGWOOD AT OAKMONT, INC. PROJECT, SERIES 1997B, VARIABLE VMIG-1 4,800,000
RATE DEMAND REVENUE BONDS, 4.250%, 7/01/27+
9,000,000 ASCENSION PARISH POLLUTION CONTROL (BASF WYANDOTTE P-1 9,000,000
CORPORATION), VARIABLE RATE DEMAND BONDS, 4.500%, 12/01/05+
4,500,000 THE ECONOMIC DEVELOPMENT CORPORATION OF THE COUNTY OF DELTA, P-1 4,500,000
MICHIGAN, ENVIRONMENTAL IMPROVEMENT REVENUE REFUNDING BONDS,
1985 SERIES F (MEAD-ESCANABA PAPER COMPANY PROJECT),
VARIABLE RATEDEMAND BONDS, 4.250%, 12/01/13+
4,300,000 GUADALUPE-BLANCO RIVER AUTHORITY (TEXAS), POLLUTION CONTROL A-1+ 4,300,000
REVENUE REFUNDING BONDS (CENTRAL POWER AND LIGHT COMPANY
PROJECT), SERIES 1995, VARIABLE RATE DEMAND BONDS, 4.400%,
11/01/15+
3,000,000 JACKSON COUNTY POLLUTION CONTROL REVENUE (CHEVRON USA P-1 3,000,000
PROJECT), 1992 VARIABLE RATE DEMAND BONDS, 4.350%, 12/01/16+
2,000,000 KEMMERER POLLUTION CONTROL REVENUE (EXXON PROJECT), SERIES A-1+ 2,000,000
1984, VARIABLE RATE DEMAND BONDS, 4.300%, 11/01/14+
7,150,000 MARICOPA COUNTY, ARIZONA, POLLUTION CONTROL CORPORATION, A-1+ 7,150,000
POLLUTION CONTROL REVENUE REFUNDING BONDS (ARIZONA PUBLIC
SERVICE COMPANY - PALO VERDE PROJECT), 1994 SERIES B, VARIABLE
RATE DEMAND BONDS, 4.200%, 5/01/29+
6,550,000 MARICOPA COUNTY, ARIZONA, POLLUTION CONTROL CORPORATION, A-1+ 6,550,000
POLLUTION CONTROL REVENUE REFUNDING BONDS (ARIZONA PUBLIC
SERVICE COMPANY - PALO VERDE PROJECT), 1994 SERIES C, VARIABLE
RATE DEMAND BONDS, 4.250%, 5/01/29+
7,000,000 MASSACHUSETTS HEALTH AND EDUCATIONAL FACILITIES AUTHORITY A-1+ 7,000,000
(CAPITAL ASSET PROGRAM), VARIABLE RATE DEMAND BONDS, 4.150%, 7/01/05+
7,360,000 METROPOLITAN NASHVILLE AIRPORT AUTHORITY (TENNESSEE), A-1+ 7,360,000
AIRPORT IMPROVEMENT REVENUE BONDS, ADJUSTABLE RATE REFUNDING,
SERIES 1995A (AMERICAN AIRLINES PROJECT), 4.300%, 10/01/12+
6,000,000 THE METROPOLITAN NASHVILLE AIRPORT AUTHORITY, SPECIAL FACILITY A-1+ 6,000,000
REVENUE BONDS (AMERICAN AIRLINES, INC. PROJECT), SERIES B,
VARIABLE RATE DEMAND BONDS, 4.300%, 10/01/12+
5,400,000 THE CITY OF NEW YORK, GENERAL OBLIGATION BONDS, A-1+ 5,400,000
FISCAL 1995 SERIES B, VARIABLE RATE DEMAND BONDS, 4.300%, 8/15/05+
6,700,000 NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY, WATER AND A-1+ 6,700,000
SEWER SYSTEM REVENUE BONDS, FISCAL 1996 SERIES A, VARIABLE
RATE DEMAND BONDS, 4.200%, 6/15/25+
- ------------------------------------------------------------------------------------------------------------------------------
$127,880,000 Total Short-Term Investments - (cost $127,880,000) - 23.8% 127,880,000
==================------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - (15.80)% (84,863,145)
------------------------------------------------------------------------------------------------------------
Net Assets - 100% $536,773,790
============================================================================================================
</TABLE>
* Optional Call Provisions: Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at varying
prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
N/R Investment is not rated.
(DD) Security purchased on a delayed delivery basis (note 1).
(WI) Security purchased on a when-issued basis (note 1).
+ Security has a maturity of more than one year, but has variable rate and
demand features which qualify it as a short-term security. The rate
disclosed is that currently in effect. This rate changes periodically based
on market conditions or a specified market index.
