<PAGE>
As filed with the Securities and Exchange Commission on May 17, 1999
1933 Act File No.
333-78323
1940 Act File No.
811-05570
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[_] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[_] Post-Effective Amendment No.
and/or
[_] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 19 Nuveen Premium Income
Municipal Fund, Inc.
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:
Thomas S. Harman Gary S. Schpero
Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett
1800 M Street, N.W. 425 Lexington Avenue
Washington, DC 20036 New York, NY 10017
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 Proposed
Maximum Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price Fee(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Auction Rate Cumulative
Preferred Stock Series M2.......... 2,000 shares $25,000 $50,000,000 $13,900
- ---------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Previously paid.
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
CROSS REFERENCE SHEET
Part A--Prospectus
<TABLE>
<CAPTION>
Items in Part A of Form N-
2 Location in Prospectus
-------------------------- ----------------------
<C> <S> <C>
Item 1. Outside Front Cover Cover Page
Item 2. Inside Front and Outside Inapplicable
Back Cover Page
Item 3. Fee Table and Synopsis Inapplicable
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Cover Page; Prospectus Summary; The
Auction; Underwriting
Item 6. Selling Shareholders Inapplicable
Item 7. Use of Proceeds Use of Proceeds; Investment Objectives
and Policies
Item 8. General Description of the Cover Page; Prospectus Summary; The
Registrant Fund; Investment Objective and
Policies; Description of MuniPreferred;
Common Stock
Item 9. Management Prospectus Summary; Management of the
Fund; Other Service Providers
Item 10. Capital Stock, Long-Term Capitalization; Investment Objectives
Debt, and Other Securities and Policies; Description of
MuniPreferred; The Auction; Common
Stock; Control of the Fund; Tax Matters
Item 11. Defaults and Arrears on Inapplicable
Senior Securities
Item 12. Legal Proceedings Legal Proceedings
Item 13. Table of Contents of the Table of Contents for the Statement of
Statement of Additional Additional Information
Information
Pan B--Statement of Additional Information
<CAPTION>
Items In Part B of Form N- Location in Statement of
2 Additional Information
-------------------------- ------------------------
<C> <S> <C>
Item 14. Cover Page Cover Page
Item 15. Table of Contents Cover Page
Item 16. General Information and Inapplicable
History
Item 17. Investment Objective and Investment Objectives and Policies;
Policies Certain Trading Strategies of the Fund;
Portfolio Transactions
Item 18. Management Management of the Fund; Portfolio
Transactions
Item 19. Control Persons and Management of the Fund; Certain Owners
Principal Holders of of Record
Securities
Item 20. Investment Advisory and Management of the Fund; Experts
Other Services
Item 21. Brokerage Allocation and Portfolio Transactions
Other Practices
Item 22. Tax Status Tax Matters
Item 23. Financial Statements Financial Statements
</TABLE>
Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+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, DATED MAY 12, 1999
PROSPECTUS
Nuveen Premium Income Municipal Fund, Inc.
Municipal Auction Rate Cumulative Preferred Stock ("MuniPreferred(R)")
2,000 Shares Series M2
Liquidation Preference $25,000 Per Share
----------
This Prospectus Part A may not be distributed unless accompanied by the Part B
of the Nuveen Exchange-Traded Funds MuniPreferred Prospectus, to which any
reference in this Part A applies. This Prospectus sets out the information that
a prospective investor should know before investing in the Fund. You should
retain both Parts of the Prospectus for future reference. Investing in
MuniPreferred shares involves certain risks, which are described in the "Risk
Factors" section beginning on page B-5 of this Prospectus.
Nuveen Premium Income Municipal Fund, Inc. (the "Fund") is a closed-end,
diversified management investment company. The Fund's investment objective is a
high level of current income exempt from regular Federal income tax, consistent
with preservation of capital. The Fund seeks to achieve its investment
objective by investing substantially all of its assets (more than 80%) in a
diversified portfolio of tax-exempt municipal bonds rated within the four
highest grades (Baa or BBB or better) by Moody's or Standard & Poor's, except
that the Fund may invest up to 20% of its assets in unrated municipal bonds
that, in the opinion of the Fund's adviser, are of comparable quality to those
so rated. There is no assurance that the Fund will achieve its objective.
Dividends paid to MuniPreferred shareholders, to the extent payable from tax-
exempt income earned on the Fund's investments, will be exempt from regular
Federal income tax. All or a portion of the Fund's exempt-interest dividends
may be subject to the alternative minimum tax and therefore MuniPreferred
shares may not be suitable for persons subject to this tax. The Fund is
required to allocate net capital gains and other taxable income, if any,
proportionately between common shares and MuniPreferred 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 taxable income to be
included in a dividend on MuniPreferred shares in advance of the auction for
these shares, and may give advance notice to MuniPreferred shareholders during
longer rate periods. Under certain circumstances the Fund will be required to
make shareholders whole for taxes owing on dividends paid to shareholders that
include taxable income and gain. The amount of taxable income and gain
allocated to MuniPreferred shares will depend on the amount of taxable income
and gain the Fund realizes.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (800) 257-8787. A Statement of
Additional Information dated , 1999 has been filed with the Securities
and Exchange Commission and is incorporated by reference in its entirety into
this Prospectus. You may receive a copy of the Statement of Additional
Information, the table of contents of which appears at page B-28 of this
Prospectus, at no charge by calling the Fund at (800) 257-8787. The Securities
and Exchange Commission maintains a web site (http://www.sec.gov) that contains
the Statement of Additional Information, 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. This Prospectus (comprised of Parts A and B) 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.
The Fund is offering the shares of MuniPreferred, Series M2, listed above. The
shares are referred to in this Prospectus as "New MuniPreferred." Except as
otherwise described in this Prospectus, the terms of this offering and all
other series of MuniPreferred the Fund previously offered are the same. The
dividend rate for the initial rate period (the period from the date of issue
through , 1999) will be . 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 beginning at Page B-18 of this 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.
----------
Neither the Securities and Exchange Commission 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 $50,000,000
------- -----------
Sales Load............................................... $ $
------- -----------
Proceeds to Fund (before expenses)....................... $ $
======= ===========
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the New MuniPreferred
shares are first issued.
----------
The underwriters are offering the shares of the New MuniPreferred subject to
various conditions. It is expected that the shares of New 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.
BT Alex. Brown
Goldman, Sachs & Co.
John Nuveen & Co. Incorporated
Legg Mason Wood Walker
Incorporated
PaineWebber Incorporated
Prudential Securities
Raymond James & Associates, Inc.
<PAGE>
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.
2
<PAGE>
Prospectus Summary
The following information is a summary of more detailed information included
in Parts A and B of this Prospectus and the Fund's Statement of Additional
Information.
The Fund and its Adviser
Nuveen Premium Income Municipal Fund, Inc. (the "Fund") is a closed-end,
diversified management investment company. Nuveen Advisory Corp. ("Nuveen
Advisory") is the Fund's investment adviser. Nuveen Advisory is responsible for
the selection and on-going monitoring of the Fund's investment portfolio. As of
March 31, 1999 the Fund had 63,785,431 shares of common stock outstanding, and
19,000 MuniPreferred shares outstanding.
The Offering
The Fund is offering 2,000 shares of New MuniPreferred. The purchase price
for this series is $25,000 per share.
Investment Objective
The Fund's investment objective is a high level of current income exempt
from regular Federal income tax, consistent with the preservation of capital.
The Fund seeks to achieve its investment objective by investing substantially
all of its assets (more than 80%) in a diversified portfolio of tax-exempt
municipal bonds rated at the time of purchase within the four highest grades
(Baa or BBB or better) by Moody's Investors Service, Inc. ("Moody's") or
Standard and Poor's Corporation ("Standard & Poor's"), except that the Fund may
invest up to 20% of its assets in unrated municipal bonds that, in Nuveen
Advisory's opinion, have credit characteristics equivalent to, and are of
comparable quality to, municipal bonds rated Baa or BBB or better. There is no
assurance that the Fund will achieve its investment objective. See "Investment
Objective and Policies."
Risk Factors
Risk is inherent in all investing. Therefore, before investing you should
consider certain risks carefully when you invest in the Fund. See "Risk
Factors" at Page B-5 of this Prospectus. 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
under certain circumstances; and in extraordinary circumstances the Fund may
not earn sufficient income from its investments to pay dividends.
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, a broker-dealer that has entered
into a separate agreement with a Broker-Dealer, or other persons as the Fund
permits. See "The Auction--Secondary Market" at Page B-25 of this Prospectus.
New MuniPreferred will trade at auction starting in the week following this
offering.
A-1
<PAGE>
The first auction date for New MuniPreferred will be Friday, , 1999,
the business day before the dividend payment date for the initial rate period
for New MuniPreferred. The auction date for New MuniPreferred shares normally
will be a Monday, and the start date for subsequent rate periods normally will
be the following business day, typically a Tuesday, unless the then-current
rate period is a special rate period, or the day that normally would be the
auction date or the first day of the subsequent rate period is not a business
day.
Dividends and Rate Periods
The dividend rate for the initial rate period on the shares offered in this
Prospectus will be %. For subsequent rate periods, New MuniPreferred shares
will pay dividends based on a rate set at these 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 Rate Periods--Maximum Rate"
at Page B-12 of this Prospectus.
Dividends on New MuniPreferred shares will accumulate at the initial rate
beginning on Friday, , 1999. Dividends will be paid on shares of New
MuniPreferred on Tuesday, , 1999 and normally thereafter on each Tuesday.
If the Tuesday 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 Tuesday.
The initial rate period will be eleven days. Subsequent rate periods
generally will be seven days. The dividend payment date for a special rate
period of more than 28 days will be set out in the notice designating a special
rate period. See "Description of MuniPreferred--Dividends and Rate Periods--
Designation of Special Rate Periods" at Page B-11 of this Prospectus.
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 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. 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 rate periods, the Fund may notify shareholders. Under 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" at Page B-25 of this Prospectus.
Ratings
Shares of each series of MuniPreferred are issued with a rating of "Aaa"
from Moody's Investors Service, Inc. ("Moody's") and "AAA" from Standard &
Poor's Corporation ("Standard & Poor's"). 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--Asset Maintenance and Rating
Agency Guidelines--Rating Agencies" at Page B-15 of this Prospectus.
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 correct a failure to meet a rating agency
guideline in a timely manner. The Fund voluntarily may redeem MuniPreferred
shares under certain conditions. See "Description of MuniPreferred--Redemption"
and "Description of MuniPreferred--Asset Maintenance and Rating Agency
Guidelines--Rating Agencies" at Pages B-14 and B-15 of this Prospectus.
A-2
<PAGE>
Liquidation Preference
The liquidation preference of New MuniPreferred shares will be $25,000 per
share plus any accumulated, unpaid dividends.
FINANCIAL HIGHLIGHTS
The table below shows financial information for the Fund, expressed in terms
of one share outstanding throughout the period. The information in the table
is covered by the report of Ernst & Young LLP except where noted. The report
is contained in the Statement of Additional Information and is available from
the Fund.
<TABLE>
<CAPTION>
Year Ended 10/31
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992+
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of
period........... $ 15.28 $ 14.96 $ 15.11 $ 14.14 $ 16.30 $ 15.79 $ 15.76
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating
performance:
Net investment
income.......... 1.15 1.14 1.16 1.24 1.26 1.43 .60
Net realized &
unrealized gain
(loss) from
investments..... .43 .37 (.09) 1.01 (2.02)*** .61 .03
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from
investment
operations....... 1.58 1.51 1.07 2.25 (.76) 2.04 .63
---------- ---------- ---------- ---------- ---------- ---------- ----------
Dividends from
net investment
income:
To Common
shareholders.... (.88) (.94) (.97) (1.06) (1.17) (1.36) (.52)
To Preferred
shareholders#... (.25) (.20) (.20) (.22) (.16) (.17) (.08)
Distributions
from capital
gains:
To Common
shareholders.... (.06) (.03) (.05) -- (.07) -- --
To Preferred
shareholders#... (.01) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
distributions.... (1.20) (1.17) (1.22) (1.28) (1.40) (1.53) (.60)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Organization and
offering costs
and Preferred
share
underwriting
discounts........ -- (.02) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value
end of period.... $ 15.66 $ 15.28 $ 14.96 $ 15.11 $ 14.14 $ 16.30 $ 15.79
========== ========== ========== ========== ========== ========== ==========
Per Common share
market value end
of period........ $ 15.1875 $ 14.6250 $ 14.5000 $ 14.3750 $ 13.2500 $ 17.7500 $ 15.8750
Total investment
return on market
value**.......... 10.60% 7.81% 8.24% 16.88% (19.13)% 20.96% .73%
Total return on
net asset
value**.......... 8.86% 8.89% 5.92% 14.84% (5.88)% 12.33% 3.46%
Ratios/Supplemental
data:
Net assets end
of period (in
thousands)...... $1,473,755 $1,449,660 $1,304,192 $1,313,673 $1,252,208 $1,213,064 $1,173,329
Ratio of
expenses to
average net
assets##........ .77% .76% .75% .76% .77% .79% .78%*
Ratio of net
investment
income to
average net
assets##........ 5.00% 5.51% 5.67% 6.13% 6.08% 6.28% 6.33%*
Portfolio
turnover rate... 19% 10% 16% 12% 15% 11% 2%
<CAPTION>
Year Ended May 31
------------------------------------------------
1992 1991 1990 1989++
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value
beginning of
period........... $ 15.18 $ 14.60 $ 14.72 $ 14.05
----------- ----------- ----------- ------------
Operating
performance:
Net investment
income.......... 1.49 1.50 1.51 1.10
Net realized &
unrealized gain
(loss) from
investments..... .50 .54 (.12) .75
----------- ----------- ----------- ------------
Total from
investment
operations....... 1.99 2.04 1.39 1.85
----------- ----------- ----------- ------------
Dividends from
net investment
income:
To Common
shareholders.... (1.14) (1.08) (1.08) (.75)
To Preferred
shareholders#... (.27) (.38) (.43) (.27)
Distributions
from capital
gains:
To Common
shareholders.... -- -- -- --
To Preferred
shareholders#... -- -- -- --
----------- ----------- ----------- ------------
Total
distributions.... (1.41) (1.46) (1.51) (1.02)
----------- ----------- ----------- ------------
Organization and
offering costs
and Preferred
share
underwriting
discounts........ -- -- -- (.16)
----------- ----------- ----------- ------------
Net asset value
end of period.... $ 15.76 $ 15.18 $ 14.60 $ 14.72
=========== =========== =========== ============
Per Common share
market value end
of period........ $ 16.2500 $ 15.3735 $ 15.0000 $ 14.8750
Total investment
return on market
value**.......... 13.32% 10.14% 8.39% 4.38%
Total return on
net asset
value**.......... 11.72% 11.88% 6.74% 10.44%
Ratios/Supplemental
data:
Net assets end
of period (in
thousands)...... $1,167,042 $1,127,103 $1,090,365 $1,089,152
Ratio of
expenses to
average net
assets##........ .66% .65% .65% .62%*
Ratio of net
investment
income to
average net
assets##........ 6.71% 6.97% 6.98% 6.92%*
Portfolio
turnover rate... 2% 1% 4% 7%
</TABLE>
- ----
*Annualized.
**Total investment return on market value is the combination of reinvested
dividend income, reinvested capital gains distributions, if any, and changes
in stock price per share. Total return on net asset value is the combination
of reinvested dividend income, reinvested capital gains, if any, and changes
in net asset value per share. Total returns are not annualized.
***Includes $(.19) effect of the Fund's Rights Offering of shares at a price
below NAV and costs of the offering.
#The amounts shown are based on Common share equivalents.
##Ratios do not reflect the effect of dividend payments to Preferred
shareholders.
+For the five months ended October 31, 1992.
++For the period July 18, 1988 to May 31, 1989.
A-3
<PAGE>
THE FUND
The Fund is a closed-end, diversified management investment company
registered under the Investment Company Act of 1940 (the "1940 Act"). The Fund
was organized as a Minnesota corporation on April 15, 1988, and may issue up
to 1 million shares of MuniPreferred and up to 200 million shares of common
stock. In 1988, the Fund issued 50,000,000 shares of common stock. In November
1988, the Fund issued 3,500 shares of Remarketed Preferred Stock in five
offerings (700 shares each of Series A, B, C, D, and E). In January, 1994, the
Fund issued rights to subscribe for an aggregate of 17,695,926 additional
shares of common stock. 30,187,275 rights were subscribed for, which were
converted into 10,062,425 shares of common stock. On August 1, 1995, the Fund
conducted a 4-for-1 preferred stock split which was effected by dividing each
outstanding share of Remarketed Preferred Stock into four shares, with a
liquidation preference of $25,000 per share, for an aggregate of 14,000
Remarketed Preferred shares. On August 12, 1997, the terms of the Fund's
preferred stock were amended, converting the Remarketed Preferred Stock into
MuniPreferred stock and converting Series A, B, C, D, and E into Series M, T,
W, TH, and F, respectively. In September and October, 1997, the Fund issued an
additional 5,000 shares of MuniPreferred in five offerings (1,000 shares each
of Series M, T, W, TH, and F). The Fund had 63,785,431 shares of common stock
outstanding as of March 1999. The common stock trades on the New York Stock
Exchange under the symbol "NPI." The Fund's principal office is located at 333
West Wacker Drive, Chicago, Illinois 60606, and its telephone number is (800)
257-8787.
The table below provides information on MuniPreferred shares since 1989.