See accompanying notes to financial statements.
<PAGE> 65
APPENDIX A
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")
A-2
<PAGE> 66
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
TABLE OF CONTENTS
PAGE
----
APPENDIX A.................................................................A-2
DEFINITIONS................................................................A-8
"AA" Composite Commercial Paper Rate..............................A-8
Accountant's Confirmation.........................................A-8
Affiliate.........................................................A-9
Agent Member......................................................A-9
Anticipation Notes................................................A-9
Applicable Rate...................................................A-9
Auction .........................................................A-9
Auction Agency Agreement..........................................A-9
Auction Agent.....................................................A-9
Auction Date......................................................A-9
Auction Procedures................................................A-9
Available MuniPreferred...........................................A-9
Benchmark Rate....................................................A-9
Beneficial Owner..................................................A-9
Bid" and "Bids....................................................A-9
Bidder" and "Bidders..............................................A-9
Board of Trustees.................................................A-9
Broker-Dealer.....................................................A-9
Broker-Dealer Agreement..........................................A-10
Business Day.....................................................A-10
Code ........................................................A-10
Commercial Paper Dealers.........................................A-10
Common Shares....................................................A-10
Cure Date........................................................A-10
Date of Original Issue...........................................A-10
Declaration......................................................A-10
Deposit Securities...............................................A-10
Discounted Value.................................................A-10
[Reserved].......................................................A-10
[Reserved].......................................................A-10
Dividend Payment Date............................................A-10
Dividend Period..................................................A-10
Existing Holder..................................................A-10
Failure to Deposit...............................................A-11
Federal Tax Rate Increase........................................A-11
Fund ........................................................A-11
Gross-up Payment.................................................A-11
Holder ........................................................A-11
Hold Order" and "Hold Orders.....................................A-11
Independent Accountant...........................................A-11
Initial Rate Period..............................................A-11
Interest Equivalent..............................................A-11
Issue Type Category..............................................A-11
Kenny Index......................................................A-11
Late Charge......................................................A-11
A-3
<PAGE> 67
Liquidation Preference............................................A-11
Market Value......................................................A-11
Maximum Potential Gross-up Payment Liability......................A-12
Maximum Rate......................................................A-12
[Reserved]........................................................A-12
Minimum Rate Period...............................................A-12
Moody's .........................................................A-12
Moody's Discount Factor...........................................A-12
Moody's Eligible Asset............................................A-12
Moody's Exposure Period...........................................A-12
Moody's Volatility Factor.........................................A-13
MuniPreferred.....................................................A-13
MuniPreferred Basic Maintenance Amount............................A-13
MuniPreferred Basic Maintenance Cure Date.........................A-14
MuniPreferred Basic Maintenance Report............................A-14
Municipal Obligations.............................................A-14
1940 Act .........................................................A-14
1940 Act Cure Date................................................A-14
1940 Act MuniPreferred Asset Coverage.............................A-14
Notice of Redemption..............................................A-14
Notice of Special Rate Period.....................................A-14
"Order" and "Orders"..............................................A-14
Original Issue Insurance..........................................A-14
Other Issues......................................................A-14
Outstanding.......................................................A-15
Permanent Insurance...............................................A-15
Person .........................................................A-15
Portfolio Insurance...............................................A-15
Potential Beneficial Owner........................................A-15
Potential Holder..................................................A-15
Preferred Shares..................................................A-15
Quarterly Valuation Date..........................................A-15
Rate Multiple.....................................................A-15
Rate Period.......................................................A-15
Rate Period Days..................................................A-15
Receivables for Municipal Obligations Sold........................A-15
Redemption Price..................................................A-15
Reference Rate....................................................A-16
Registration Statement............................................A-16
S&P .........................................................A-16
S&P Discount Factor...............................................A-16
S&P Eligible Asset................................................A-16
S&P Exposure Period...............................................A-16
S&P Volatility Factor.............................................A-16
Secondary Market Insurance........................................A-16
Securities Depository.............................................A-16
Sell Order" and "Sell Orders......................................A-16
Special Rate Period...............................................A-16
Special Redemption Provisions.....................................A-16
Submission Deadline...............................................A-16
Submitted Bid" and "Submitted Bids................................A-16
Submitted Hold Order" and "Submitted Hold Orders..................A-16
Submitted Order" and "Submitted Orders............................A-16
Submitted Sell Order" and "Submitted Sell Orders..................A-16
Subsequent Rate Period............................................A-17
Substitute Commercial Paper Dealer................................A-17
A-4
<PAGE> 68
<TABLE>
<S> <C>
Substitute U.S. Government Securities Dealer..........................................................A-17
Sufficient Clearing Bids..............................................................................A-17
Taxable Allocation....................................................................................A-17