<TABLE>
<CAPTION>
Amount Outstanding
Year ended Exclusive of Treasury Asset Coverage Involuntary Liquidating
5/31 Securities Per Share* Preference Per Share
---------- --------------------- -------------- -----------------------
<S> <C> <C> <C>
1989+.......... 3,500 $311,186 $100,000
1990........... 3,500 $311,533 $100,000
1991........... 3,500 $322,029 $100,000
1992........... 3,500 $333,440 $100,000
<CAPTION>
Year ended
10/31
----------
<S> <C> <C> <C>
1992++......... 3,500 $335,237 $100,000
1993........... 3,500 $346,590 $100,000
1994........... 3,500 $357,774 $100,000
1995........... 14,000 $ 93,834 $ 25,000
1996........... 14,000 $ 93,157 $ 25,000
1997........... 19,000 $ 76,298 $ 25,000
1998........... 19,000 $ 77,566 $ 25,000
</TABLE>
- --------
*Calculated by dividing net assets by the number of MuniPreferred shares
outstanding.
+For the period July 18, 1988 to May 31, 1989.
++For the five months ended October 31, 1992.
The following provides information about the Fund's outstanding shares as
of March 31, 1999:
<TABLE>
<CAPTION>
Amount Held by the
Fund or for its
Title of Class Amount Authorized Account Amount Outstanding
-------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Common.............. 200,000,000 0 63,785,431
MuniPreferred....... 1,000,000 0 19,000
</TABLE>
USE OF PROCEEDS
The Fund will use the net proceeds of the offering, about $ after
payment of the sales load and offering costs, to buy municipal bonds (see
"Investment Objectives and Policies--Portfolio Investments"). The Fund expects
to invest almost all of the proceeds in long-term municipal bonds within eight
to ten weeks after the offering concludes, but if it cannot, it will invest in
municipal bonds with shorter effective maturities or in high quality, short-
term tax-exempt securities. In the unlikely event that the Fund cannot find
suitable short-term, tax-exempt securities, the Fund may buy short-term
taxable securities. The income on these securities would be subject to regular
Federal income tax.
A-4
<PAGE>
CAPITALIZATION
(Unaudited)
The following table sets forth the capitalization of the Fund as of October
31,1998 and as adjusted to give effect to the issuance of the shares of New
MuniPreferred offered hereby.
<TABLE>
<CAPTION>
Actual As Adjusted
-------------- --------------
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, $25,000 stated value per share,
at liquidation value;
1,000,000 shares authorized (19,000 shares
issued and 21,000 shares issued, as adjusted,
respectively)................................. $ 475,000,000 $ 525,000,000
Common Stock, $.01 per value per share,
200,000,000 shares authorized, 63,785,431
shares outstanding*............................ 637,854 637,854
Paid-in surplus................................. 901,946,522 901,332,622
Balance of undistributed net investment income.. 1,479,619 1,479,619
Accumulated net realized gain (loss) from
investment transactions........................ 5,689,364 5,689,364
Net unrealized appreciation of investments...... 89,002,058 89,002,058
-------------- --------------
Net Assets................................... $1,473,755,417 $1,523,141,517
============== ==============
</TABLE>
- --------
*None of these outstanding shares are held by or for the account of the Fund.
A-5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is a high level of current income exempt
from regular Federal income tax, consistent with the preservation of capital.
The Fund seeks to achieve its investment objective by investing
substantially all of its assets (more than 80%) in a diversified portfolio of
tax-exempt municipal bonds rated at the time of purchase within the four
highest grades (Baa or BBB or better) by Moody's or Standard and Poor's, except
that the Fund may invest up to 20% of its assets in unrated municipal bonds
which, in Nuveen Advisory's opinion, have credit characteristics equivalent to,
and are of comparable quality to, municipal bonds rated Baa or BBB or better.
The Fund will not invest in any rated municipal bonds that are rated lower than
Baa by Moody's or BBB by Standard & Poor's at the time of purchase. Municipal
bonds rated Baa or BBB or better are considered "investment grade" securities.
Bonds rated Baa are considered medium grade obligations that lack outstanding
investment characteristics and in fact have speculative characteristics as
well, while municipal bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. See Appendix A to the Statement of
Additional Information for a description of securities ratings.
Underrated municipal bonds are those municipal bonds whose ratings do not,
in Nuveen Advisory's opinion, reflect their true value. They may be underrated
because of the time that has elapsed since their last ratings, or because
rating agencies have not fully taken into account positive factors, or for
other reasons. Undervalued municipal bonds are those bonds that, in Nuveen
Advisory's opinion, are worth more than their market value. They may be
undervalued because there is a temporary excess of supply in that particular
sector (such as hospital bonds, or bonds of a particular municipal issuer).
Nuveen Advisory may buy such a bond even if the value of that bond is
consistent with the value of other bonds in that sector. Municipal bonds also
may be undervalued because there has been a general decline in the market price
of municipal bonds for reasons that do not apply to the particular municipal
bonds that Nuveen Advisory considers undervalued. Nuveen Advisory believes that
the prices of these municipal bonds should ultimately reflect their true value.
Therefore, the Fund's secondary investment objective of enhancing portfolio
value relative to the municipal bond market refers to the Fund's objective of
attempting to realize above-average capital appreciation in a rising market,
and to experience less than average capital losses in a declining market.
Capital appreciation, alone, is not an investment objective. Rather, the Fund
seeks to enhance portfolio value relative to the municipal bond market by
prudently selecting municipal bonds, regardless of whether the market is rising
or declining.
Portfolio Investments
Except to the extent that the Fund buys temporary investments as described
in Part B, the Fund will, as a fundamental policy, invest substantially all of
its assets (more than 80%) in tax-exempt municipal bonds that are rated at the
time of purchase within the four highest grades (Baa or BBB or better) by
Moody's or Standard and Poor's, except that the Fund may invest up to 20% of
its assets in unrated municipal bonds which, in Nuveen Advisory's opinion, have
credit characteristics equivalent to, and are of comparable quality to,
municipal bonds so rated. These policies and the Fund's investment objective
are fundamental policies, which cannot be changed without the approval of the
holders of a majority of the outstanding shares of common shares and
MuniPreferred shares, voting together, and of the holders of a majority of the
outstanding MuniPreferred shares, voting separately. For this purpose, "a
majority of the outstanding shares" means the vote of (1) 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 (2) more than 50% of the shares, whichever
is less.
The Fund is diversified for purposes of the 1940 Act. Consequently, as to
75% of its total assets, the Fund may not invest more than 5% of its total
assets in the securities of any single issuer.
A-6
<PAGE>
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 New
MuniPreferred shares set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc........................................
A.G. Edwards & Sons, Inc........................................
BT Alex. Brown Incorporated.....................................
Goldman, Sachs & Co.............................................
John Nuveen & Co. Incorporated..................................
Legg Mason Wood Walker, Incorporated............................
PaineWebber Incorporated........................................
Prudential Securities Incorporated..............................
Raymond James & Associates, Inc ................................
-----
Total......................................................... 2,000
=====
</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 New
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 New 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 makers 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 the underwriters may be required to make for any of
those liabilities.
LEGAL OPINIONS
Morgan, Lewis & Bockius LLP, Washington, D.C., will pass on certain legal
matters for the Fund, and Simpson Thacher & Bartlett will pass on certain
legal matters for the underwriters. Morgan, Lewis & Bockius LLP and Simpson
Thacher & Bartlett will rely as to certain matters under Minnesota law on the
opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota.
A-7
<PAGE>
EXPERTS
The financial statements of the Fund at October 31, 1998 and the selected
per share data and ratios set forth under the caption "Financial Highlights"
for the period 1988 to October 31, 1998, appearing in Part A of this
Prospectus, have been audited by Ernst & Young LLP, Sears Tower, 223 South
Wacker Drive, Chicago, Illinois 60606, independent auditors, as set forth on
their report appearing elsewhere in this Registration Statement, and are
included in reliance upon that report given upon Ernst & Young's authority 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.
A-8
<PAGE>
NUVEEN
EXCHANGE-TRADED FUNDS
MuniPreferred(R) Shares
Prospectus Part B
The Prospectus offering MuniPreferred shares for a Nuveen closed-end fund
(each, a "Fund") is divided into two parts. Part A of the Prospectus relates
exclusively to a particular closed-end fund and provides specific information
about the Fund's portfolio, investment objectives, and financial highlights.
Part B of the Prospectus provides a more general description of the municipal
bonds in which each Fund invests and related risks, and more general
information about MuniPreferred shares, including the auction at which
MuniPreferred shares are traded, dividends and rate periods, tax status, and
voting rights. You should read both parts of the Prospectus and retain them
for future reference. Except as provided in Part A or this Part B, the
information contained in this Part B will apply to each Fund.
Neither the Securities and Exchange Commission 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
Municipal Bonds
States, local governments and municipalities issue municipal bonds to raise
money for public purposes such as building public facilities, refinancing
outstanding obligations, and financing internal operating expenses. Municipal
bonds are generally either general obligation bonds, which are backed by the
full faith and credit of the issuer and may be repaid from any revenue source,
or revenue bonds, which may be repaid only from the revenues of a specific
facility or source. Each Fund also may buy municipal bonds that represent
interests in lease obligations. These bonds carry special risks because the
issuer may not be required to appropriate money annually to make payments
under the lease. To reduce this risk, a Fund will only buy these bonds where
the issuer has a strong incentive to continue making appropriations until the
municipal bond matures. The Funds do not have any limits on investing in lease
obligations that do not contain a "nonappropriation" clause. A Fund may invest
no more than 10% of its net assets in municipal bonds issued by U.S.
possessions or territories, which pay interest exempt from regular Federal
income tax.
Each Fund may buy municipal bonds that pay a variable or floating rate of
interest that changes with changes in specified market rates or indices, such
as a bank prime rate or a tax-exempt money market index. As used in this
Prospectus, the term "municipal bonds" includes municipal securities with
relatively short-term maturities. Some of these short-term securities may be
variable or floating rate securities. The Funds, however, intend to emphasize
investments in municipal bonds with long- or intermediate-term maturities.
Yields on municipal bonds depend on many factors, including the condition
of the general money market and the municipal bond market, the size of a
particular offering, and the maturity and rating of a particular municipal
bond. Moody's and Standard & Poor's ratings represent their opinions of the
quality of a particular municipal bond, but these ratings are general and are
not absolute quality standards. Therefore, municipal bonds with the same
maturity, coupon, and rating may have different yields, while municipal bonds
with the same maturity and coupon and different ratings may have the same
yield. The market value of municipal bonds will vary with changes in interest
rates and in the ability of their issuers to make interest and principal
payments.
Obligations of municipal bond issuers are subject to bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors.
These obligations also may be subject to future Federal or state laws or
referenda that extend the time to payment of interest and/or principal, or
that constrain the enforcement of these obligations or the power of
municipalities to levy taxes. Legislation or other conditions may materially
affect the power of a municipal bond issuer to pay interest and/or principal
when due.
B-1
<PAGE>
Portfolio Investments
Each Fund buys municipal bonds with different maturities and intends to
maintain an average portfolio maturity of 15 to 30 years, although this may be
shortened depending on market conditions. As a result, a Fund's portfolio may
include long-term and intermediate-term municipal bonds. If the long-term
municipal bond market is unstable, a Fund may temporarily invest up to 100% of
its assets in temporary investments. Temporary investments are high quality,
generally uninsured, short-term municipal bonds that may either be tax-exempt
or taxable. Each Fund will buy taxable temporary investments only if suitable
tax-exempt temporary investments are not available at reasonable prices and
yields. Each Fund will invest only in taxable temporary securities that are
U.S. Government securities or corporate debt securities rated within the
highest grade by Moody's or Standard & Poor's, and that mature within one year
from the date of issuance. The Funds' policies on securities ratings only
apply when the Fund buys a security, and a Fund is not required to sell
securities that have been downgraded. See Appendix A to the Statement of
Additional Information for a description of securities ratings. Each Fund also
may invest in taxable temporary investments that are certificates of deposit
from U.S. banks with assets of at least $1 billion, or repurchase agreements.
Each Fund is required to allocate taxable income on temporary investments, if
any, proportionately between common shares and MuniPreferred shares, based on
the percentage of total dividends distributed to each class for that year.
Insured Funds: Municipal Bond Insurance
The following discussion relates only to the following Funds: Nuveen
Insured Quality Municipal Fund, Inc.; Nuveen Insured Municipal Opportunity
Fund, Inc.; Nuveen Premier Insured Municipal Income Fund, Inc.; Nuveen Insured
Premium Income Municipal Fund 2; Nuveen New York Select Quality Municipal
Fund, Inc.; Nuveen New York Investment Quality Municipal Fund, Inc., and
Nuveen New York Quality Income Municipal Fund, Inc.
Each insured municipal bond a Fund acquires will be covered by a specific
insurance policy (either original issue insurance or secondary market
insurance) or portfolio insurance. While each Fund has obtained several
policies of portfolio insurance, a Fund may emphasize investments in municipal
bonds insured under specific insurance policies. Each Fund has obtained
portfolio insurance from the insurers described in Appendix C to the Statement
of Additional Information and may in the future obtain portfolio insurance
from other insurers. In any event, each Fund has obtained and in the future
will only obtain portfolio insurance issued by insurers whose claims-paying
ability Moody's rates "Aaa" or Standard & Poor's rates "AAA." There is no
limit on the percentage of a Fund's assets that may be invested in municipal
bonds insured by any one insurer.
Municipal bonds covered by a specific insurance policy, rather than by
portfolio insurance, will be rated "Aaa" by Moody's or "AAA" by Standard &
Poor's, because of the rating of the insurer's claims-paying ability.
Municipal bonds covered by portfolio insurance, however, will be rated based
primarily on the credit characteristics of the issuer, without regard to the
portfolio insurance, and generally will be rated below "Aaa" or "AAA." While a
Fund holds a municipal bond covered by portfolio insurance, it will,
effectively, be of the same credit quality as a municipal bond covered by a
specific insurance policy.
Each Fund's policy of buying municipal bonds insured by insurers whose
claims-paying ability is rated "Aaa" or "AAA" applies only when the Fund buys
the municipal bond. If either rating agency downgrades an insurer's claims-
paying ability, the Fund is not required to sell bonds covered by that
insurer's policies. If a rating agency downgrades its rating of an insurer, it
likely would downgrade its rating of a municipal bond covered by that
insurer's original issuance insurance or secondary market insurance. Municipal
bonds in the Fund's portfolio covered by that insurer's portfolio insurance
also would be downgraded. Moody's and Standard & Poor's continually assess the
claims-paying ability of insurers and the creditworthiness of municipal bond
issuers, and the Fund cannot guarantee that Moody's and Standard & Poor's will
not downgrade their ratings. The value of municipal bonds covered by portfolio
insurance that are in default or in significant risk of default will be
determined by separately establishing a value for the municipal bond and a
value for the portfolio insurance.
B-2
<PAGE>
Original Issue Insurance. The issuer of municipal bonds or a third party
buys original issue insurance for a particular issue of municipal bonds at the
time the municipal bonds are issued. Under this insurance, the insurer
unconditionally guarantees to the holder of the municipal bond the timely
payment of principal and interest when and as these payments become due if the
issuer does not pay them. However, if the due date of the principal is
accelerated because of mandatory or optional redemption (other than
acceleration because of a mandatory sinking fund payment), default or
otherwise, the payments guaranteed may be made in the amounts and at the times
as principal payments would have been due had there not been any acceleration.
The insurer is responsible for these payments less any amounts the holders
receive from any trustee for the municipal bonds issuer or from any other
source. Original issue insurance does not guarantee the payment of any
redemption premium (except for certain premium payments for certain small
issue industrial development and pollution control municipal bonds), the value
of the Fund's shares or the market value of municipal bonds, or payments of
any tender purchase price upon the tender of the municipal bonds. Original
issue insurance also does not insure against nonpayment of principal or
interest on municipal bonds resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for these bonds.
Original issue insurance remains in effect as long as the municipal bonds
it covers remain outstanding and the insurer remains in business, regardless
of whether the Fund ultimately disposes of these municipal bonds.
Consequently, original issue insurance may be considered to represent an
element of market value of the municipal bonds so insured, but the exact
effect, if any, of this insurance on the market value cannot be estimated.
Secondary Market Insurance. After a municipal bond is issued, the Fund or a
third party may purchase insurance on that security. Secondary market
insurance generally provides the same type of coverage as original issue
insurance and, as with original issue insurance, secondary market insurance
remains in effect as long as the municipal bonds it covers remain outstanding
and the insurer remains in business, regardless of whether the Fund ultimately
disposes of these municipal bonds.
One of the purposes of acquiring secondary market insurance for a
particular municipal bond is to enable the Fund to enhance the value of the
security. The Fund, for example, might seek to buy a particular municipal bond
and obtain secondary market insurance for it if, in Nuveen Advisory's opinion,
the market value of the security, as insured, would exceed the current value
of the security without insurance plus the cost of the secondary market
insurance. Similarly, if the Fund owns but wishes to sell a municipal bond
that is then covered by portfolio insurance, the Fund might seek to obtain
secondary market insurance for it if, in Nuveen Advisory's opinion, the net
proceeds of the Fund's sale of the security, as insured, would exceed the
current value of the security plus the cost of the secondary market insurance.
In determining whether to insure municipal bonds the Fund owns, an insurer
will apply its own standards, which correspond generally to the standards it
has established for determining the insurability of new issues of municipal
bonds. See "Original Issue Insurance" above.
Portfolio Insurance. Each Fund has purchased several policies of portfolio
insurance, each of which would guarantee the payment of principal and interest
on specified eligible municipal bonds the Fund has bought. Except as described
below, portfolio insurance generally provides the same type of coverage as
original issue insurance or secondary market insurance. Municipal bonds
insured under one portfolio insurance policy would generally not be insured
under any other policy the Fund buys. A municipal bond is eligible for
coverage under a policy if it meets certain requirements of the insurer. If a
municipal bond is already covered by original issue insurance or secondary
market insurance, then the security is not required to be additionally insured
under any portfolio insurance policy that the Fund may buy.
Each portfolio insurance policy will terminate for any municipal bond that
has been redeemed or that the Fund has sold, on the date of redemption or the
settlement date of sale, and an insurer will not have any liability thereafter
under a policy for any municipal bond, except that if the redemption date or
settlement date occurs after a record date and before the related payment date
for any municipal bond, the policy will terminate for that municipal bond on
the business day immediately following the payment date.
One or more portfolio insurance policies may provide the Fund, under an
irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance for a municipal bond that the Fund
B-3
<PAGE>
will sell. The Fund would exercise the right to obtain permanent insurance
upon payment of a single, predetermined insurance premium payable from the
sale proceeds of the municipal bond. The Fund expects to exercise the right to
obtain permanent insurance for a municipal bond only if, in Nuveen Advisory's
opinion, upon the exercise the net proceeds from the sale of the municipal
bond, as insured, would exceed the proceeds from the sale of the security
without insurance.
The permanent insurance premium for each municipal bond is determined based
upon the insurability of each security as of the date the Fund originally
bought the security. This premium will not be increased or decreased for any
change in the security's creditworthiness, unless the security is in default
as to payment of principal or interest, or both. If this happens, the
permanent insurance premium will be subject to an increase predetermined at
the date of the Fund's purchase.
Each Fund generally intends to retain any insured bonds covered by
portfolio insurance that are in default or in significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted bond and the market value of similar
bonds of minimum investment grade (that is, rated "Baa" or "BBB") that are not
in default. In certain circumstances, however, Nuveen Advisory may determine
that an alternative value for the insurance, such as the difference between
the market value of the defaulted bond and either its par value or the market
value of similar bonds that are not in default or in significant risk of
default, is more appropriate. To the extent that the Fund holds defaulted
municipal bonds, it may be limited in its ability to manage its investment
portfolio and to purchase other bonds. Except as described above for bonds
covered by portfolio insurance that are in default or subject to significant
risk of default, the Fund will not place any value on the insurance in valuing
the municipal bonds it holds.
Because each portfolio insurance policy will terminate for a particular
covered bond on the date a Fund sells that bond, the insurer will be liable
only for those payments of principal and interest that are then due and owing
(unless the Fund obtains permanent insurance). Portfolio insurance will not
enhance the marketability of the Fund's bonds, whether or not the bonds are in
default or in significant risk of default. On the other hand, because original
issue insurance and secondary market insurance will remain in effect as long
as the municipal bonds they cover are outstanding, these insurance policies
may enhance the marketability of these bonds even when they are in default or
in significant risk of default, but the exact effect, if any, on
marketability, cannot be estimated. Accordingly, the Fund may determine to
retain or, alternatively, to sell municipal bonds covered by original issue
insurance or secondary market insurance that are in default or in significant
risk of default.
Each Fund generally pays the premiums for a portfolio insurance policy
monthly, and premiums are adjusted for purchases and sales of municipal bonds
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums the Fund pays which, in turn,
will depend upon the characteristics of the covered municipal bonds. If the
Fund were to buy secondary market insurance for any municipal bond then
covered by a portfolio insurance policy, the coverage and the obligation to
pay monthly premiums under the portfolio policy would cease.
Investment Restrictions
The following investment restrictions are fundamental policies of each Fund
which may not be changed without the approval of the holders of a majority of
the outstanding shares of common and MuniPreferred shares (voting together as
a single class) and of the holders of a majority of the outstanding shares of
MuniPreferred shares (voting as a separate class).
Each Fund may not:
. Invest more than 25% of its total assets in securities of issuers in any
one industry, other than municipal bonds issued by states and local
governments and their instrumentalities or agencies (not including those
backed only by the assets and revenues of non-governmental users), and
municipal bonds issued or guaranteed by the U.S. Government or its
instrumentalities or agencies; and
. Invest more than 5% of its total assets in securities of any one issuer
(not including securities of the U.S. Government and its agencies, or the
investment of 25% of the Fund's total assets).
B-4
<PAGE>
See the Statement of Additional Information for additional fundamental and
non-fundamental policies of each Fund.
Moody's and Standard & Poor's, in connection with establishing and
maintaining ratings on the Fund's MuniPreferred shares, restrict a Fund's
ability to borrow money, sell securities short, tend securities, buy and sell
futures contracts, and write put or call options. Each Fund does not expect
that these restrictions will adversely affect its ability to achieve its
investment objectives. These restrictions are not fundamental policies and a
Fund may change them without shareholder approval.
Except to the extent that a Fund invests in temporary investments, each
Fund will invest substantially all of its assets in municipal bonds that pay
interest that is exempt from regular Federal income tax. No Fund has set any
limit on the percentage of its portfolio that may be invested in municipal
bonds subject to the Federal alternative minimum tax. Because a substantial
part of the income from these bonds is expected to be subject to the Federal
alternative minimum tax, MuniPreferred shares may not be a suitable investment
for shareholders subject to this tax. Suitability will depend on a comparison
of the Fund's likely after-tax yield with the likely after-tax yield from
comparable tax-exempt investments not subject to the alternative minimum tax,
and with fully taxable investments, in light of an investor's tax position.
Special considerations apply to corporate shareholders. Dividends paid on
MuniPreferred shares may include an allocated portion of net capital gain or
other Federal taxable income. See "Tax Matters" and "The Auction--Auction
Dates; Advance Notice of Allocation of Taxable Income."
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.
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 of return on your shares than the market rate. See "Description of
MuniPreferred" and "The Auction--Summary of Auction Procedures" and "--
Acceptance or Rejection of Orders and Allocation of Shares."
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 Standard & Poor's assign
ratings of "Aaa" or "AAA" to MuniPreferred shares (except for MuniPreferred
shares of the Nuveen Michigan Quality Income Municipal Fund, Inc., which are
assigned ratings of Aal and AAA), 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
B-5
<PAGE>
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.
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. So long as the return on the Fund's long-term bond
portfolio, net of Fund expenses, exceeds MuniPreferred dividend rates, the
investment of the proceeds of the issuance of MuniPreferred will generate more
income than is needed to pay MuniPreferred dividends, and the excess will be
used to pay higher dividends on common shares. Dividends paid to MuniPreferred
shareholders could, however, exceed the income from the portfolio securities
purchased with the proceeds from the sale of MuniPreferred. Short-term
interest rates may fluctuate. If short-term rates exceed the net rate of
return on the Fund's bond portfolio, the Fund could invest up to 100% of its
assets in temporary, short-term instruments. Only if MuniPreferred dividend
rates were to greatly exceed the Fund's net portfolio returns would the Fund
need to sell municipal bonds to pay MuniPreferred dividends, which would tend
to reduce the amount of the assets standing behind the MuniPreferred shares.
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. If rating agencies lower their ratings of municipal bonds in a
Fund's portfolio, the value of those bonds could decline, which could
jeopardize the rating agencies' ratings of MuniPreferred shares. In that case,
the Fund may be forced to sell downgraded portfolio securities (possibly at a
loss) and buy higher-rated securities to replace them. In general, lower-rated
municipal bonds are perceived to carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments. Credit
risk is reduced because of the Fund's asset coverage ratio for MuniPreferred
shares. See "Description of MuniPreferred--Asset Maintenance and Rating Agency
Guidelines."
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. 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
made 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.
State Concentration Risk. Some of the Funds invest primarily in bonds from
a single state. These Funds bear investment risk from the economic, political
or regulatory changes that could adversely affect municipal bond issuers in
that state and therefore the value of the Fund's investment portfolio. See
Part A of the Prospectus for a discussion of the specific risks for each
state.
B-6
<PAGE>
MANAGEMENT OF THE FUND
Board of Directors
Each Fund's Board of Directors is responsible for the management of the
Fund, including general supervision of Nuveen Advisory's duties.
Investment Adviser and Portfolio Managers
Nuveen Advisory was organized in 1976 and is a wholly-owned subsidiary of
John Nuveen & Co. Incorporated ("Nuveen"). The offices of Nuveen Advisory and
Nuveen are located at 333 West Wacker Drive, Chicago, Illinois 60606. Nuveen
Advisory is responsible for the selection and ongoing monitoring of the bonds
in each Fund's investment portfolio. Nuveen Advisory also administers each
Fund's business affairs and provides office facilities, equipment and certain
administrative services. Nuveen Advisory may buy municipal bonds or other
portfolio investments for a Fund from an underwriting syndicate of which
Nuveen or its affiliates is a member under conditions set out in Rule l0f-3
under the 1940 Act. A Fund also may buy or sell municipal bonds or other
portfolio investments from or to another Fund or account managed by Nuveen
Advisory or an affiliate, under conditions set out in Rule 17a-7 under the
1940 Act.
Founded in 1898, Nuveen currently sponsors 100 investment company
portfolios with approximately $39 billion of assets under management. Nuveen
is a subsidiary of The John Nuveen Company, which is a majority-owned
subsidiary of The St. Paul Companies.
Portfolio Managers
Michael Davern, a Vice President and Portfolio Manager of Nuveen Advisory
(since 1997), and prior thereto Vice President and Portfolio Manager of
Flagship Financial Inc., manages Nuveen Michigan Quality Income Municipal
Fund, Inc. (since 1993), and Nuveen Texas Quality Income Municipal Fund (since
1998). Mr. Davern manages eight Nuveen-sponsored open-end and seven other
Nuveen-sponsored closed-end investment companies.
William Fitzgerald, a Vice President (since 1995) and Portfolio Manager
(since 1998) of Nuveen Advisory, manages Nuveen Municipal Market Opportunity
Fund, Inc. (since 1990), Nuveen Quality Income Municipal Fund, Inc. (since
1991), Nuveen California Performance Plus Municipal Fund, Inc. (since 1991),
Nuveen California Municipal Market Opportunity Fund, Inc. (since 1991), Nuveen
California Investment Quality Municipal Fund, Inc. (since 1990), Nuveen
California Select Quality Municipal Fund, Inc. (since 1998), and Nuveen
California Quality Income Municipal Fund, Inc. (since 1991). Mr. Fitzgerald
manages three Nuveen-sponsored open-end and three other Nuveen-sponsored
closed-end investment companies.
J. Thomas Futrell, a Vice President (since 1991) and Portfolio Manager of
Nuveen Advisory (since 1986), manages Nuveen Premium Income Municipal Fund,
Inc. (since 1988), Nuveen Investment Quality Municipal Fund, Inc. (since
1990), and Nuveen New Jersey Investment Quality Municipal Fund, Inc. (since
1998). Mr. Futrell manages five Nuveen-sponsored open-end and four other
Nuveen-sponsored closed-end investment companies.
Richard Huber, a Vice President and Portfolio Manager of Nuveen Advisory
(since 1997), and prior thereto Vice President and Portfolio Manager of
Flagship Financial Inc., manages Nuveen Municipal Advantage Fund, Inc. (since
1998) and Nuveen Select Quality Municipal Fund, Inc. (since 1998). Mr. Huber
manages three Nuveen-sponsored open-end investment companies.
Steven Krupa, a Vice President and Portfolio Manager of Nuveen Advisory
(since 1990), manages Nuveen Insured Municipal Opportunity Fund, Inc. (since
1991), Nuveen Insured Quality Municipal Fund, Inc. (since 1991), Nuveen
Premier Insured Municipal Income Fund, Inc. (since 1998), and Nuveen Insured
Premium Income Municipal Fund 2 (since 1998). Mr. Krupa manages one Nuveen-
sponsored open-end investment company.
Edward Neild, a Vice President (since 1996), and prior thereto Assistant
Vice President (since 1993) of Nuveen Advisory, manages Nuveen Premium Income
Municipal Fund 4, Inc. (since 1993). Mr. Neild manages
B-7
<PAGE>
one other Nuveen-sponsored closed-end investment company. He is Managing
Director of Nuveen Investment Advisory Services, and has overall supervisory
responsibility for Nuveen's investment and management activity.
Thomas O'Shaughnessy, an Assistant Vice President (since 1998) and
Portfolio Manager of Nuveen Advisory since 1991, manages Nuveen Pennsylvania
Investment Quality Municipal Fund (since 1991), Nuveen Florida Investment
Quality Municipal Fund (since 1991), and Nuveen Florida Quality Income
Municipal Fund (since 1991). Mr. O'Shaughnessy manages seven Nuveen-sponsored
open-end and three other Nuveen-sponsored closed-end investment companies.
Stephen Peterson, a Vice President (since 1997) and Portfolio Manager of
Nuveen Advisory (since 1991), manages Nuveen Premier Municipal Income Fund,
Inc. (since 1992), Nuveen Premium Income Municipal Fund 2, Inc. (since 1994),
Nuveen Performance Plus Municipal Fund, Inc. (since 1998), Nuveen New York
Select Quality Municipal Fund, Inc. (since 1999), Nuveen New York Quality
Income Municipal Fund, Inc. (since 1999), Nuveen New York Performance Plus
Municipal Fund, Inc. (since 1999), and Nuveen New York Investment Quality
Municipal Fund, Inc. (since 1999). Mr. Peterson manages one Nuveen-sponsored
open-end and two other Nuveen-sponsored closed-end investment companies.
For its services, Nuveen Advisory is paid an annual management fee for each
Fund, as a percentage of average daily net asset value of each Fund, according
to the following schedule:
Management Fees
<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................................. .5875%
</TABLE>
In addition to the management fee, each Fund pays all other costs and
expenses of its operations, including fees to third-party service providers
such as the custodian and transfer agent, the compensation of its directors
(other than those affiliated with Nuveen Advisory), legal and accounting fees,
and printing expenses.
Legal Proceedings
On June 21, 1996, a lawsuit was filed against Nuveen, Nuveen Advisory, six
Nuveen-sponsored closed-end funds (Nuveen Massachusetts Premium Income
Municipal Fund (ticker symbol NMT), Nuveen Insured Municipal Opportunity Fund,
Inc. (NIO), Nuveen Insured Premium Income Municipal Fund, Inc. (NPE), Nuveen
Premium Income Municipal Fund 2, Inc. (NPM), Nuveen Insured Premium Income
Municipal Fund 2 (NPX), and Nuveen Premium Income Municipal Fund 4, Inc.
(NPT)), and two of the funds' former directors (the "Defendants"). The suit,
which is pending in federal district court in the Northern District of
Illinois, seeks unspecified damages, an injunction, and other relief. The
plaintiffs allege that the funds' directors and Nuveen Advisory breached their
fiduciary duty in connection with alleged undisclosed conflicts of interest
relating to the maintenance of leverage in the funds and the alleged financial
interest of the Defendants. The plaintiffs also allege various
misrepresentations and omissions in prospectuses and share holder reports
about the use of leverage through the issuance and auctioning of MuniPreferred
and the Defendants' alleged financial interest in maintaining leverage, and
relating to expense ratios. The plaintiffs filed a motion to certify a
plaintiff class (which would include current and former shareholders of all
Nuveen leveraged closed-end funds) and a motion to certify a defendant class
(which would include the same leveraged closed-end funds). On March 30, 1999,
the court entered a memorandum opinion and order granting the Defendants'
motion to dismiss four of the plaintiffs' counts; denying the Defendants'
motion to dismiss the remaining count (breach of fiduciary duty under Section
36(b) of the 1940 Act) as to Nuveen Advisory, and granting the same motion as
to the remaining Defendants; and denying the plaintiffs' motion to certify a
plaintiff class and a defendant class.
B-8
<PAGE>
CERTAIN TRADING STRATEGIES OF THE FUNDS
When-Issued or Delayed-Delivery Securities. Each Fund may buy municipal
bonds on a when-issued or delayed-delivery basis, paying for and taking
delivery of the bonds at a later date, normally within 15 to 45 days of the
trade date. These transactions may be more risky than transactions in which a
Fund pays for and takes delivery of bonds within several days of the trade
date, because the value of the bond to be purchased may decline before the
delivery date. When a Fund buys on a when-issued or delayed-delivery basis, it
establishes a separate account with its custodian that consists at all times
of cash, cash equivalents, or liquid securities having a market value at least
equal to the amount of the bonds the Fund has committed to buy. A "when-
issued" municipal bond will be covered under a portfolio insurance policy upon
the security's settlement date. See "Insured Funds: Municipal Bond Insurance."
Portfolio Trading and Turnover Rate. Each Fund may buy and sell municipal
bonds to accomplish its investment objective(s) in relation to actual and
anticipated changes in interest rates. A Fund also may sell one municipal bond
and buy another of comparable quality at about the same time to take advantage
of what Nuveen Advisory believes to be a temporary price disparity between the
two bonds that may result from imbalanced supply and demand. A Fund also may
engage in a limited amount of short-term trading, consistent with its
investment objectives. A Fund may sell securities in anticipation of a market
decline (a rise in interest rates) or buy securities in anticipation of a
market rise (a decline in interest rates) and later sell them, but the Fund
will not engage in trading solely to recognize a gain. A Fund will attempt to
achieve its investment objectives by prudently selecting municipal bonds with
a view to holding them for investment. Each Fund expects, though it cannot
guarantee, that its annual portfolio turnover rate generally will not exceed
100%. Turnover rate will not be a limiting factor when a Fund deems it
desirable to buy or sell securities, so depending on market conditions, the
turnover rate may exceed 100% in some years.
DESCRIPTION OF MUNIPREFERRED
General
The following is a brief description of the terms of the New MuniPreferred
shares. This is not a complete description and is subject to and entirely
qualified by reference to a Fund's Articles of Incorporation or Declaration of
Trust and the Statement of Preferences. These documents are filed with the
Securities and Exchange Commission as exhibits to the Fund's registration
statement of which this Prospectus is a part and the Statement of Preferences
(the "Statement") also is Appendix B to the Fund's Statement of Additional
Information. Copies may be obtained as described under "Available
Information." Many of the terms in this section have a special meaning. Any
terms in this section not defined have the meaning assigned to them in the
Statement of Preferences.
MuniPreferred shares are shares of preferred stock that pay dividends based
on a rate set at auction. The auction usually is held weekly, but may be held
less frequently. MuniPreferred shares may be bought and sold at these auctions
for $25,000 per share. Shares also may trade in the secondary market.