Taxable Income........................................................................................A-17
Taxable Equivalent of the Short-Term Municipal Bond Rate..............................................A-17
Treasury Bill.........................................................................................A-17
Treasury Bill Rate....................................................................................A-17
Treasury Note.........................................................................................A-18
Treasury Note Rate....................................................................................A-18
U.S. Government Securities Dealer.....................................................................A-18
Valuation Date........................................................................................A-18
Volatility Factor.....................................................................................A-18
Voting Period.........................................................................................A-18
Winning Bid Rate......................................................................................A-18
<CAPTION>
<S> <C> <C>
PART I ......................................................................................................A-19
1. Number of Authorized Shares..................................................................A-19
2. Dividends....................................................................................A-19
(a) Ranking...............................................................................A-19
(b) Cumulative Cash Dividends.............................................................A-19
(c) Dividends Cumulative From Date of Original Issue......................................A-19
(d) Dividend Payment Dates and Adjustment Thereof.........................................A-19
(e) Dividend Rates and Calculation of Dividends...........................................A-19
(i) Dividend Rates..................................................................A-19
(ii) Calculation of Dividends........................................................A-21
(f) Curing a Failure to Deposit...........................................................A-21
(g) Dividend Payments by Fund to Auction Agent............................................A-21
(h) Auction Agent as Trustee of Dividend Payments by Fund.................................A-21
(i) Dividends Paid to Holders.............................................................A-22
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends..................A-22
(k) Dividends Designated as Exempt-Interest Dividends.....................................A-22
3. Gross-up Payments............................................................................A-22
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or Fewer.........................................................................A-22
(b) Special Rate Periods of More Than 28 Rate Period Days.................................A-22
(c) No Gross-up Payments In the Event of a Reallocation...................................A-22
4. Designation of Special Rate Periods..........................................................A-22
(a) Length of and Preconditions for Special Rate Period...................................A-22
(b) Adjustment of Length of Special Rate Period...........................................A-23
(c) Notice of Proposed Special Rate Period................................................A-23
(d) Notice of Special Rate Period.........................................................A-23
(e) Failure to Deliver Notice of Special Rate Period......................................A-24
5. Voting Rights................................................................................A-24
(a) One Vote Per Share of MuniPreferred...................................................A-24
(b) Voting For Additional Trustees........................................................A-24
(i) Voting Period...................................................................A-24
(ii) Notice of Special Meeting.......................................................A-25
(iii) Terms of Office of Existing Trustees............................................A-25
(iv) Terms of Office of Certain Trustees to Terminate Upon
Termination of Voting Period....................................................A-25
(c) Holders of MuniPreferred To Vote On Certain Other Matters.............................A-25
(i) Increases in Capitalization.....................................................A-25
(ii) 1940 Act Matters................................................................A-26
(d) Board May Take Certain Actions Without Shareholder Approval...........................A-26
(e) Voting Rights Set Forth Herein Are Sole Voting Rights.................................A-27
(f) No Preemptive Rights or Cumulative Voting.............................................A-27
</TABLE>
A-5
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<TABLE>
<S> <C> <C>
(g) Voting for Trustees Sole Remedy for Fund's Failure to Pay Dividends...................A-27
(h) Holders Entitled to Vote..............................................................A-27
6. 1940 Act MuniPreferred Asset Coverage........................................................A-27
7. MuniPreferred Basic Maintenance Amount.......................................................A-27
8. [Reserved]...................................................................................A-29
9. Restrictions on Dividends and Other Distributions............................................A-29
(a) Dividends on Preferred Shares Other Than MuniPreferred................................A-29
(b) Dividends and Other Distributions With Respect to Common Shares
Under the 1940 Act....................................................................A-29
(c) Other Restrictions On Dividends and Other Distributions...............................A-29
10. Rating Agency Restrictions...................................................................A-30
11. Redemption...................................................................................A-30
(a) Optional Redemption...................................................................A-30
(b) Mandatory Redemption..................................................................A-31
(c) Notice of Redemption..................................................................A-32
(d) No Redemption Under Certain Circumstances.............................................A-32
(e) Absence of Funds Available for Redemption.............................................A-32
(f) Auction Agent as Trustee of Redemption Payments by Fund...............................A-32
(g) Shares for Which Notice of Redemption Has Been Given Are No
Longer Outstanding....................................................................A-32
(h) Compliance With Applicable Law........................................................A-33
(i) Only Whole Shares of MuniPreferred May Be Redeemed....................................A-33
12. Liquidation Rights...........................................................................A-33
(a) Ranking...............................................................................A-33
(b) Distributions Upon Liquidation........................................................A-33
(c) Pro Rata Distributions................................................................A-33
(d) Rights of Junior Shares...............................................................A-33
(e) Certain Events Not Constituting Liquidation...........................................A-34
13. Miscellaneous................................................................................A-34