MuniPreferred shareholders, voting separately, elect at least two of a Fund's
directors and will elect a majority of the Fund's directors in the unlikely
event that the Fund fails to pay dividends to MuniPreferred shareholders for
two years. MuniPreferred shares have a liquidation preference of $25,000 per
share plus accumulated but unpaid dividends, whether or not earned or
declared.
MuniPreferred shares are fully paid and non-assessable when issued and have
no preemptive, conversion, or exchange rights or rights to cumulative voting.
New MuniPreferred shares will rank equally with shares of all other
MuniPreferred series of a Fund, and with any other series of preferred stock
of the Fund, as to payment of dividends and the distribution of the Fund's
assets upon liquidation.
As long as either Moody's or Standard & Poor's is rating MuniPreferred
shares, a Fund may, without the vote of MuniPreferred shareholders, issue
additional series of MuniPreferred only if (l) any additional series ranks
equally with the outstanding MuniPreferred shares as to payment of dividends
and distribution of assets on liquidation; and (2) the Fund obtains written
confirmation from Moody's and/or Standard & Poor's that issuing additional
series of MuniPreferred would not impair the rating for outstanding
MuniPreferred shares.
B-9
<PAGE>
Dividends and Rate Periods
General. The following is a general description of dividends and rate
periods. The calculation of dividends and rate periods is complex and subject
to special rules. See Appendix B to the Statement of Additional Information
for a description of the terms used in this section and a more detailed
discussion of this topic.
The dividend rate for the initial rate period for New MuniPreferred shares
will be the rate set out on the cover of Part A of the Prospectus for a
particular Fund. For subsequent rate periods, New MuniPreferred shares will
pay dividends based on a rate set at these auctions, normally held weekly, but
the rate set at the auction will not exceed the Maximum Rate. See "Description
of MuniPreferred--Dividends and Rate Periods--Maximum Rate." Rate periods
generally will be seven days, and a rate period will begin on the first
business day after the auction. In most instances, dividends are also paid
weekly, on the day following the end of the rate period. Each Fund, subject to
certain conditions, may change the length of rate periods, designating them as
"Special Rate Periods." See "Description of MuniPreferred--Dividends and Rate
Periods--Designation of Special Rate Periods."
Dividend Payments. Except as provided below, the dividend payment date will
be the day after the rate period ends. If your shares normally pay dividends
on Monday or Tuesday, and that day is not a business day, then your dividends
will be paid on the first business day that falls after that Monday or
Tuesday. If your shares normally pay dividends on Wednesday, Thursday, or
Friday, and that day is not a business day, then your dividends will be paid
on the first business day that falls before that Wednesday, Thursday, or
Friday. See "Description of MuniPreferred--Dividends and Rate Periods--
Designation of Special Rate Periods" for a discussion of payment dates for a
special rate period.
Dividends on New MuniPreferred shares will be paid on the dividend payment
date to holders of record as their names appear on a Fund's stock books, on
the business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time, to holders of record as
their names appear on the Fund's stock books, on that date, not more than 15
days before the payment date, as the Fund's Board of Directors may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit on each dividend payment date dividends received from a
Fund to the accounts of its agent members, in next-day funds. "Agent members"
are Broker-Dealers or broker-dealers that are members of or participants in
the Depository Trust Company who act on behalf of MuniPreferred shareholders.
Agent members, in turn, are expected to distribute these dividend payments to
the person for whom they are acting as agents. Each of the firms listed on the
front cover of Part A of the Prospectus, however, has indicated to the Funds
that it or the agent member it designates will make these dividend payments
available in same-day funds, rather than next-day funds, on each dividend
payment date to customers that use that Broker-Dealer or its designee as its
agent member. A MuniPreferred shareholder that does not use one of the firms
listed on the front cover of Part A of the Prospectus, or one of its
affiliates, should contact his or her Broker-Dealer or broker-dealer to
determine whether it will make dividends payments available to the shareholder
in same-day or next-day funds. If a Broker-Dealer or a broker-dealer that is
an agent member of the Depository Trust Company does not make dividends
available to MuniPreferred shareholders in same-day funds, these shareholders
will not have funds available until the next business day.
Dividend Rate Set at Auction. MuniPreferred shares pay dividends based on a
rate set at auction. The auction usually is held weekly, but may be held less
frequently. The auction sets the dividend rate, and MuniPreferred shares may
be bought and sold at the auction. Bankers Trust Company, the auction agent,
reviews orders from Broker-Dealers on behalf of existing shareholders that
wish to sell, hold at the auction rate, or hold only at a specified rate, and
on behalf of potential shareholders that wish to buy MuniPreferred shares, and
determines the lowest dividend rate that will result in all of the outstanding
MuniPreferred shares of that series continuing to be held. The shares in this
offering will trade at auction starting in the week following this offering.
See "The Auction."
B-10
<PAGE>
Determination of Dividend Rate. Each Fund computes the dividends per share
by multiplying the dividend rate determined at the auction by the following
fraction: the numerator normally is seven and the denominator is 365. If a
Fund has designated a special rate period, then the numerator is the number of
days in the rate period, and the denominator is 360. In either case, this rate
is then multiplied against $25,000 to arrive at the dividend per share. The
numerator may be different if the rate period includes a holiday. If an
auction for any subsequent rate period of New MuniPreferred shares is not held
for any reason other than as described below, the dividend rate on those
shares will be the Maximum Rate on the auction date for that subsequent rate
period.
Each Fund may only pay dividends when and if the Fund's Board of Directors
declares dividends out of monies legally available for this purpose, at the
applicable rate per year for this purpose and no more (except as described
under "Gross-Up Payments"), payable on the dates determined as described
below. If the Fund does not pay a dividend when the Board declares it, then
that dividend will be added to dividends payable on those MuniPreferred shares
in the future.
Effect of Failure to Pay Dividends in Timely Manner. If a Fund fails to
pay, in a timely manner, the auction agent the full amount of any dividend on
any New MuniPreferred shares during any rate period (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 a
failure occurred that has not been cured), but the Fund cures the failure and
pays any late charge before 12:00 Noon on the third business day following the
date the failure occurred, no auction will be held for New MuniPreferred
shares for the first subsequent rate period thereafter, and the dividend rate
for New MuniPreferred shares for that subsequent rate period will be the
Maximum Rate on the auction date for that subsequent rate period.
If a Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on any New MuniPreferred shares during any rate period
(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 a failure occurred that has not been cured), and the Fund
does not cure the failure and pay any late charge before 12:00 Noon on the
third business day next succeeding the date on which the failure occurred, no
auction will be held for New MuniPreferred shares for the first subsequent
rate period thereafter (or for any rate period thereafter, to and including
the rate period during which the failure is cured and the late charge is paid)
(the late charge is to be paid only in the event Moody's is rating the shares
at the time the Fund cures the failure), and the dividend rate for shares of
that series for each such subsequent rate period will be an annual rate equal
to the Maximum Rate on the auction date for that subsequent rate period (but
with the prevailing rating for New MuniPreferred, for purposes of determining
the Maximum Rate, being "Below ba3/BB-").
If a Fund fails to pay, in a timely manner, the auction agent the full
amount of any dividend on any shares of New MuniPreferred during a special
rate period of more than 364 rate period days, or during any rate period
succeeding any special rate period of more than 364 rate period days during
which a failure occurred that has not been cured, and the Fund does not cure
the failure and pay a late charge before 12:00 Noon on the fourth business day
preceding the auction date for the rate period subsequent to such rate period,
no auction will be held for New MuniPreferred shares for the subsequent rate
period (or for any rate period thereafter, to and including the rate period
during which the failure is cured and the late charge paid) (the late charge
is to be paid only in the event Moody's is rating New MuniPreferred shares at
the time the Fund cures the failure), and the dividend rate for New
MuniPreferred shares for each such subsequent rate period will be an annual
rate equal to the Maximum Rate on the auction date for each such subsequent
rate period (but with the prevailing rating for New MuniPreferred, for
purposes of determining the Maximum Rate, being "Below ba3/BB-").
A Fund cures a failure to pay dividends on shares of New MuniPreferred for
any rate period if, within the respective time periods described in the
Statement, the Fund pays the auction agent all accumulated and unpaid
dividends on the New MuniPreferred shares.
Designation of Special Rate Periods. Each Fund may instruct the auction
agent to hold auctions and pay dividends less frequently than weekly. A Fund
may do this if, for example, Fund management expects that short-term rates
might increase or market conditions otherwise change, in an effort to optimize
the effect of the Fund's
B-11
<PAGE>
leverage on common shareholders. If a Fund decides to use a special rate
period, the special rate period will consist of a number of days evenly
divisible by seven and not more than 1,820 days (approximately five years),
subject to certain adjustments. The Funds do not currently expect to hold
auctions and pay dividends less frequently than weekly in the near future,
although this has happened in the past. If a Fund designates a special rate
period, changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market.
Before a Fund designates a special rate period: (1) at least 20 and not
more than 30 days before the first day of the proposed special rate period,
the Fund must publish a notice of its intention to designate a special rate
period in a newspaper circulated to the financial community in New York, and
must mail a notice to MuniPreferred shareholders of that series of its intent
to designate a special rate period; (2) the Fund must inform the auction agent
by 11:00 a.m. Eastern time on the second business day before the first day of
the proposed special rate period; (3) an auction must have been held in the
rate period before the special rate period, and in that auction potential
shareholders seeking a dividend rate equal to or lower than the dividend rate
resulting from the auction entered bid orders for as many or more
MuniPreferred shares than current shareholders entering sell orders submitted
and current shareholders entering bid orders and seeking a dividend rate
higher than the dividend rate resulting from the auction; and (4) the Fund
must deposit the redemption price with the auction agent for any shares of
that series it has decided to redeem.
If a Fund has designated a special rate period of 14, 21, or 28 days, then
dividends will be paid weekly on the same day of the week on which dividends
are paid in a seven day rate period. The dividend payment date for a special
rate period of more than 28 days will be set out in the notice designating a
special rate period. The dividend payment date will be a business day, and the
last dividend payment date for any special rate period will be the business
day immediately following the last day of the special rate period. After any
special rate period, the rate periods normally will be seven days, and
dividends on New MuniPreferred shares will be payable, except as described
below, on each succeeding regular dividend payment date, but the Fund may
further designate any subsequent rate period as a special rate period.
Maximum Rate. The dividend rate that results from an auction for New
MuniPreferred shares will not be greater than the Maximum Rate, which is:
(a) for 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 that auction date for the next rate period of New
MuniPreferred shares and (ii) the Rate Multiple on that auction date,
unless New MuniPreferred shares have or had a special rate period (other
than a special rate period of 28 days or fewer) and an auction at which
"sufficient clearing bids" existed has not yet occurred after that special
rate period for a minimum rate period (seven days) of New MuniPreferred
shares, in which case the higher of:
(A) the dividend rate on New MuniPreferred shares for the then-
ending rate period, and
(B) the product of (x) the higher of (I) the Reference Rate on that
auction date for a rate period equal in length to the then-ending rate
period of New MuniPreferred shares, if the then-ending rate period was
364 days or fewer, or the Treasury Note Rate on that auction date for a
rate period equal in length to the then ending rate period of New
MuniPreferred shares, if the then-ending rate period was more than 364
days, and (II) the Reference Rate on that auction date for a rate
period equal in length to that special rate period of New MuniPreferred
shares, if that special rate period was 364 days or fewer, or the
Treasury Note Rate on that auction date for a rate period equal in
length to that special rate period, if that special rate period was
more than 364 days and (y) the Rate Multiple on that auction date; or
(b) for any auction date that 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 that auction date for a rate period
equal in length to the then-ending rate period of New MuniPreferred shares,
if the then-ending rate period was 364 days or fewer, or the Treasury Note
Rate on that auction date for a rate period equal in length to the then-
ending rate period of New MuniPreferred shares, if the then-ending rate
period was more than 364 days, (y) the Reference Rate on that auction date
for the special rate period for which the auction
B-12
<PAGE>
is being held if that special rate period is 364 days or fewer or the
Treasury Note Rate on that auction date for the special rate period for
which the auction is being held if that special rate period is more than
364 days, and (z) the Reference Rate on that auction date for minimum rate
periods and (ii) the Rate Multiple on that auction date.
The "Reference Rate" is, for a seven-day rate period or a special rate
period of 28 days or less, the higher of the taxable equivalent of the short-
term municipal bond rate and the "AA" Composite Commercial Paper Rate; for a
special rate period of more than 28 but less than 183 days, the "AA."
Composite Commercial Paper Rate; and for a special rate period of more than
182 but less than 365 days, the Treasury Bill Rate.
The "AA" Composite Commercial Paper Rate, Treasury Note Rate, and Treasury
Bill Rate will be the rates announced on the auction date for the business day
immediately before the auction date. See Appendix B to the Statement of
Additional Information for a definition of these rates and the taxable
equivalent of the short-term municipal bond rate. The "Rate Multiple" will be
a percentage, determined as set out below, based on the prevailing rating of
MuniPreferred shares of that series in effect at the close of business on the
business day immediately before the auction date. See Page B-A-5 of Appendix B
to the Statement of Additional Information for a description of "prevailing
rating."
<TABLE>
<CAPTION>
Prevailing MuniPreferred Rating Percentage
------------------------------- ----------
<S> <C>
aa3/AA- or higher.............................................. 110%
a3/A-.......................................................... 125%
baa3/BBB-...................................................... 150%
ba3/BB-........................................................ 200%
Below ba3/BB-.................................................. 250%
</TABLE>
If a Fund has notified the auction agent that it intends to allocate
Federal taxable income to MuniPreferred shares before the auction establishing
the dividend rate for those shares, the applicable percentage in the table
above will 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, whichever is
greater (or if the Fund is a state Fund, the maximum marginal combined
Federal, State and local individual or corporate income tax rate (taking into
account the Federal income tax deductibility of state and local taxes paid or
incurred)). If only one rating agency is rating MuniPreferred shares, that
agency's rating will be the prevailing rating.
Restrictions on Dividends and Other Distributions. When a Fund has any
MuniPreferred shares outstanding, the Fund may not pay any dividend or
distribution (other than a stock dividend) to shareholders of its common stock
unless (1) it has paid all cumulative dividends on MuniPreferred shares; (2)
it has redeemed any MuniPreferred shares that it has called for mandatory
redemption, and (3) after paying the dividend, the Fund meets Moody's and
Standard & Poor's asset coverage requirements for "Aaa" and "AAA" ratings,
respectively (or Aa1 and AA+, in the case of the Nuveen Michigan Quality
Income Municipal Fund, Inc.) and 1940 Act asset coverage requirements.
Gross-Up Payments. If a Fund allocates net capital gain or other taxable
income on a dividend on MuniPreferred shares for a rate period of 28 days or
less, the Fund usually will inform the auction agent of this fact before the
next auction. The auction agent will notify Broker-Dealers, who in turn are
expected to notify MuniPreferred shareholders and potential MuniPreferred
shareholders. If the Fund does not inform the auction agent that the dividend
will include net capital gain or other taxable income before the next auction,
and the allocation is made retroactively solely as a result of the redemption
of some or all of the MuniPreferred shares or the liquidation of the Fund, the
Fund will, before the end of the calendar year in which the dividend was paid,
send a "gross-up" payment to MuniPreferred shareholders.
If a Fund allocates net capital gains or other taxable income on a dividend
on MuniPreferred shares for a rate period of more than 28 days, the Fund will
send a "gross-up" payment to MuniPreferred shareholders before the end of the
calendar year in which the dividend was paid. A "gross-up" payment is the
amount of money that, giving effect to the taxable portion of a dividend,
would cause a shareholder's Federal after-tax
B-13
<PAGE>
return (taking into account both the taxable portion of the dividend and the
gross-up payment) to be equal to the after-tax return the shareholder would
have received if no such taxable allocation had occurred. For state funds, the
gross-up payment will take into account what the shareholder's Federal, state
and local after-tax return would have been (taking into account the Federal
income tax deductibility of state and local taxes paid or incurred). When the
Fund calculates the gross-up payment, it does not take into account the time
value of money, and it assumes that you are in the highest applicable federal,
state and local tax bracket and that you are not subject to the federal
alternative minimum tax. See "Tax Matters" in the Statement of Additional
Information for additional details.
The Funds have received an opinion of counsel to the effect that the manner
in which the Funds intends to allocate items of tax-exempt income, net capital
gain and other taxable income, if any, between common shares and MuniPreferred
shares will be respected for Federal income tax purposes. This opinion of
counsel represents only counsel's best legal judgment, and is not binding on
the Internal Revenue Service or the courts. The Funds are not required to make
gross-up payments for any net capital gain or other taxable income the
Internal Revenue Service ("IRS") determines is allocable in a manner different
from the manner in which the Funds allocated those gains or income. See "Tax
Matters" in the Statement of Additional Information.
Redemption
You do not have the right to redeem your MuniPreferred shares. A Fund will
be required to redeem your shares in certain circumstances, and has the right
to redeem your MuniPreferred shares under certain conditions.
Mandatory Redemption. Each Fund is required under the 1940 Act to maintain
a ratio of total assets to MuniPreferred shares of at least two to one (200%
asset coverage). Essentially, for every two dollars of Fund assets, a Fund can
issue one dollar of MuniPreferred shares (measured by liquidation preference).
Each Fund's Articles of Incorporation or Declaration of Trust require it to
redeem MuniPreferred shares if it does not maintain this two to one ratio.
After the offering, each Fund expects that its asset coverage will be
approximately 285%. Each Fund also must redeem MuniPreferred shares if it
fails to maintain the rating agencies' MuniPreferred Basic Maintenance Amount.
See "Description of MuniPreferred--Asset Maintenance and Rating Agency
Guidelines--Rating Agencies." The redemption price will be $25,000 per share
plus the amount of accumulated but unpaid dividends, up to the redemption
date. A Fund will redeem only the amount of MuniPreferred shares necessary to
comply with the 1940 Act restrictions, the rating agencies' requirements, or
both.
Optional Redemption. Each Fund may, but is not required to, redeem
MuniPreferred shares under certain conditions. The redemption price will be
$25,000 per share plus the amount of accumulated but unpaid dividends, up to
the redemption date. A Fund may redeem MuniPreferred shares in whole or in
part, on the second business day before any dividend payment date for shares
of that series, out of funds legally available, at the redemption price, but
(1) the Fund may not redeem shares in part if after the partial redemption
there are fewer than 500 shares of that series outstanding; and (2) the notice
establishing a special rate period of shares of that series may provide that
shares of that series may not be redeemable during all or a part of the
special rate period, or shall be redeemable only upon payment of specified
redemption premiums. The Fund also may redeem shares as a whole but not in
part, out of funds legally available, on the first day after any dividend
period included in a special rate period of more than 364 days if, on the date
the dividend rate was determined for shares of that series for the special
rate period, the dividend rate equaled or exceeded the yield on the most
recently auctioned U.S. Treasury note with a remaining maturity closest to the
same special rate period.
Notice of Redemption. Notice of redemption will be made by mailing a notice
to each shareholder of any series to be redeemed, at least 20 but not more
than 45 days before the redemption date, at the address as it appears in a
Fund's stock books. The notice will state (1) the redemption date; (2) the
number of shares of each MuniPreferred series to be redeemed; (3) the CUSIP
number for that series; (4) the redemption price; (5) that the dividends on
shares to be redeemed will cease to accumulate on the redemption date; and (6)
the provisions of the Statement of Preferences under which the redemption is
made. If the Fund intends to redeem fewer than all of the shares of a series,
the notice will state the number of shares to be redeemed from the
shareholder.
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<PAGE>
Other Redemption Procedures. If a Fund mails a notice of redemption, but
does not redeem shares because there are no legally available monies for this
purpose, the Fund will redeem shares as soon as practicable when monies are
legally available. The Fund will be deemed to have failed to redeem shares at
any time after a redemption date when the Fund has failed, for any reason, to
deposit the redemption price for those shares with the auction agent. Even if
the Fund has failed to redeem shares for which a notice has been mailed,
dividends on MuniPreferred shares may be declared and paid on all shares of
MuniPreferred, including those shares for which a notice of redemption has
been mailed.
When the Fund has mailed a notice of redemption and deposited monies
sufficient to redeem those shares with the auction agent, dividends on those
shares will cease to accumulate and the shares will no longer be deemed to be
outstanding for any purpose. All rights of the holders of these shares will
cease except for the right to receive the redemption price, but without any
interest or other payments, except as provided under "Description of
MuniPreferred--Dividends and Rate Periods--Gross-Up Payments." The Fund is
entitled to receive from the auction agent, promptly after the redemption
date, any monies deposited in excess of the redemption price of the shares
called for redemption, and all other amounts to which MuniPreferred shares
called for redemption may be entitled. Any deposited funds that are unclaimed
after 90 days from the redemption date will, if permitted by law, be repaid to
the Fund. After this time MuniPreferred shareholders whose shares were 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 may receive,
after the redemption date, any interest on the funds deposited with the
auction agent.
If any dividends on MuniPreferred shares of a series are in arrears, a Fund
may not redeem any MuniPreferred shares of that series unless it redeems all
outstanding shares of that series simultaneously, and the Fund may not buy or
acquire any MuniPreferred shares of that series. This will not prevent the
Fund from buying or acquiring all of the outstanding shares of that
MuniPreferred series through the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, all
holders of outstanding shares of that series of MuniPreferred.
Liquidation
If a Fund is liquidated, MuniPreferred shareholders will receive $25,000
per share, plus all dividends that have been declared but not paid, and any
gross-up payments (see "Description of MuniPreferred--Dividends and Rate
Periods--Gross-Up Payments"), subject to the rights of holders of shares
ranking equally with MuniPreferred shares as to distribution of assets on
liquidation. MuniPreferred shareholders will receive these payments before any
common shareholders receive any payments or distributions. After MuniPreferred
shareholders have been paid, they will not have the right to receive any
remaining assets of the Fund. The Fund will not be considered "liquidated" if
it sells all or substantially all of its property, or merges or consolidates
with or into any other corporation.
Asset Maintenance and Rating Agency Guidelines
1940 Act. The 1940 Act requires each Fund to maintain, immediately after
the issuance of New MuniPreferred, asset coverage of at least 200% for senior
securities that are stock, including MuniPreferred shares. Each Fund must
maintain, as of the last business day of each month in which any MuniPreferred
shares are outstanding, asset coverage of at least 200% for MuniPreferred
shares (or other asset coverage that the 1940 Act may require in the future).
If a Fund fails to maintain this asset coverage, and the Fund does not cure
this failure as of the last business day of the following month, the Articles
of Incorporation or Declaration of Trust require the Fund under certain
circumstances to redeem MuniPreferred shares. See "Description of
MuniPreferred--Redemption." Based on the composition of each Fund's portfolio
and market conditions as of the date of the offering, assuming the issuance of
all shares of New MuniPreferred for each Fund, and taking into account the
deduction of offering costs and sales loads, the asset coverage for each
Fund's MuniPreferred shares would have been approximately 285%.
Rating Agencies. So long as a Fund has MuniPreferred shares outstanding,
the Fund is required to maintain ratings for MuniPreferred shares of "Aaa"
from Moody's or "AAA" from Standard & Poor's (Aa1 or
B-15
<PAGE>
AAA, in the case of the Nuveen Michigan Quality Income Municipal Fund, Inc.).
These ratings reflect the rating agencies' opinion of the creditworthiness of
MuniPreferred shares. The Fund will pay fees to Moody's and/or Standard &
Poor's for these ratings. A preferred stock rating is a rating agency's
assessment of the issuer's capacity and willingness to pay preferred share
obligations. MuniPreferred ratings are not recommendations to buy, hold, or
sell MuniPreferred shares, because they do not comment on market price or
suitability for a particular investor. Ratings agency guidelines do not
address the likelihood that a shareholder will be able to sell its shares at
an auction or otherwise. The ratings are based on current information the Fund
and Nuveen Advisory furnish to the rating agencies, and on information
obtained from other sources. The rating agencies may change, suspend, or
withdraw their ratings because of changes in, or the unavailability of, this
information. No rating agency has rated the Fund's common stock.
Moody's and Standard & Poor's have developed guidelines the Funds must
follow to maintain these ratings. The guidelines are designed to ensure that
portfolio securities underlying MuniPreferred shares will be sufficiently
varied, and of sufficient quality and amount, to justify the assigned ratings.
While the guidelines do not have the force of law, each Fund has adopted them
to obtain the rating agencies' ratings on MuniPreferred shares. The guidelines
supplement and in some cases are more restrictive than the 1940 Act's
requirements for closed-end funds that issue preferred stock. A Fund may, but
is not required to, adopt any modifications to these guidelines that Moody's
or Standard & Poor's may later establish. If a Fund fails to adopt these
modifications, however, the rating agencies may change or withdraw their
ratings. In any event, the rating agencies may at any time change or withdraw
their ratings. Because each Fund must maintain "Aaa" (from Moody's) or "AAA"
(from Standard & Poor's) ratings on MuniPreferred shares (Aa1 or AAA, in the
case of the Nuveen Michigan Quality Income Municipal Fund, Inc.), each Fund
would be required to take action if the rating agencies lowered or withdrew
their ratings. See "Description of MuniPreferred--Redemption." A Fund's Board
of Directors may, without shareholder approval, change certain definitions or
restrictions that the Fund has adopted in connection with the rating agency
guidelines, but only if Moody's or Standard & Poor's has confirmed to the Fund
or the Board in writing that any change would not impair their ratings of
MuniPreferred shares.
The rating agencies also limit some of each Fund's activities. So long as a
rating agency is rating a Fund's MuniPreferred shares, the Fund will only
enter into futures or options transactions in accordance with that agency's
guidelines and after the rating agency confirms in writing that these
transactions will not impair the rating on MuniPreferred shares. In addition,
a Fund may not, among other things, (1) borrow money (except to clear
securities transactions or pay dividends and only if the Fund maintains the
MuniPreferred Basic Maintenance Amount, described below); (2) sell securities
short, or (3) lend any securities, unless the rating agency confirms in
writing that the loan would not impair the rating on MuniPreferred shares.
Each Fund does not intend to borrow money; each has an operating policy that
prevents it from borrowing an amount greater than 5% of its total assets so
long as MuniPreferred shares are outstanding; and the rating agencies restrict
each Fund's ability to borrow money. Nevertheless, under certain circumstances
each Fund is allowed to borrow money for temporary or emergency purposes or to
repurchase shares when borrowing is deemed to be in the best interests of the
common shareholders. See "Repurchase of Shares or Conversion to an Open-End
Fund." If a Fund borrows, it would be required to pay interest on that debt
before it pays any dividends to MuniPreferred shareholders, and it likely
would have to repay the principal due before it could pay the liquidation
preference on MuniPreferred shares. Interest expense will reduce the Fund's
net investment income, and thus borrowing may impair the Fund's ability to pay
dividends to MuniPreferred shareholders. This risk will be higher if the Fund
borrows money at a variable interest rate that increases when prevailing
market rates increase.
MuniPreferred Basic Maintenance Amount. Moody's and Standard & Poor's
require each Fund to maintain assets having, in the aggregate, a "discounted
value" at least equal to the MuniPreferred Basic Maintenance Amount. Each
rating agency has its own guidelines for determining the "discounted value" of
the value of the Fund's portfolio holdings. The discount factors applied by
each rating agency to portfolio securities include the sensitivity of a
security's value to changes in interest rates, the liquidity and depth of the
market for the security, the security's credit quality, and how often the
security is marked to market. If a security in the Fund's portfolio does not
meet a rating agency's guidelines, all or part of it will not be included in
the calculation of "discounted value." See Appendix A to the Statement of
Additional Information for a detailed description of
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<PAGE>
the Moody's and Standard & Poor's rating guidelines. In addition, Standard &
Poor's requires each Fund to meet a minimum liquidity level. Both of these
requirements are discussed below.
The Moody's and Standard & Poor's guidelines do not limit the percentage of
a Fund's assets that may be invested in holdings not eligible to be included
in calculating discounted value. The amount of these ineligible 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 each Fund does not expect that in the normal course of
business the value of these ineligible assets would exceed 20% of the Fund's
total assets.
The MuniPreferred Basic Maintenance Amount is, on any day, the sum of the
liquidation preference value of MuniPreferred shares outstanding, accumulated
but unpaid dividends, estimated dividends for the next nine weeks, a Fund's
anticipated expenses for the next three months, any gross-up payments the Fund
intends to pay to MuniPreferred shareholders, and any other current
liabilities; minus the value of any assets the Fund has set aside to pay its
current liabilities.
If a Fund does not cure its failure to maintain the MuniPreferred Basic
Maintenance Amount, the Fund promptly will alter its portfolio to reattain the
MuniPreferred Basic Maintenance Amount, which will cause the Fund to incur
transaction costs and possible gains or losses on the sale of portfolio
securities. Further, if the Fund does not cure a failure in a timely manner
and Moody's and/or Standard & Poor's is rating MuniPreferred shares, the Fund
will be required to redeem MuniPreferred shares. See "Description of
MuniPreferred--Redemption." Nuveen Advisory will not alter the Fund's
portfolio if, in its reasonable belief, the effect of the alteration would
cause the Fund to have "eligible" assets (assets that can be included in the
calculation of discounted value) on any business day with an aggregate
discounted value of less than the MuniPreferred Basic Maintenance Amount as of
the previous business day. If, however, on a business day the Fund has
"eligible" assets with an aggregate discounted value that exceeds the
MuniPreferred Basic Maintenance Amount by 5 percent or less as of the previous
business day, Nuveen Advisory will not alter the Fund's portfolio in a manner
reasonably expected to reduce the discounted value of the Fund's eligible
assets, unless the Fund confirms that after the alteration, the aggregate
discounted value of the Fund's eligible assets would exceed the MuniPreferred
Basic Maintenance Amount.
Voting Rights
MuniPreferred shareholders generally have equal voting rights with common
shareholders (that is, each common or MuniPreferred share has one vote), and
will vote with them as a single class. MuniPreferred shareholders vote
separately in several circumstances. First, MuniPreferred shareholders vote as
a separate class to elect two of a Fund's directors, and to elect a majority
of the Fund's directors if the Fund fails to pay dividends to MuniPreferred
shareholders for two years. The common shareholders and the MuniPreferred
shareholders, voting together, will elect the remaining directors, in each
case. Second, a majority of MuniPreferred shareholders, voting as a separate
class, must approve a Fund's conversion from a closed-end to an open-end fund,
or a plan of reorganization adversely affecting the MuniPreferred shares.
Third, a majority of MuniPreferred shareholders, voting as a separate class,
must approve changes to a Fund's fundamental investment policies.
For those Funds organized as Minnesota corporations, when MuniPreferred
shareholders vote as a class, Minnesota law requires a vote of holders of a
majority of the MuniPreferred shares to approve the action, unless the Fund's
Articles of Incorporation or the 1940 Act require a different percentage. For
those Funds organized as Massachusetts business trusts, when MuniPreferred
shareholders vote as a class, the Declaration of Trust generally requires a
vote of holders of a majority of the MuniPreferred shares to approve the
action, unless the 1940 Act requires a different percentage.
Each Fund may not, without the approval of holders of a majority of the
MuniPreferred shares: (1) create or issue any class of security that ranks
superior to shares of MuniPreferred, as to paying dividends or distributing
assets if the Fund liquidates, or (2) materially modify the Fund's Articles of
Incorporation, Declaration of Trust, or the Statement of Preferences to affect
the rights or powers of the MuniPreferred shareholders. Subject to
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<PAGE>
certain rating agency approvals, the Board, without the vote or consent of the
MuniPreferred shareholders, may from time to time authorize and create (and a
Fund may from time to time issue) additional shares of any series of
MuniPreferred or classes or series of preferred stock that rank equal to shares
of MuniPreferred as to the payment of dividends and the distribution of assets
upon liquidation.
If you do not vote your MuniPreferred shares, and you hold your shares
through a member of the New York Stock Exchange, the Exchange's rules allow
your Broker-Dealer or broker-dealer to vote them for you and for all of its
customers who own MuniPreferred shares but have not voted, if: (1) the Broker-
Dealer or broker-dealer has sent you the proxy; (2) you have not instructed
your Broker-Dealer or broker-dealer how to vote your shares; (3) the owners of
at least 30% of the MuniPreferred shares of a particular Fund (or shares of
each series of a Fund's MuniPreferred shares, when a series-by-series vote is
required) have voted; (4) less than 10% of the MuniPreferred shares of a
particular Fund (or shares of each series of the Fund's MuniPreferred shares,
when a series-by-series vote is required) have voted against the proposal; (5)
in situations when the common and MuniPreferred shareholders vote together on
the proposal, the common shareholders have approved the proposal; and (6) a
majority of the Fund's independent directors approved the proposal. Your
Broker-Dealer or broker-dealer will vote your shares in the same proportion as
all of its other customers who own MuniPreferred shares and who actually voted.
For example, if 60% of a Broker-Dealer's customers who own MuniPreferred shares
vote their shares, and 92% vote "for" a proposal and 8% vote "against," then
the Broker-Dealer will vote the remaining 40% of its customers MuniPreferred
shares 92% "for" and 8% "against." If you do not hold your shares through a
member of the New York Stock Exchange, your Broker-Dealer, broker-dealer, or
other nominee may not be able to vote your shares for you and for all of its
customers who own MuniPreferred shares but have not voted, depending on the
rules applicable to that Broker-Dealer, broker-dealer, or nominee.
THE AUCTION
Summary of Auction Procedures
The following is a brief summary of the auction procedures. They are
described in more detail after this summary. The auction procedures are
complicated, and there are exceptions to these procedures. Many of the terms in
this section have a special meaning. Any terms in this section not defined have
the meaning assigned to them in the Statement of Preferences. See Appendix B to
the Statement of Additional Information for a full description of the auction
procedures. The auction determines the Applicable Rate (the dividend rate) for
MuniPreferred shares, but the Applicable Rate will not be higher than the
Maximum Rate. See "Description of MuniPreferred--Dividends and Rate Periods--
Maximum Rate." You also may buy or sell shares in the auction.
If you own MuniPreferred shares, you may instruct, orally or in writing, a
Broker-Dealer or a broker-dealer that has entered into an agreement with a
Broker-Dealer, to enter an order in the auction. If your broker-dealer is not
an agent member of the Depository Trust Company, or an affiliate of an agent
member, it may submit orders for MuniPreferred shares to John Nuveen & Co.
Incorporated. Existing MuniPreferred shareholders can enter three kinds of
orders regarding their MuniPreferred shares: sell, bid, and hold.
. If you enter a sell order, you indicate that you want to sell shares of
MuniPreferred at $25,000 per share, no matter what the next rate period's
Applicable Rate will be.
. If you enter a bid (or "hold at a rate") order, you indicate that you
want to sell shares of MuniPreferred only if the next rate period's
Applicable Rate is less than the rate you specify.
. If you enter a hold order, you indicate that you want to continue to own
shares of MuniPreferred, no matter what the next rate period's Applicable
Rate will be.
You may enter different types of orders for your MuniPreferred shares, as
well as orders for additional MuniPreferred shares. All orders must be for
whole shares. All orders you submit are irrevocable. There are a fixed number
of MuniPreferred shares, and the Applicable Rate likely will vary from auction
to auction depending on the number of bidders, the number of shares the bidders
seek to buy, and general economic
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<PAGE>
conditions including current interest rates. If you own MuniPreferred shares
and submit a bid higher than the Maximum Rate, your bid will be treated as a
sell order. If you do not enter an order, the Broker-Dealer will assume that
you want to continue to hold MuniPreferred shares, but if you fail to submit an
order and the rate period is longer than 28 days, the Broker-Dealer will treat
your failure to submit a bid as a sell order.