(a) Amendment of Appendix A to Add Additional Series......................................A-34
(b) Appendix A Incorporated By Reference..................................................A-34
(c) No Fractional Shares..................................................................A-34
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise
Acquired by the Fund..................................................................A-34
(e) Board May Resolve Ambiguities.........................................................A-34
(f) Headings Not Determinative............................................................A-34
(g) Notices...............................................................................A-34
<CAPTION>
<S> <C> <C>
PART II ......................................................................................................A-35
1. Orders.......................................................................................A-35
2. Submission of Orders by Broker-Dealers to Auction Agent......................................A-36
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate..............A-38
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares.........................................................................A-39
5. Notification of Allocations..................................................................A-41
6. Auction Agent................................................................................A-41
7. Transfer of Shares of MuniPreferred..........................................................A-41
8. Global Certificate...........................................................................A-42
Appendix A.....................................................................................................A-43
Section 1. Designation As To Series..............................................................A-43
Section 2. Number of Authorized Shares Per Series................................................A-43
Section 3. Exceptions to Certain Definitions.....................................................A-44
Section 4. Certain Definitions...................................................................A-44
Section 5. Initial Rate Periods..................................................................A-47
</TABLE>
A-6
<PAGE> 70
<TABLE>
<S> <C> <C>
Section 6. Date for Purposes of Paragraph (yyy) Contained Under the Heading
"Definitions" in this Statement.......................................................A-48
Section 7. Party Named for Purposes of the Definition of "Rate Multiple" in this Statement.......A-48
Section 8. Additional Definitions................................................................A-48
Section 9. Dividend Payment Dates................................................................A-48
Section 10. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this
Statement.............................................................................A-48
Section 11. Redemption Provisions Applicable to Initial Rate Periods..............................A-48
Section 12. Applicable Rate for Purposes of Subparagraph (b)(iii) of Section 3 of
Part II of this Statement.............................................................A-48
</TABLE>
A-7
<PAGE> 71
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND, 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 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.
A-8
<PAGE> 72
(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) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RAN's), 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.
(f) "APPLICABLE RATE" shall have the meaning specified in
subparagraph (e)(i) of Section 2 of Part I of this Statement.
(g) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(h) "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.
(i) "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.
(j) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(k) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.
(l) "AVAILABLE MUNIPREFERRED" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(m) "BENCHMARK RATE" shall have the meaning specified in Section 12 of
Appendix A hereto.
(n) "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.
(o) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(p) "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.
(q) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Fund or
any duly authorized committee thereof.
(r) "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
A-9
<PAGE> 73
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.
(s) "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.
(t) "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.
(u) "CODE" means the Internal Revenue Code of 1986, as amended.
(v) "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.
(w) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.01 per share, of the Fund.
(x) "CURE DATE" shall mean the MuniPreferred Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.
(y) "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.
(z) "DECLARATION" shall have the meaning specified on the first page of
this Statement.
(aa) "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.
(bb) "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 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.
(cc) [RESERVED]
(dd) [RESERVED]
(ee) "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.
(ff) "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.
(gg) "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.
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<PAGE> 74
(hh) "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.
(ii) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Moody's Volatility Factor."
(jj) "FUND" shall mean the entity named on the first page of this
Statement, which is the issuer of the shares of MuniPreferred.
(kk) "GROSS-UP PAYMENT" shall have the meaning specified in Section
4 of Appendix A hereto.
(ll) "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.
(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) "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.
(oo) "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.
(pp) "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.
(qq) "ISSUE TYPE CATEGORY," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(rr) "KENNY INDEX" shall have the meaning specified in the
definition of "Taxable Equivalent of the Short-Term Municipal Bond Rate."
(ss) "LATE CHARGE" shall have the meaning specified in subparagraph (e)
(1) (B) of Section 2 of Part I of this Statement.
(tt) "LIQUIDATION PREFERENCE," with respect to a given number of shares
of MuniPreferred, means $25,000 times that number.
(uu) "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
A-11
<PAGE> 75
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.
(vv) "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.
(ww) "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:
(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.
(xx) [RESERVED]
(yy) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days.
(zz) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(aaa) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(bbb) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(ccc) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
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(ddd) "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 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 INCREASE VOLATILITY FACTOR
------------------------- -----------------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
(eee) "MUNIPREFERRED" shall have the meaning set forth on the first
page of this Statement.