If you do not currently own shares of MuniPreferred, or want to buy more
shares, you may instruct a Broker-Dealer, or a broker-dealer that has entered
into an agreement with a Broker-Dealer, to enter a bid order to buy shares in
an auction at $25,000 per share, at a specified dividend rate. If your bid
specifies a rate higher than the Maximum Rate, your order will not be accepted.
Broker-Dealers will submit orders from existing and potential shareholders
to the auction agent. Neither the Fund nor the auction agent will be
responsible for a Broker-Dealer's failure to submit orders from existing
shareholders and potential shareholders. A Broker-Dealer's failure to submit
orders for MuniPreferred shares held by it or its customers will be treated in
the same manner as a shareholder's failure to submit an order to the Broker-
Dealer. A Broker-Dealer (other than an affiliate of a Fund) may submit orders
to the auction agent for its own account.
If the number of MuniPreferred shares of a series subject to bid orders with
a dividend rate equal to or lower than the Maximum Rate for shares of that
series is at least equal to the number of MuniPreferred shares of that series
subject to sell orders, then the Applicable Rate for the next rate period will
be the lowest rate submitted which, taking into account that rate and all lower
rates submitted in order from existing and potential shareholders, would result
in existing and potential shareholders owning all the MuniPreferred shares
available for purchase in the auction.
If the number of MuniPreferred shares of a series subject to bid orders with
a dividend rate equal to or lower than the Maximum Rate for shares of that
series is less than the number of MuniPreferred shares of that series subject
to sell orders, then the auction is considered to be a failed auction, and the
dividend rate will be the Maximum Rate. In that event, existing shareholders
that have submitted sell orders (or are treated as having submitted sell
orders) may not be able to sell any or all the shares for which they submitted
sell orders.
The auction agent will not accept a bid above the Maximum Rate from a
potential shareholder, and will treat such a bid from an existing shareholder
as a sell order. The purpose of the Maximum Rate is to place an upper limit on
MuniPreferred dividends and in so doing to help protect the earnings available
to pay common share dividends, and to serve as the Applicable Rate in the event
of a failed auction (that is, an auction where there are more MuniPreferred
shares offered for sale than there are buyers for those shares).
If Broker-Dealers submit or are deemed to submit hold orders for all
outstanding shares of a series of MuniPreferred, this is considered an "all
hold" auction and the Applicable Rate for the next rate period will be the All
Hold Order Rate. See "The Auction--Determination of Sufficient Clearing Bids,
Winning Bid Rate, and Applicable Rate" and Appendix B to the Statement of
Additional Information for a description of this rate.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This may result in an existing shareholder continuing to hold or
selling, or a potential shareholder buying, fewer shares than the number of
shares in its order. If this happens, Broker-Dealers will be required to make
appropriate pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date, through the
Depository Trust Company. Purchasers will pay for their shares through Broker-
Dealers in same-day funds to the Depository Trust Company against delivery to
the Broker-Dealers. The Depository Trust Company will make payment to the
sellers' Broker-Dealers in accordance with its normal procedures, which require
Broker-Dealers to make payment against delivery in same-day funds.
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<PAGE>
If a Fund plans to include any net capital gains or other Federal taxable
income in a MuniPreferred dividend, it generally will notify the auction agent
of the amount to be included, at least a week before the dividend payment date
for the rate period in which taxable income will be included in a dividend. The
auction agent will notify Broker-Dealers, who in turn will notify their
customers.
The following is a simplified example of how a typical auction works. Assume
that a Fund has 1,000 outstanding shares of New MuniPreferred, and three
current shareholders. The three current shareholders and three potential
shareholders submit orders through Broker-Dealers at the auction:
<TABLE>
<S> <C> <C>
Current Shareholder A... Owns 500 shares, wants to Bid order of 3.5% rate for all
sell all 500 shares if 500 shares
auction rate is less than
3.5%
Current Shareholder B... Owns 300 shares, wants to Hold order--will take the
hold auction rate
Current Shareholder C... Owns 200 shares, wants to Bid order of 3.3% rate for all
sell all 200 shares if 200 shares
auction rate is less than
3.3%
Potential Shareholder D. Wants to buy 200 shares Places order to buy at or above
3.4%
Potential Shareholder E. Wants to buy 300 shares Places order to buy at or above
3.3%
Potential Shareholder F. Wants to buy 200 shares Places order to buy at or above
3.5%
</TABLE>
The lowest dividend rate that will result in all 1,000 shares of New
MuniPreferred continuing to be held is 3.4% (the offer by D). Therefore, the
Applicable Rate will be 3.4%. Current shareholders B and C will continue to own
their shares, and current shareholder A will sell its shares, because A's
dividend rate bid was higher than the Applicable Rate. Potential shareholder D
will buy 200 shares, and Potential shareholder E will buy 300 shares, because
their bid rates were at or below the Applicable Rate. Potential shareholder F
will not buy any shares because its bid rate was above the Applicable Rate.
The foregoing discussion is a summary of the auction procedures. What
follows is a more detailed explanation of the auction procedures.
Auction Dates; Advance Notice of Allocation of Taxable Income
An auction to determine the Applicable Rate for New MuniPreferred shares for
each rate period after the initial rate period will be held on the first
business day preceding the first day of the rate period. The date is the
"auction date." The auction date and the first day of the related rate period
(which is also the dividend payment date for the preceding rate period) must be
business days but need not be consecutive days. See "Description of
MuniPreferred--Dividends and Rate Periods--Designation of Special Rate Periods"
for information about the circumstances under which the first day of a rate
period or the auction date, or both, may be moved to another date.
Whenever a Fund intends to include any net capital gains or other federal
taxable income in any MuniPreferred dividend, it will, for any rate period of
28 days or less, and may, for any rate period of more than 28 days, notify the
auction agent of the amount to be included, on or before the dividend payment
date next preceding the auction date on which the Applicable Rate is to be set.
When the auction agent receives this notice from the Fund, it will in turn
notify each Broker-Dealer who, on or before the auction date and in accordance
with its broker-dealer agreement, will notify its existing shareholders and
persons it believes are interested in submitting an order in that auction.
Orders by Existing Shareholders and Potential Shareholders
You may submit orders for an auction only through a Broker-Dealer (one that
has signed a dealer agreement with a Fund and the auction agent), or through a
broker-dealer that has entered into a correspondent arrangement with a Broker-
Dealer. Your order must be submitted before the submission deadline, which is
1:30 p.m. Eastern
B-20
<PAGE>
time on the auction date. Your orders must indicate whether you want to buy,
sell, or hold some or all of your shares, and the lowest dividend rate you will
accept for the next rate period (normally one week, although this can be
extended). The auction agent selects the lowest dividend rate bid that will
result in all of the MuniPreferred continuing to be held.
You may enter different types of orders for your MuniPreferred shares, as
well as orders for additional MuniPreferred shares. All orders you submit are
irrevocable. An existing shareholder's sell order will be an irrevocable offer
to sell MuniPreferred shares subject to the order. An existing shareholder's
bid order will be an irrevocable offer to sell MuniPreferred shares subject to
the order if the Applicable Rate is less than the rate specified in the bid
order. A potential shareholder's bid order will be an irrevocable offer to buy
MuniPreferred shares subject to the order if the Applicable Rate is equal to or
greater than the rate specified in the bid order. The number of shares you buy
or sell may be subject to proration.
Your order must be in whole shares. If you are an existing shareholder and
want to buy additional MuniPreferred shares, you will be treated as a potential
shareholder for those additional shares, for the purpose of determining the
priority of orders. See "The Auction--Submission of Orders by Broker-Dealers to
Auction Agent." Broker-Dealers may contact prospective purchasers of
MuniPreferred shares to determine whether they wish to submit orders.
Any bid order that specifies a rate higher than the Maximum Rate will be (1)
treated as a sell order if an existing shareholder submits the order, and (2)
not be accepted if a potential shareholder submits the order. The auction
procedures establish the Maximum Rate that can result from an auction. See "The
Auction--Determination of Sufficient Clearing Bids, Winning Bid Rate, and
Applicable Rate" and "The Auction--Acceptance or Rejection of Orders and
Allocation of Shares."
Submission of Orders by Broker-Dealers to Auction Agent
Before the submission deadline, which is 1:30 p.m. Eastern time on each
auction date (or another time the auction agent specifies), each Broker-Dealer
will submit to the auction agent in writing all orders it obtained for the
auction. Any order submitted before the auction deadline will be irrevocable.
The auction agent is entitled to rely on the terms of any order a Broker-Dealer
submits. If any rate specified in a bid order contains more than three figures
to the right of the decimal point, the auction agent will round up that rate to
the next highest one-thousandth (.001) of 1%. If a potential shareholder
submits more than one bid order through a Broker-Dealer, each bid order will be
treated as a separate bid order with the rate and number of shares specified in
the order. If an existing shareholder submits through a Broker-Dealer one or
more orders covering in the aggregate more MuniPreferred shares of a series
than the existing shareholder owns, the orders will be considered valid in the
following order of priority:
1. All hold orders will be considered valid, up to and including in the
aggregate the number of MuniPreferred shares of that series the shareholder
owns.
2. (a) Any bid order will be considered valid, up to and including the
excess of the number of outstanding MuniPreferred shares of that series the
shareholder owns over the number of MuniPreferred shares of that series
subject to hold orders referred to in clause 1 above;
(b) subject to 2(a), if more than one bid order with the same
specified rate is submitted on behalf of an existing shareholder and
the number of MuniPreferred shares of that series subject to those bid
orders is greater than the excess, the bid orders will be considered
valid up to and including the amount of that excess, and the number of
MuniPreferred shares of that series subject to each bid order with the
same rate will be reduced pro rata to cover the number of MuniPreferred
shares of that series equal to the excess;
(c) subject to 2(a) and 2(b), if more than one bid order with
different rates is submitted on behalf of an existing shareholder, the
bid orders will be considered valid in the ascending order of their
respective rates up to and including the amount of that excess; and
B-21
<PAGE>
(d) in any event, the number of shares subject to bids not valid
under this clause 2 will be treated as the subject of a bid order by a
potential shareholder at the rate specified in the order.
3. All sell orders will be considered valid, up to and including the
excess of the number of outstanding MuniPreferred shares of that series the
existing shareholder owns, over the sum of MuniPreferred shares of that
series subject to valid hold orders referred to in clause 1 above and valid
bid orders referred to in clause 2 above.
Determination of Sufficient Clearing Bids, Winning Bid Rate, and Applicable
Rate
The auction agent will assemble, not earlier than the submission deadline,
all valid orders submitted or deemed submitted by Broker-Dealers for a series
of MuniPreferred. The auction agent will determine the excess of the number of
outstanding shares of that series of MuniPreferred over the number of
outstanding shares subject to submitted hold orders, and will then determine
whether "sufficient clearing bids" have been made in the auction. "Sufficient
clearing bids" means that the number of outstanding MuniPreferred shares of
that series that are the subject of bid orders submitted by potential
shareholders specifying a rate not higher than the Maximum Rate, equals or
exceeds the number of outstanding shares of that series that are the subject of
sell orders submitted by existing shareholders (including the shares of that
series that are the subject of bid orders by existing shareholders specifying
rates higher than the Maximum Rate).
If sufficient clearing bids have been made, the auction agent will determine
the winning bid rate; that is, the lowest rate specified in the bid orders
which, taking into account the rates in the bid orders submitted by existing
shareholders, would result in existing shareholders continuing to hold an
aggregate number of outstanding MuniPreferred shares of that series which, when
added to the number of outstanding MuniPreferred shares of that series to be
bought by potential shareholders, would equal not less than the available
amount of outstanding MuniPreferred shares. The winning bid rate will be the
Applicable Rate for the next rate period for all outstanding shares of that
series.
If sufficient clearing bids have not been made (other than because all of
the outstanding MuniPreferred shares of that series are subject to hold
orders), the Applicable Rate for the next rate period for all outstanding
shares of that series will be the Maximum Rate. If sufficient clearing bids
have not been made, existing shareholders that submitted sell orders may not be
able to sell any or all of their shares in the auction, and will continue to
hold those unsold shares in the next rate period. Dividends in that next rate
period may include taxable income. See "The Auction--Auction Dates; Advance
Notice of Allocation of Taxable Income" and "--Acceptance or Rejection of
Orders and Allocation of Shares."
If all of the outstanding shares of MuniPreferred for that series are
subject to hold orders, the Applicable Rate for the next period for all shares
of that series will be the All Hold Order Rate, which is the lesser of the
Kenny Index (if the rate period is less than 183 days) or the product of:
(1) (a) the "AA" Composite Commercial Paper Rate on the auction date for
that rate period if the rate period is less than 183 days; (b) the Treasury
Bill Rate on that auction date for that rate period if the rate period is
more than 182 days but less than 365 days; or (c) the Treasury Note Rate on
that auction date for that rate period if the rate period is more than 364
days (the rate in clauses a, b or c is the "benchmark rate"); and
(2) 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, whichever is greater.
If a Fund has notified the auction agent that it intends to allocate any net
capital gains or other Federally taxable income to MuniPreferred shares for
that rate period, the Applicable Rate in an "all hold" auction for the portion
of the dividends that represents the allocation of net capital gains or other
Federally taxable income will be:
(1) if the "taxable yield rate" is greater than the benchmark rate, then
the benchmark rate; or
B-22
<PAGE>
(2) if the taxable yield rate is less than or equal to the benchmark
rate, then the rate equal to the sum of (a) the lesser of the Kenny Index
(if the rate period is less than 183 days) or the product of the benchmark
rate multiplied by the factor in clause (2) above, and (b) 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.
The "taxable yield rate" is the rate determined by (a) dividing the amount
of taxable income available for distribution per share of MuniPreferred by the
number of days in the dividend period in which the Fund intends to distribute
taxable income, (b) multiplying the amount in (a) by 365 (if the dividend
period is seven days) or by 360 (for any other dividend period), and (c)
dividing the amount determined in (b) by $25,000.
See Appendix B to the Statement of Additional Information for the
definitions of "Kenny Index," "AA Composite Commercial Paper Rate," "Treasury
Bill Rate" and "Treasury Note Rate."
Acceptance or Rejection of Orders and Allocation of Shares
Based on the determinations made under "Determination of Sufficient Clearing
Bids, Winning Bid Rate and Applicable Rate," and subject to the auction agent's
discretion to round and allocate shares as described below, the auction agent
will accept or reject submitted bid and sell orders in the order of priority
set out in the Auction Procedures. The result will be that existing and
potential shareholders will sell, continue to hold, and/or purchase outstanding
MuniPreferred shares of that series as described below. Existing shareholders
that submitted or were deemed to have submitted hold orders will continue to
own MuniPreferred shares subject to those hold orders.
Sufficient Clearing Bids. If sufficient clearing bids have been made in an
auction for a series of MuniPreferred, orders will be accepted or rejected in
the following order.
1. Each existing shareholder that submitted a sell or bid order
specifying a rate higher than the winning bid rate will sell outstanding
MuniPreferred shares subject to that sell or bid order.
2. Each existing shareholder that submitted a bid order specifying a
rate lower than the winning bid rate will continue to hold outstanding
MuniPreferred shares subject to that bid order.
3. Each potential shareholder that submitted a bid order specifying a
rate lower than the winning bid rate will have its bid order accepted
(although it may not be able to buy all the shares specified in its order).
4. Each existing shareholder that submitted a bid order specifying a
rate equal to the winning bid rate will continue to hold the outstanding
MuniPreferred shares subject to that bid order. But if the number of
outstanding MuniPreferred shares subject to all bid orders is greater than
the number of outstanding MuniPreferred shares in excess of the available
outstanding MuniPreferred shares of that series over the number of
outstanding MuniPreferred shares accounted for in clauses 2 and 3 above,
then each existing shareholder that submitted a bid order specifying a rate
equal to the winning bid rate will continue to hold a number of the
outstanding MuniPreferred shares subject to that bid order, determined on a
pro rata basis based on the number of outstanding MuniPreferred shares
subject to all bid orders by existing shareholders.
5. Each potential shareholder that submitted a bid order specifying a
rate equal to the winning bid rate will buy any shares of available
outstanding MuniPreferred shares not accounted for in clauses 2 through 4,
above, on a pro rata basis based on the number of outstanding MuniPreferred
shares subject to all bid orders.
Insufficient Clearing Bids. If sufficient clearing bids have not been made
in an auction for a series of MuniPreferred (unless this is because all
outstanding MuniPreferred shares of that series are subject to hold orders):
1. Each existing shareholder that submitted a bid order specifying a
rate equal to or lower than the Maximum Rate will continue to hold
outstanding MuniPreferred shares subject to that bid order.
B-23
<PAGE>
2. Each potential shareholder that submitted a bid order specifying a
rate equal to or lower than the Maximum Rate will buy the number of
outstanding MuniPreferred shares subject to that bid order.
3. Each existing shareholder that submitted bid order specifying a rate
higher than the Maximum Rate, or a sell order, will sell a number of
outstanding MuniPreferred shares determined on a pro rata basis based on
the number of outstanding MuniPreferred shares subject to all bid and sell
orders.
If, because of the pro rata allocation described in clauses 4 and 5 in
"Sufficient Clearing Bids," or in clause 3 of "Insufficient Clearing Bids," any
existing shareholder would be entitled or required to sell, or any potential
shareholder would be entitled or required to buy, a fractional share of
MuniPreferred, the auction agent will, in its sole discretion, round up or down
to the nearest whole share the number of MuniPreferred shares sold or bought on
the auction date so that the number of shares an existing or potential
shareholder sells or buys will be whole shares.
If, because of the pro rata allocation described in clause 5 in "Sufficient
Clearing Bids," any potential shareholder would be entitled or required to buy
less than a whole MuniPreferred share, the auction agent will in its sole
discretion, allocate MuniPreferred shares for purchase among potential
shareholders so that any potential shareholders will only buy whole shares,
even if this means that one or more potential shareholders will not buy any
MuniPreferred shares.
Notification of Results; Settlement
The auction agent will notify, by telephone by approximately 3:00 p.m.
Eastern time on the auction date, each Broker-Dealer that submitted an order,
of the Applicable Rate for the next rate period and, if the order was a bid or
sell order, whether the order was accepted or rejected in whole or in part.
Each Broker-Dealer that submitted an order on behalf of an existing or
potential shareholder will notify that person of the Applicable Rate for the
next rate period and, if the order was a bid or sell order, whether the order
was accepted or rejected in whole or in part; and will confirm purchases and
sales with each existing or potential shareholder purchasing or selling shares
as a result of the auction. The auction agent will record each transfer of
MuniPreferred shares on the registry of existing shareholders it maintains.
In accordance with the Depository Trust Company's normal procedures, on the
business day after the auction date, purchases and sales of MuniPreferred
shares will be executed through the Depository Trust Company and the accounts
of the agent members will be debited and credited and shares delivered as
necessary to effect the purchases and sales of MuniPreferred shares as
determined in the auction. Purchasers will make payment though their agent
members in same-day funds to the Depository Trust Company against delivery
through their agent members; the Depository Trust Company will make payment in
accordance with its normal procedures, which now provide for payment against
delivery by its agent members in same-day funds.
If any existing shareholder selling MuniPreferred shares in an auction fails
to deliver its shares, the Broker-Dealer of any buyer of shares in an auction
may deliver to that person a number of whole MuniPreferred shares that is less
than the number of shares that the person otherwise was to buy. In that event,
the Broker-Dealer will determine the number of MuniPreferred shares to be
delivered, and delivery of the lesser number of shares will constitute good
delivery.
Auction Agent
The auction agent acts as an agent of each of the Funds. Unless the auction
agent acts in bad faith or negligently, it will not be liable for any action
taken, suffered, or omitted or for any error of judgment it makes in the
performance of its duties under the Auction Agency Agreement, and it will not
be liable for any error of judgment it makes in good faith unless it is
negligent in ascertaining the pertinent facts. The auction agent may terminate
the Auction Agency Agreement as to one or more Funds upon 45 days' notice to
the Fund(s). If the auction agent should resign, the Fund will use its best
efforts to enter into an agreement with a successor auction agent that contains
substantially the same terms and conditions as the Auction Agent Agreement. A
Fund may remove the auction agent, but before this removal, the Fund must have
entered into an agreement with a successor auction agent.
B-24
<PAGE>
Broker-Dealers; Participation Fee
After each auction, the auction agent will pay to each Broker-Dealer, from
monies a Fund provides, a participation fee at the annual rate of 1/4 of 1% of
the Fund's net assets for any auction immediately preceding a rate period of
less than one year. For a rate period of one year or longer, the amount will be
a percentage of the purchase price of MuniPreferred shares the broker-dealer
places at that auction, as the Fund and Broker Dealers may agree. "Places at
auction" means that the shares were (1) the subject of hold orders deemed to be
sell orders made by existing shareholders who acquired their shares from that
Broker-Dealer, or (2) the subject of an order the Broker-Dealer submitted that
is (a) a bid order from an existing shareholder that results in the shareholder
continuing to hold those shares as a result of the auction; (b) a bid order
from a potential shareholder that results in the shareholder buying those
shares as a result of the auction; or (c) a valid hold order.
The broker-dealer agreements allow a Broker-Dealer (other than an affiliate
of a Fund), to submit orders in auctions for its own account, unless a Fund
notifies all Broker-Dealers that they may no longer do so. In that case,
Broker-Dealers may continue to submit hold and sell orders, but not bid orders,
for their own accounts. Any Broker-Dealer that is an affiliate of a Fund may
submit orders in auctions, but only if these orders are not for its own
account. If a Broker-Dealer submits an order for its own account in an auction,
it might have an advantage over other bidders because it would know about
orders it placed through the auction. This Broker-Dealer, however, would not
know about orders other Broker-Dealers submitted in the auction. A Fund may
request that the auction agent terminate one or more broker-dealer agreements
at any time, provided that at least one broker-dealer agreement is in effect
after the termination(s).
Secondary Market
Broker-Dealers and other broker-dealers may maintain a secondary trading
market for MuniPreferred shares, although they are not required to do so. The
secondary trading market in MuniPreferred shares may not provide you with
liquidity. MuniPreferred shares are not registered on a stock exchange or on
the Nasdaq Stock Market.
You may sell or transfer 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 other broker-
dealer; or (3) to other persons as a Fund may permit; provided, however, that
(a) a sale or transfer of your shares (if you hold your shares in the name of a
Broker-Dealer) to that Broker-Dealer, or to another customer of that Broker-
Dealer, will not be considered a sale or transfer for purposes of the foregoing
if that Broker-Dealer remains the existing holder of the shares immediately
after the transaction; and (b) in the case of all transfers, other than through
an auction, the Broker-Dealer (or other person, if the Fund permits) receiving
the transfer will advise the auction agent of the transfer.
TAX MATTERS
Federal Income Tax Matters
Each 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 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 amounts that are treated as long-term
capital gain or ordinary income to its shareholders. Each 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 and MuniPreferred shares. Each Fund intends to notify MuniPreferred
shareholders in advance if it will allocate income that is not exempt from
regular Federal income tax. In certain circumstances a Fund will make payments
to MuniPreferred shareholders to offset the tax effects
B-25
<PAGE>
of the taxable distribution. See "Description of MuniPreferred--Dividends and
Rate Periods--Gross-Up Payments" in Part B of this Prospectus. 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 each Fund or its
shareholders. Any change may be retroactive for Fund transactions. You should
consult with your tax adviser about Federal income tax matters.
National Funds: 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.
COMMON STOCK
Common shares have equal voting rights and equal rights as to dividends,
assets, and liquidation with respect to one another. Common shares are fully
paid and non-assessable when issued and have no preemptive, conversion, or
exchange rights. No Fund may declare dividends or make any distributions on
common shares, or repurchase common shares, if it has declared but not paid all
accumulated dividends on MuniPreferred shares.
CONTROL OF THE FUND
Each Fund's Articles of Incorporation or Declaration of Trust may limit the
ability of other companies or persons to acquire control of the Fund. The
holders of at least two-thirds of the common and MuniPreferred shares, voting
together, must approve the Fund's conversion from a closed-end to an open-end
fund; its merger or consolidation; a sale, lease, or transfer of all or
substantially all of the Fund's assets (other than in the course of the Fund's
regular investment activities); or the Fund's liquidation or dissolution. If
two-thirds of the Fund's directors vote to approve one of these transactions,
then the holders of at least a majority of the shares of common and
MuniPreferred, voting together, must approve the transaction.
These voting requirements are higher than legally required. They could have
the effect of making it more difficult for a third party to assume control of a
Fund or merge it with another fund. However, these voting requirements could
cause third parties seeking control of the Fund to negotiate the price to be
paid with Nuveen Advisory, and could assure the continuity of the Fund's
investment objectives and policies. Each Fund's Board believes that the higher
voting requirements are in the best interest of the Fund and its shareholders.
REPURCHASE OF SHARES OR CONVERSION TO AN OPEN-END FUND
Each of the Funds is a closed-end fund, and you do not have the right to
cause a Fund to redeem your MuniPreferred shares. MuniPreferred shares trade
primarily through the auction, while each Fund's common shares trade on the New
York Stock Exchange. Common shares may trade at a premium or a discount to net
asset value. Each Fund's Board of Directors will consider, at least annually,
whether it should take any action to reduce or eliminate a material discount
from net asset value of the common shares. The Board could authorize a Fund to
repurchase some of its common shares, make a tender offer for some of its
common shares, or convert the Fund to an open-end fund. All of these actions
are subject to certain legal restrictions. If the Fund repurchases common
shares or makes a tender offer, this may not reduce the discount. The Fund may
borrow money to repurchase common shares or pay for tendered shares. If the
Fund borrows, the costs of borrowing would reduce the Fund's net income. If the
Fund converted to an open-end fund, it could not have preferred stock
outstanding. The Fund would be required to redeem all outstanding MuniPreferred
shares (requiring in turn that the Fund
B-26
<PAGE>
liquidate a portion of its portfolio), and the Fund's common shares would no
longer be listed on the New York Stock Exchange.
The Board's present policy, which is subject to change, is that the Board
will not authorize any of these actions if: this would result in the delisting
of the common stock from the New York Stock Exchange or cause a Fund to fail to
qualify as a regulated investment company under the Code; the Fund could not
sell portfolio securities in an orderly manner, or without imposing significant
tax consequences on remaining common shareholders, sufficient to repurchase
shares; there are material legal challenges to the repurchase; the New York
Stock Exchange suspends trading; or there are other large-scale events that
affect the Fund's ability to repurchase its shares, such as a federal banking
moratorium.
NET ASSET VALUE
The Funds' custodian calculates each Fund's net asset value. The custodian
uses prices for portfolio securities from a pricing service the Fund's Board of
Directors has approved. 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 (which will constitute the majority of the Fund's portfolio
securities) are valued at fair value. The pricing service uses methods that
consider yields or prices of municipal bonds of comparable quality, type of
issue, coupon, maturity, and ratings; dealers indications of value; and general
market conditions. The pricing service may use electronic data processing
techniques or a matrix system, or both. The Fund's officers review the pricing
service's procedures and valuations, under the general supervision of the Board
of Directors.
OTHER SERVICE PROVIDERS
The Chase Manhattan Bank, located at One Chase Plaza, New York, NY 10081, is
the Fund's custodian, and the transfer agent and dividend disbursing agent for
the Fund's common shares. Bankers Trust Company, located at 4 Albany Street,
New York, NY 10006, is the auction agent, transfer agent, registrar, dividend
disbursing agent and redemption agent for the MuniPreferred shares. Purchases
and sales of MuniPreferred shares are cleared and settled at the Depository
Trust Company, 55 Water Street, New York, NY 10041.
AVAILABLE INFORMATION
The Funds are 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 Part B of the Prospectus does not contain all of the information in
each Fund's registration statement, including amendments, exhibits, and
schedules. Statements in this Part B of the 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 each Fund and MuniPreferred shares can be found
in each 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.
B-27
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies.......................................... S-1
Certain Trading Strategies of the Fund..................................... S-7
Management of the Fund..................................................... S-10
Portfolio Transactions..................................................... S-18
Net Asset Value............................................................ S-20
Additional Information Concerning the Auctions for MuniPreferred........... S-20
Tax Matters................................................................ S-22
Certain Owners of Record................................................... S-28
Experts.................................................................... S-28
Financial Statements....................................................... S-29
Report of Independent Auditors............................................. S-41
Appendix A--Ratings of Investments......................................... A-1
Appendix B--Statement of Preferences....................................... B-1
</TABLE>
B-28
<PAGE>
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>
B-A-1
<PAGE>
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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 Nuveen Premium
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.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary........................................................ A-1
Financial Highlights...................................................... A-3
The Fund.................................................................. A-4
Use of Proceeds........................................................... A-4
Capitalization............................................................ A-5
Investment Objective and Policies......................................... A-6
Underwriting.............................................................. A-7
Legal Opinions............................................................ A-7
Experts................................................................... A-8
Municipal Bonds........................................................... B-1
Portfolio Investments..................................................... B-2
Insured Funds: Municipal Bond Insurance................................... B-2
Investment Restrictions................................................... B-4
Risk Factors.............................................................. B-5
Management of the Fund.................................................... B-7
Certain Trading Strategies of the Funds................................... B-9
Description of MuniPreferred.............................................. B-9
The Auction............................................................... B-18
Tax Matters............................................................... B-25
Common Stock.............................................................. B-26
Control of the Fund....................................................... B-26
Repurchase of Shares or Conversion to an Open-End Fund.................... B-26
Net Asset Value........................................................... B-26
Other Service Providers................................................... B-27
Available Information..................................................... B-27
Table of Contents of the Statement of Additional Information.............. B-28
Taxable Equivalent Yield Table............................................ B-A-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$50,000,000
Nuveen Premium
Income
Municipal Fund, Inc.
Municipal Auction
Rate Cumulative
Preferred Stock
MuniPreferred(R)
2,000 Shares Series M2
--------
PROSPECTUS
, 1999
--------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY __, 1999
NUVEEN PREMIUM INCOME MUNICIPAL
FUND, INC.
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 May __, 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 assigned to them in the
Prospectus.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Investment Objectives and Policies.................. S-1
Certain Trading Strategies of the Fund.............. S-7
Management of the Fund.............................. S-10
Portfolio Transactions.............................. S-18
Net Asset Value..................................... S-20
Additional Information Concerning the Auctions for
MuniPreferred....................................... S-20
Tax Matters......................................... S-22
Certain Owners of Record............................ S-28
Experts............................................. S-28
Report of Independent Auditors...................... S-29
Financial Statements................................ S-30
Ratings of Investments.............................. A-1
Statement of Preferences............................ B-1
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is a high level of current income
exempt from regular Federal income tax, consistent with preservation of capital.
The Fund seeks to achieve its investment objective by investing
substantially all of its assets (more than 80%) in a diversified portfolio of
tax-exempt municipal bonds rated at the time of purchase within the four highest
grades (Baa or BBB or better) by Moody's or Standard and Poor's, except that the
Fund may invest up to 20% of its assets in unrated municipal bonds which, in
Nuveen Advisory , s opinion, have credit characteristics equivalent to, and are
of comparable quality to, municipal bonds rated Baa or BBB or better. The Fund
will not invest in any rated municipal bonds that are rated lower than Baa by
Moody's or BBB by Standard & Poor's at the time of purchase. Municipal bonds
rated Baa or BBB or better are considered "investment grade" securities. Bonds
rated Baa are considered medium grade obligations that lack outstanding
investment characteristics and in fact have speculative characteristics as well,
while municipal bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. See the Statement of Additional Information for a
description of securities ratings.
S-1
<PAGE>
PORTFOLIO INVESTMENTS
Except to the extent that the Fund buys temporary investments as described
below, the Fund will, as a fundamental policy, invest substantially all of its
assets (more than 80%) in tax-exempt municipal bonds that are rated at the time
of purchase within the four highest grades (Baa or BBB or better) by Moody's or
Standard and Poor's, except that the Fund may invest up to 20% of its assets in
unrated municipal bonds which, in Nuveen Advisory's opinion, have credit
characteristics equivalent to, and are of comparable quality to, municipal bonds
so rated. These policies and the Fund's investment objectives are fundamental
policies, which cannot be changed without the approval of the holders of a
majority of the outstanding shares of common shares and MuniPreferred shares,
voting together, and of the holders of a majority of the outstanding
MuniPreferred shares, voting separately.
These policies and the Fund's investment objective are fundamental
policies, which cannot be changed without the approval of the holders of a
majority of the outstanding shares of common shares and MuniPreferred shares,
voting together, and of the holders of a majority of the outstanding
MuniPreferred shares, voting separately. For this purpose, a "majority of the
outstanding shares" means the vote of (1) 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 (2) more than 50% of the shares, whichever is less.
S-2
<PAGE>
The Fund buys municipal bonds with different maturities and intends to
maintain an average portfolio maturity of 15 to 30 years, although this may be
shortened depending on market conditions. As a result, the Fund's portfolio may
include long-term and intermediate-term municipal bonds. If the long-term
municipal bond market is unstable, the Fund may temporarily invest up to 100% of
its assets in temporary investments. Temporary investments are high quality,
generally uninsured, short-term municipal bonds that may either be tax-exempt or
taxable. The Fund will buy taxable temporary investments only if suitable tax-
exempt temporary investments are not available at reasonable prices and yields.
The Fund will invest only in taxable temporary securities that are U.S.
Government securities or corporate debt securities rated within the highest
grade by Moody's or Standard & Poor's, and that mature within one year from the
date of issuance. The Fund's policies on securities ratings only apply when the
Fund buys a security, and the Fund is not required to sell securities that have
been downgraded. See Appendix A for a description of securities ratings. The
Fund also may invest in taxable temporary investments that are certificates of
deposit from U.S. banks with assets of at least $1 billion, or repurchase
agreements. The Fund is required to allocate taxable income on temporary
investments, if any, proportionately between common shares and MuniPreferred
shares, based on the percentage of total dividends distributed to each class for
that year.
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 a substantial portion of the income produced
by the Fund may 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. 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. In
addition, the dividends paid on MuniPreferred shares during specified Rate
Periods will include an allocated portion of any net capital gains or other
income taxable for Federal income tax purposes the Fund realizes. See "Tax
Matters."
MUNICIPAL BONDS
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 Municipal Lease
Obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a Municipal Lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is
S-3
<PAGE>
appropriated for such purpose on a yearly basis. In the case of a "non-
appropriationn lease, the Fund's ability to recover under the lease in the event
of non-appropriation or default will be limited solely to the repossession of
the leased property, without recourse to the general credit of the lessee, and
disposition or releasing of the property might prove difficult. The Fund seeks
to minimize these risks by only investing in those "non-appropriation" Municipal
Lease Obligations where (a) the nature of the leased equipment or property is
such that its ownership or use is essential to a governmental function of the
municipality, (b) the lease payments will commence amortization of principal at
an early date that results in an average life of seven years or less for the
Municipal Lease Obligation, (c) appropriate covenants will be obtained from the
municipal obligor prohibiting the substitution or purchase of similar equipment
if lease payments are not appropriated, (d) the lease obligor has maintained
good market acceptability in the past, (e) the investment is of a size that will
be attractive to institutional investors and (f) the underlying leased equipment
has elements of portability or use, or both, that enhance its marketability in
the event foreclosure on the underlying equipment were ever required.
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 indexes, such as a bank prime rate or a tax-exempt money market
index. As used in the Prospectus and in this Statement of Additional
Information, the term municipal bonds also includes obligations, such as tax-
exempt notes, municipal commercial paper and Municipal Lease Obligations, having
relatively short-term maturities, although the Fund emphasizes investments in
municipal bonds with long-term maturities.