(fff) "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 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
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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) of any of the
Fund's assets irrevocably deposited by the Fund for the payment of any of (i)(A)
through (i)(F).
(ggg) "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.
(hhh) "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.
(iii) "MUNICIPAL OBLIGATIONS" shall mean "Municipal Obligations" as
defined in the Fund's registration statement on Form N-2 on file with the
Securities and Exchange Commission, as such registration statement may be
amended from time to time (the "Registration Statement").
(jjj) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.
(kkk) "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.
(lll) "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).
(mmm) "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.
(nnn) "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.
(ooo) "ORDER" and "ORDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
(ppp) "ORIGINAL ISSUE INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(qqq) "OTHER ISSUES," if defined in Section 4 of Appendix A hereto,
shall have the meaning specified in that section.
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<PAGE> 78
(rrr) "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.
(sss) "PERMANENT INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(ttt) "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.
(uuu) "PORTFOLIO INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(vvv) "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.
(www) "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.
(xxx) "PREFERRED SHARES" shall mean the preferred shares of the Fund,
and includes the shares of MuniPreferred.
(yyy) "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.
(zzz) "RATE MULTIPLE" shall have the meaning specified in Section 4 of
Appendix A hereto.
(aaaa) "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.
(bbbb) "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.
(cccc) "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.
(dddd) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.
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<PAGE> 79
(eeee) "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.
(ffff) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(gggg) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
(hhhh) "S&P DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(iiii) "S&P ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(jjjj) "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).
(kkkk) "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.
(llll) "SECONDARY MARKET INSURANCE," if defined in Section 4 of
Appendix A hereto, shall have the meaning specified in that section.
(mmmm) "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.
(nnnn) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.
(oooo) "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.
(pppp) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified
in subparagraph (a)(i) of Section 11 of Part I of this Statement.
(qqqq) "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.
(rrrr) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(ssss) "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.
(tttt) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(uuuu) "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.
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(vvvv) "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 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.
(wwww) "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.
(xxxx) "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.
(yyyy) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(zzzz) "TAXABLE ALLOCATION" shall have the meaning specified in
Section 3 of Part I of this Statement.
(aaaaa) "TAXABLE INCOME" shall have the meaning specified in Section 12
of Appendix A hereto.
(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) "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.
(ddddd) "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 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.
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<PAGE> 81
(eeeee) "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.
(fffff) "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.
(ggggg) "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.
(hhhhh) "VALUATION DATE" shall mean, for purposes of determining
whether the Fund is maintaining the MuniPreferred Basic Maintenance Amount, each
Business Day.
(iiiii) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility Factor.
(jjjjj) "VOTING PERIOD" shall have the meaning specified in paragraph (b)
of Section 5 of Part I of this Statement.
(kkkkk) "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.
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<PAGE> 82
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) (A) 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.
(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
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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 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
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(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 a0y 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 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.
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(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 in accordance with the Declaration and applicable law, dividends in an
amount equal to the aggregate Gross-up Payments as follows:
(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
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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 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 (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
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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 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.
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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.
(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
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<PAGE> 89
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 662/3% 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 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
Issue Type Category Coverage
Market Value Other Issues
Maximum Potential Gross-up Payment Quarterly Valuation Date
Liability Receivables for Municipal
MuniPreferred Basic Maintenance Amount Obligations Sold
MuniPreferred Basic Maintenance S&P Discount Factor
Cure Date S&P Eligible Asset
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<PAGE> 90
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
(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.
(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
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<PAGE> 91
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.
(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) and (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").
(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.
(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%, 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.
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<PAGE> 92
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 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.
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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;
(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 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 500 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
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<PAGE> 94
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 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 equalled 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
MuniPreferred and other Preferred Shares
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<PAGE> 95
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 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
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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 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
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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.
(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.
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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 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."
(b) (i) 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
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(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 numberor 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:
(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;
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<PAGE> 100
(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 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) (A) 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;
(B) 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;
(C) 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
(D) 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
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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.
(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
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series to be purchased by such Potential Holders 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 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
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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.
(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
A-40
<PAGE> 104
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.
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,
A-41
<PAGE> 105
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.
IN WITNESS WHEREOF, NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND, has
caused these presents to be signed on , 1999 in its name and on its behalf by
its 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 DIVIDEND ADVANTAGE MUNICIPAL
FUND
By:
----------------------------------
Gifford R. Zimmerman
Vice President
ATTEST:
------------------------------
Larry W. Martin
Assistant Secretary
A-42
<PAGE> 106
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
APPENDIX A
SECTION 1. DESIGNATION AS TO SERIES.
SERIES M: A series of 10,000 Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series M." Each share of Series M
MuniPreferred shall, for purposes hereof, be deemed to have a Date of Original
Issue of ______ __, 1999; have an Applicable Rate for its Initial Rate Period
equal to ____% per annum; have an initial Dividend Payment Date of ______ __,
1999; 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 M MuniPreferred issued after the
effective date of this Statement shall be issued on the first day of a Rate
Period of the then outstanding shares of Series M 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 M
MuniPreferred shall constitute a separate series of Preferred Shares of the
Fund, and each share of Series M MuniPreferred shall be identical except as
provided in Section 11 of Part I of this Statement.
SERIES T: A series of 10,000 Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series T." Each share of Series T
MuniPreferred shall, for purposes hereof, be deemed to have a Date of Original
Issue of ______ __, 1999; have an Applicable Rate for its Initial Rate Period
equal to ____% per annum; have an initial Dividend Payment Date of ______ __,
1999; 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 T MuniPreferred issued after the
effective date of this Statement shall be issued on the first day of a Rate
Period of the then outstanding shares of Series T 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 T
MuniPreferred shall constitute a separate series of Preferred Shares of the
Fund, and each share of Series T MuniPreferred shall be identical except as
provided in Section 11 of Part I of this Statement.
SERIES TH: A series of 10,000 Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series TH." Each share of Series TH
MuniPreferred shall, for purposes hereof, be deemed to have a Date of Original
Issue of ______ __, 1999; have an Applicable Rate for its Initial Rate Period
equal to ____% per annum; have an initial Dividend Payment Date of ______ __,
1999; 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 TH MuniPreferred issued after
the effective date of this Statement shall be issued on the first day of a Rate
Period of the then outstanding shares of Series TH 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 TH MuniPreferred shall constitute a separate series of Preferred Shares
of the Fund, and each share of Series TH 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 M MuniPreferred is
10,000; Series T MuniPreferred is 10,000; and Series TH MuniPreferred is 10,000.
A-43
<PAGE> 107
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.
"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 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 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 regular Federal
individual income tax rate applicable to ordinary income 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.
"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:
<TABLE>
<CAPTION>
RATING CATEGORY
-----------------------------------------------------------------------
Below BAA or
unrated by
EXPOSURE PERIOD AAA* AA* A* BAA* Moody's/S&P MIG-1*** SP-1+***
- --------------- ---------------- ------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks.............................. 151% 159% 168% 202% 225% 136% 148%
8 weeks or less but greater than
seven weeks....................... 154 164 173 205 231 137 149
9 weeks or less but greater than
eight weeks....................... 158 169 179 209 240 138 150
</TABLE>
- ------------------
* Moody's rating.
** Municipal Obligations not rated by Moody's or S&P or rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's,
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.
A-44
<PAGE> 108
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) is publicly rated Baa or higher by Moody's or,
if not rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided, however, that for purposes of determining the Moody's
Discount Factor applicable to any such S&P-rated Municipal Obligation,
such Municipal Obligation (excluding any short-term Municipal
Obligation) shall be deemed to have a Moody's rating which is one full
rating category lower than its S&P rating), (iii) does not have its
Moody's rating suspended by Moody's, and (iv) is part of an issue of
Municipal Obligations of at least $10,000,000. Municipal Obligations
issued by any one issuer and rated BBB by S&P may comprise no more than
4% of total Moody's Eligible Assets; such BBB-rated Municipal
Obligations, 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 BBB, 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 BBB, 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. Municipal
Obligations issued by issuers located within a single state or
territory and rated BBB by S&P may comprise no more than 12% of total
Moody's Eligible Assets; such BBB-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located
within the same state or territory and rated Baa by Moody's or A by
S&P, may comprise no more than 20% of total Moody's Eligible Assets;
such BBB, Baa and A-rated Municipal Obligations, if any, together with
any Municipal Obligations issued by issuers located within the same
state or territory 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 BBB, Baa, A
and AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same state or
territory 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 applying the
foregoing requirements, a Municipal Obligation shall be deemed to be
rated BBB by S&P if rated BBB-, BBB or 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., United States Trust Company of
New York or the Auction Agent and (d) Liens by virtue of any repurchase
agreement; or (iii) deposited irrevocably for the payment of any liabilities for
purposes of determining the MuniPreferred Basic Maintenance Amount.
A-45
<PAGE> 109
"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:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
----------------- ----------
<S> <C>
"aa3"/AA-- or higher....... 110%
"a3"/A--................... 125%
"baa3"/BBB--............... 150%
"ba3"/BB--................. 200%
Below "ba3"/BB--.......... 250%
</TABLE>
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 regular Federal individual
income tax rate applicable to ordinary income 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.
"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:
<TABLE>
<CAPTION>
RATING CATEGORY
---------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB*
- --------------- ----- ----- ----- ------
<S> <C> <C> <C> <C>
40 Business Days........... 190% 195% 210% 250%
22 Business Days........... 170 175 190 230
10 Business Days........... 155 160 175 215
7 Business Days............ 150 155 170 210
3 Business Days............ 130 135 150 190
</TABLE>
- ------------------
* S&P rating.
A-46
<PAGE> 110
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 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 rating agency, 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; (ii) no
S&P Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold; and (iii) 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 Moody's. 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 rating agency, 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),
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 rating agency, on a case by case basis;
(iv) is not part of a private placement of Municipal Obligations; and
(v) of an issue of Municipal Obligations with an original issue size of
at least $20 million or, if of an issue with an original issue size
below $20 million (but in no event below $10 million), is issued by an
issuer with a total of at least $50 million of securities outstanding.
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) 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 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;
(2) 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 aggregate Market Value
of S&P Eligible Assets; and
(3) Long-Term Municipal Obligations (excluding Escrowed Bonds)
issued by issuers in any one state or territory 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.
SECTION 5. INITIAL RATE PERIODS.
The Initial Rate Period for shares of Series M MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding ______ __, 1999.
The Initial Rate Period for shares of Series T MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding ______ __, 1999.
The Initial Rate Period for shares of Series TH MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding ______ __, 1999.
A-47
<PAGE> 111
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (YYY) CONTAINED UNDER THE HEADING
"DEFINITIONS" IN THIS STATEMENT.
______ __, 1999.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE MULTIPLE" IN THIS
STATEMENT.
PARTY: SERIES OF MUNIPREFERRED
------ -----------------------
Series M
Series T
Series TH
SECTION 8. ADDITIONAL DEFINITIONS.
Not applicable.
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 M MuniPreferred, for the Initial Rate Period on
________, _________, 1999, and on each thereafter;
Series T MuniPreferred, for the Initial Rate Period on
________, _________, 1999, and on each thereafter;
Series TH MuniPreferred, for the Initial Rate Period on
________, _________, 1999, and on each thereafter; and
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 regular Federal
individual income tax rate applicable to ordinary income 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 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
A-48
<PAGE> 112
product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (B) and (y) the product of the maximum marginal regular Federal
individual income tax rate applicable to ordinary income 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.
A-49
<PAGE> 113
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation-A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt 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 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.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
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.
INVESTMENT GRADE
AAA Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only
in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the
B-1
<PAGE> 114
highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB--" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal.
The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB--" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial,
and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "B" or "B--" rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC--"
debt rating. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating "CI" is reserved for income bonds on which no
interest is being paid.
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments 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 if debt service
payments 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.
Provisional Ratings: 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 and
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 judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is federally insured by the
Federal Savings & Loan Insurance Corp. or the Federal Deposit
insurance Corp.* and interest is adequately collateralized. In
the case of certificates of deposit the letter "L" indicates
that the deposit, combined with other deposits being held in
the same right and capacity will be honored for principal and
accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured institution
or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
B-2
<PAGE> 115
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a matter
of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 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).
- 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 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
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 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
B-3
<PAGE> 116
D Debt rated "D" is in payment default. The "D" rating category
is used when interest payments or principal payments 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.
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 edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
B-4
<PAGE> 117
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. Parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating category from Aa to B in the public finance sectors. The
modifier 1 indicates that the issuer is in the higher end of its letter
rating category; the modifier 2 indicates a mid-range ranking; the
modifier 3 indicates that the issuer is in the lower end of the letter
ranking category.
SHORT-TERM LOANS
MIG1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well-established.
MIG4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of
protection.
COMMERCIAL PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market posit-ions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- 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 capacity for repayment of short-term promissory 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.
B-5
<PAGE> 118
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory 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 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 or
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%.
B-6
<PAGE> 119
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.
Fl 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. 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'.
'NRI' indicates that Fitch IBCA does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert 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. RatingAlert is typically resolved over a relatively short
period.
B-7
<PAGE> 120
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 a
Fund's existing or anticipated holdings of long-term debt securities. When a
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 a Fund's
existing or anticipated holdings of long-term debt securities. For example, if a
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 mate
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
Funds 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.
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 a 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 same Fund. There is no guarantee that such
closing transactions can be effected.
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<PAGE> 121
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
<PAGE> 122
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Statement of Net Assets, , 1999 (audited)
Statement of Net Assets, , 1999 (unaudited)
Statement of Operations from , 1999 (commencement of
operations) to , 1999 (unaudited)
Statement of Changes in Net Assets from , 1999
(commencement of operations) to , 1999(unaudited)
Portfolio of Investments, , 1999 (unaudited)
2. Exhibits:
a.1 Agreement and Declaration of Trust dated January 15, 1999.(2)
a.2 Certificate of Amendment to Declaration of Trust dated April 9,
1999.(1)
b. By-laws of Registrant.(1)(2)
c. None.
d. None.
e. Dividend Investment Plan.(1)
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp.(1)
h. Form of Underwriting Agreement.*
i. Deferred Compensation Plan for Non-Employee Trustees.(1)
j. Form of Exchange Traded Fund Custody Agreement between Registrant and
The Chase Manhattan Bank.(1)
k.1 Form of Shareholder Transfer Agency Agreement between Registrant and
Chase Global Funds Services Company.(1)
k.2 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp.(1)
k.3 Form of Auction Agency Agreement between the Registrant and Bankers
Trust Company as to the Registrant's MuniPreferred Shares.*
k.4 Form of Broker-Dealer Agreement as to the Registrant's MuniPreferred
Shares.*
k.5 DTC Representations 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 Dana LLP.*
m. None.
n. Consent of Ernst & Young LLP.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated April 12,
1999.(1)
q. None.
r. None.
s. Powers of Attorney.(1)
- -------------------
*To be filed by amendment.
(1) Incorporated herein by reference to the initial Registrant's
Registration Statement on Form N-2, File No. 333- 76461, filed on April
16, 1999.
(2) Incorporated herein by reference to Pre-Effective Amendment No.1 to
Registrant's Registration Statement on Form N-2, File No. 333-76461,
filed on April 27, 1999.
Part C-1
<PAGE> 123
Item 25: Marketing Arrangements
See Section __ of the Underwriting Agreement 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
Blue Sky filing fees and expenses
Miscellaneous expenses
Total
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At _________, 1999
Title of Class Number of Record Holders
-------------- ------------------------
Common Shares, $.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 (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
Part C-2
<PAGE> 124
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, as such Disinterested Trustee,
anyone 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 Errors and Omission policies in the aggregate amount of $20,000,000 (with
a maximum deductible of $500,000) 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 where he or she had reasonable cause to believe this conduct was unlawful).
Section 8 of the Underwriting Agreement 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.
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 Flagship Multistate Trust
I, Nuveen Flagship Multistate II, Nuveen Flagship Multistate Trust III, Nuveen
Flagship Multistate Trust IV, Nuveen Flagship Municipal Trust, Nuveen California
Tax Free Fund, Inc., Nuveen Tax-Free Money Market Fund, Inc., Nuveen Tax-Exempt
Money Market Fund, Inc., Nuveen Tax-Free Reserves, Inc. and Nuveen Taxable Funds
Inc., 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
Part C-3
<PAGE> 125
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 New Jersey
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 New Jersey Premium
Income Municipal Fund 2, Nuveen Pennsylvania Premium Income Municipal Fund 2,
Nuveen Maryland Premium Income Municipal Fund, Nuveen Massachusetts Premium
Income Municipal Fund, Nuveen Virginia Premium Income Municipal Fund, Nuveen
Washington 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 Municipal Advantage Fund and Nuveen
California Municipal Advantage Fund. 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 trustee
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.
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.
The Chase Manhattan Bank, 4 New York Plaza, New York, New York
10004-2413 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. or Chase Global Funds Services
Company.
Chase Global Funds Services Company, P.O. Box 5186, Bowling Green
Station, New York, NY 10275-0672 (regular mail) or 4 New York Plaza, 6th Floor,
New York, NY 10004, maintains all the required records in its capacity as
transfer and dividend paying agent for the Registrant.
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.
Part C-4
<PAGE> 126
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-5
<PAGE> 127
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 6th day of
July, 1999.
NUVEEN DIVIDEND ADVANTAGE MUNICIPAL FUND
/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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Stephen D. Foy July 6, 1999
- --------------------------------- Vice President and Controller (Principal
Stephen D. Foy Financial and Accounting Officer)
Timothy R. Schwertfeger Chairman of the Board and Trustee July 6, 1999
(Principal Executive Officer)
Robert P. Bremner Trustee July 6, 1999
Lawrence H. Brown Trustee July 6, 1999
Anne E. Impellizzeri Trustee July 6, 1999
Peter R. Sawers Trustee July 6, 1999
William J. Schneider Trustee July 6, 1999
Judith M. Stockdale Trustee July 6, 1999
By: /s/ Gifford R. Zimmerman
-----------------------------
Gifford R. Zimmerman
Attorney-in Fact
</TABLE>
Original powers of attorney authorizing Alan G. Berkshire and 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.
Part C-6
<PAGE> 128
INDEX TO EXHIBITS
Part C-7