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, as amended. In addition,
Congress, state legislatures or referenda may in the future enact laws affecting
the obligations of these issuers by 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
Obligations may be materially affected.
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 shares of
common stock and preferred stock of the Fund, including MuniPreferred, voting
together as a single class, and of the holders of a majority of the outstanding
shares of preferred stock of the Fund, including MuniPreferred, voting as a
separate class:
S-4
<PAGE>
(1) Issue senior securities, as defined in the 1940 Act, other than preferred
stock, except to the extent such issuance might be involved with respect to
borrowings described under subparagraph (3) below or with respect to
transactions involving futures contracts or the writing of options within the
limits described under "Certain Trading Strategies of the Fund Financial Futures
and Options Transactions" below;
(2) Make short sales of securities or purchase any securities on margin (except
for such short-term credits as are necessary for the clearance of transactions),
or write or purchase put or call options, except to-the extent that the purchase
of a standby commitment may be considered the purchase of a put, and except for
transactions involving options within the limits described under "Certain
Trading Strategies of the Fund -- Financial Futures and Options Transactions"
below;
(3) Borrow money, except from banks for temporary or emergency purposes or for
repurchase of its shares, and then only in an amount not exceeding one-third of
the value of its total assets including the amount borrowed; while any such
borrowings exceed 5% of its total assets, no additional purchases of investment
securities will be made;
(4) Underwrite any issue of securities, except to the extent that the purchase
of Municipal Obligations in accordance with its investment objective, policies
and limitations may be deemed to be an underwriting;
(5) Invest more than 25% of its total assets in securities of issuers in any one
industry; provided, however, that such limitation shall not apply to Municipal
Obligations other than those Municipal Obligations backed only by the assets and
~evenues of non-governmental users, nor shall it apply to Municipal Obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities;
(6) Purchase or sell real estate, but this shall not prevent the Fund from
investing in Municipal Obligations secured by real estate or interests therein;
(7) Purchase or sell commodities or commodities contracts, except for
transactions involving futures contracts within the limits described under
"Certain Trading Strategies of the Fund -- Financial Futures and Options
Transactions" bellow;
(8) Make loans, other than by entering into repurchase agreements and through
the purchase of Municipal Obligations or temporary investments in accordance
with its investment objective, policies and limitations;
(9) Invest in securities other than Municipal Obligations and temporary
investments as described under "Investment Objectives and Policies -- Portfolio
Investments" above; and purchase financial futures and options except within the
limits described in "Certain Trading Strategies of the Fund -- Financial Futures
and Options Transactions."
S-5
<PAGE>
(10) Invest more than 5% of its total assets in securities of any one issuer,
except that this limitation shall not apply to securities of the U.S.
Government, its agencies and instrumentalities or to the investment of 25% of
its total assets;
(11) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (3) above, it may pledge securities having
a market value at the time of pledge not exceeding 20% of the value of its total
assets;
(12) Invest more than 10% of its total assets in repurchase agreements maturing
in more than seven days; and
(13) Purchase or retain the securities of any issuer other than its own
securities if, to its knowledge, those of its directors, or those officers and
directors of the Nuveen Advisory Corp. who individually own beneficially more
than 1/2 of 1% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities.
For the purpose of applying the limitation set forth in subparagraph (10) 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 user, 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 user, then such non-governmental user 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, the guarantee or letter of credit would be considered a
separate security and would be treated as an issue of that government or other
entity. When a municipal bond is insured by bond insurance, it shall not be
~onsidered a security that is issued or guaranteed by the issuer; instead, the
issuer of the municipal bond will be determined in accordance with the
principles set out 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.
In addition to the limitations set forth above, the Fund will not, as a
matter of operating policy, (1) invest for the purpose of exercising control or
management, (2) borrow in excess of 5% of its total assets if and so long as its
preferred shares are outstanding. These policies are not fundamental and the
Board may change them without shareholder approval.
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.
S-6
<PAGE>
The Fund has no intention to 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.
CERTAIN TRADING STRATEGIES OF THE FUND
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objective
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 objective.
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
objective by prudent selection of Municipal Obligations with a view to holding
them for investment. The Fund anticipates that its annual portfolio turnover
rate generally will not exceed 100%, although there can be no assurance of this.
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 Fund's annual portfolio turnover rate may exceed 100% in
particular years.
WHEN-ISSUED AND DELAYED DELIVERY
The Fund may purchase and sell Municipal Obligations on a when-issued or
delayed delivery basis. When-issued and delayed delivery transactions arise when
securities are purchased or sold with payment and delivery beyond the regular
settlement date. (When-issued transactions normally settle within 30-45 days).
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, it is required under rules promulgated by the Securities and
Exchange Commission ("SEC") to maintain in a segregated account cash or liquid
assets, equal in value to the purchase price due on the settlement date. Income
these assets generate in a segregated account, which provides taxable income for
Federal income tax purposes, is includable in the taxable income of the Fund.
The Fund currently intends to allocate net capital gains and other income
taxable for Federal income tax purposes, if any, proportionately between its
common stock and its MuniPreferred shares, and dividends paid on its
MuniPreferred shares during specified periods will include an allocated portion
of any
S-7
<PAGE>
such net capital gains and other taxable income. See "Tax Matters." The
commitment to purchase securities on a when-issued or delayed delivery basis may
involve an element of risk because the value of the securities is subject to
market fluctuation. No interest accrues to the purchaser prior to settlement of
the transaction, and at the time of delivery the market value may be less than
cost.
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its investment portfolio
against market risk by engaging in transactions in financial futures contracts,
options on financial futures or options that either are based on an index of
long-term Municipal obligations (i.e., those with remaining maturities averaging
20-30 years) or relate to debt securities whose prices Nuveen Advisory
anticipates to correlate with the prices of the Municipal Obligations the Fund
owns. The Fund has no present intention to engage in such hedging transactions
and in no event does it expect that any material portion of its assets would be
so committed. To accomplish such hedging, the Fund may take an investment
position in a futures contract or in an option which is expected to move in the
opposite direction from the position being hedged. Hedging may be utilized to
reduce the risk that the value of securities the Fund owns may decline on
account of an increase in interest rates and to hedge against increases in the
cost of the securities the Fund intends to purchase as a result of a decline in
interest rates. The use of futures and options for hedging purposes can be
expected to result in taxable income or gain. The Fund currently intends to
allocate any taxable income or gain proportionately between its common stock and
its MuniPreferred shares. See "Tax Matters."
The sale of financial futures or the purchase of put options on financial
futures or on debt securities or indexes is a means of hedging against the risk
of rising interest rates, whereas the purchase of financial futures or of call
options on financial futures or on debt securities or indexes is a means of
hedging the Fund's portfolio against an increase in the price of securities such
Fund intends to purchase. Writing a call option on a futures contract or on debt
securities or indexes may serve as a hedge against a modest decline in prices of
Municipal Obligations held in the Fund's portfolio, and writing a put option on
a futures contract or on debt securities or indexes may serve as a partial hedge
against an increase in the value of Municipal Obligations the Fund intends to
acquire. The writing of these options provides a hedge to the extent of the
premium received in the writing transaction.
Although certain risks are involved in futures and options transactions (as
discussed under "Risks of Futures and options Transactions" below), because the
Fund will engage in these transactions only for hedging purposes, these futures
and options portfolio strategies should not subject the Fund to those risks
frequently associated with speculation in futures or options transactions.
Regulations of the Commodity Futures Trading Commission (the "CFTC") require
that the Fund engage in transactions in futures and options on futures only for
bona fide hedging purposes or if the aggregate initial margin deposits and
premiums the Fund pays do not exceed 5% of the market value of its assets. The
Fund will not purchase futures unless it has segregated
S-8
<PAGE>
cash, government securities or high grade liquid debt equal to the contract
price of the futures less any margin on deposit, or unless the purchase of a put
option covers the long futures position. The Fund will not sell futures unless
the Fund owns the instruments underlying the futures or owns options on such
instruments or owns a portfolio whose market price may be expected to move in
tandem with the market price of the instruments or index underlying the futures.
If the Fund engages in transactions involving the purchase or writing of put and
call options on debt securities or indexes, the Fund will not purchase these
options if more than 5% of its assets would be invested in the premiums for
these options, and it will only write "covered" or "secured" options, where the
Fund holds the securities or cash required to be delivered upon exercise, with
such cash being maintained in a segregated account. These requirements and
limitations may limit the Fund's ability to engage in hedging transactions. So
long as Moody's or S&P, or both, are rating the Fund's MuniPreferred shares, the
Fund will only engage in futures or options transactions in accordance with the
then-current guidelines of such rating agencies, and only after it has received
written confirmation from Moody's and S&P, as appropriate, that these
transactions would not impair the ratings then assigned by Moody's and S&P to
such shares.
DESCRIPTION OF FINANCIAL FUTURES AND OPTIONS. A futures contract is a
contract between a seller and a buyer for the sale and purchase of specified
property at a specified future date for a specified price. An option is a
contract that gives the holder of the option the right, but not the obligation,
to buy (in the case of a call option) specified property from, or to sell (in
the case of a put option) specified property to, the writer of the option for a
specified price during a specified period prior to the option's expiration.
Financial futures contracts and options cover specified debt securities (such as
U.S. Treasury securities) or indexes designed to correlate with price movements
in certain categories of debt securities. At least one exchange trades futures
contracts on an index designed to correlate with the long-term municipal bond
market. Financial futures contracts and options on financial futures contracts
are traded on exchanges regulated by the CFTC. Options on certain financial
instruments and financial indexes are traded on securities markets regulated by
the SEC. Although futures contracts and options on specified financial
instruments call for settlement by delivery of the financial instruments covered
by the contracts, in most cases positions in these contracts are closed out in
cash by entering into offsetting liquidating or closing transactions. Index
futures and options are designed for cash settlement only.
RISKS OF FUTURES AND OPTIONS TRANSACTIONS. There are certain risks
associated with the use of financial futures and options to hedge investment
portfolios. There may be an imperfect correlation between price movements of the
futures and options and price movements of the portfolio securities being
hedged. Losses may be incurred in hedging transactions, which could reduce the
portfolio gains that might have been realized if the hedging transactions had
not been entered into. The ability to close out positions in futures and options
depends upon the existence of a liquid secondary market, which may not exist for
all futures and options at all times. If the Fund engages in futures
transactions or in the writing of options on futures, it will be required to
maintain initial margin and maintenance margin and may be required to make daily
variation margin payments in accordance with applicable rules of the
S-9
<PAGE>
exchanges and the CFTC. If the Fund purchases a financial futures contract or a
call option or writes a put option in order to hedge the anticipated purchase of
Municipal Obligations, and if the Fund fails to complete the anticipated
purchase transaction, the Fund may have a loss or a gain on the futures or
options transaction that will not be offset by price movements in the Municipal
Obligations that were the subject of the anticipatory hedge. The cost of put
options on debt securities or indexes effectively increases the cost of the
securities subject to them, thereby reducing the yield otherwise available from
these securities. If the Fund decides to use futures contracts or options on
futures contracts for hedging purposes, the Fund will be required to establish
an account for such purposes with one or more CFTC-registered futures commission
merchants. A futures commission merchant could establish initial and maintenance
margin requirements for the Fund that are greater than those which would
otherwise apply to the Fund under applicable rules of the exchanges and the
CFTC.
REPURCHASE AGREEMENTS. The Fund may buy repurchase agreement's as temporary
investments. A repurchase agreement is a contract in which the seller of
securities (U.S. government securities or municipal bonds) agrees to repurchase
the same securities from the buyer at a specified price on a future date. The
repurchase price determines the yield during the Fund's holding period.
Repurchase agreements are considered to be loans whose collateral is the
underlying security that is the subject of the repurchase agreement. Income from
repurchase agreements is taxable and required to be allocated between common
shares and MuniPreferred shares. See "Tax Matters" and "The Auction - Auction
Dates; Advance Notice of Allocation of Taxable Income" in the Prospectus. The
Fund will enter into repurchase agreements only with registered securities
dealers or domestic banks that, in Nuveen Advisory's opinion, present minimal
credit risks. The risk to the Fund is limited to the ability of the other party
to pay the agreed-upon repurchase price on the delivery date; however, although
the value of the underlying collateral at the time of the transaction always
equals or exceeds the repurchase price, if the value of the collateral declines
there is a risk of loss of principal and interest. If the other party defaults,
the collateral may be sold, but the Fund may lose money if the value of the
collateral declines and may have to pay the costs of the sale or experience
delays in selling the collateral. If the seller files for bankruptcy, the Fund
may not be able to sell the collateral quickly or at all. Nuveen Advisory will
monitor the value of the collateral at the time the Fund enters into a
repurchase agreement and during the term of the repurchase agreement to
determine that at all times that value of the collateral equals or exceeds the
repurchase price. If the value of the collateral is less than the repurchase
price, Nuveen Advisory will demand additional collateral from the other party to
increase the value of the collateral to at least the redemption price plus
interest.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Board of Directors is responsible for the management of the Fund,
including general supervision of the duties Nuveen Advisory performs under the
Investment Management Agreement. There are seven directors of the Fund, one of
whom is an "interested person" (as
S-10
<PAGE>
defined in the 1940 Act) and six of whom are "disinterested persons." The names
and business addresses of the directors and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth below, with those directors who are "interested persons" of the Fund
indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, AGE POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS
AND ADDRESS WITH FUND DURING PAST FIVE YEARS
- ------------------------------ ------------------------------------- -------------------------------------
<S> <C> <C>
Timothy R. Schwertfeger,* 50 Chairman of the Board and Director Chairman (since July 1996) and
333 West Wacker Drive Director of The John Nuveen
Chicago, IL 60606 Company, John Nuveen & Co.
Incorporated, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.; prior thereto, Executive
Vice President; Chairman and
Director (since January 1997) of
Nuveen Asset Management, Inc.;
Director (since 1996) of
Institutional Capital Corporation;
Chairman and Director of Rittenhouse
Financial Services Inc. (since 1999).
- ------------------------------ ------------------------------------- -------------------------------------
Robert P. Bremner, 58 Director Private investor and management
3725 Huntington Street, NW consultant.
Washington, D.C. 20015
- ------------------------------ ------------------------------------- -------------------------------------
Lawrence H. Brown, 64 Director Retired in August 1989 as Senior
201 Michigan Avenue Vice President of The Northern
Highwood, IL 60040 Trust Company
- ------------------------------ ------------------------------------- -------------------------------------
Anne E. Impellizzeri, 65 Director President and Chief Executive
3 West 29th Street Officer of Blanton-Peale Institute,
New York, NY 10001 a training and counseling
organization.
- ------------------------------ ------------------------------------- -------------------------------------
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Peter R. Sawers, 66 Director Adjunct Professor of
22 The Landmark Business and Economics,
Northfield, IL 60093 University of Dubuque,
Iowa; Adjunct Professor,
Lake Forest Graduate
School of Management, Lake
Forest, Illinois; prior
Certified Management
Consultant.
- -------------------------------------------------------------------------------------------------------------
William J. Schneider, 54 Director Senior Partner and Chief Operating
4000 Miller-Valentine Ct Officer, Miller-Valentine Partners;
P.O. Box 744 Vice President, Miller-Valentine Group,
Dayton, OH 45401 a development and contract company;
Member Community Advisory Board,
National City Bank, Dayton, Ohio.
- -------------------------------------------------------------------------------------------------------------
Judith M. Stockdale, 50 Director Executive Director (since
35 East Wacker Drive 1994) of the Gaylord and
Chicago, IL 60601 Dorothy Donnelley
Foundation, a private
family foundation; prior
thereto, Executive
Director (from 1990 to
1994) of the Great Lakes
Protection Fund.
- -------------------------------------------------------------------------------------------------------------
Alan G. Berkshire, 38 Vice President and Assistant Vice President and General Counsel
333 W. Wacker Drive Secretary (since September 1997) and
Chicago, IL 60606 Secretary (since May 1998) of the
John Nuveen Company, John Nuveen
Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Corp., prior
thereto, Partner in the law firm of
Kirkland & Ellis.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Peter H. D'Arrigo, 31 Vice President and Treasurer Vice President of John Nuveen & Co.
333 West Wacker Drive Incorporated (since January 1999),
Chicago, IL 60606 prior thereto, Assistant Vice
President (since January 1997);
formerly, Associate of John Nuveen
& Co. Incorporated; Chartered
Financial Analyst
- -------------------------------------------------------------------------------------------------------------
Michael S. Davern, 41 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.; prior thereto, Vice
Chicago, IL 60606 President and Portfolio Manager of
Flagship Financial.
- -------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson, 53 Vice President Vice President of John Nuveen & Co.
333 W . Wacker Drive (since January 1998) of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen
Institutional Advisory Corp.
- -------------------------------------------------------------------------------------------------------------
William M. Fitzgerald, 35 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp (since December 1995); prior
Chicago, IL 60606 thereto, Assistant Vice President
of Nuveen Advisory Corp. (from
September 1992 to December 1995);
Chartered Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
Stephen D. Foy, 44 Vice President and Controller Vice President of John Nuveen & Co.
333 W. Wacker Drive Incorporated.
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------
J. Thomas Futrell, 43 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.; Chartered Financial Analyst.
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard A. Huber, 36 Vice President Vice President of Nuveen
333 W. Wacker Drive Institutional Advisory Corp. (since
Chicago, IL 60606 March 1998) and Nuveen Advisory
Corp. (since January 1997); prior
thereto, Vice and Portfolio Manager
of Flagship Financial.
- -------------------------------------------------------------------------------------------------------------
Steven J. Krupa, 41 Vice President Vice President of Nuveen Advisory
333 West Wacker Drive Corp.
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------
Larry W. Martin, 47 Vice President and Assistant Vice President, Assistant Secretary
333 West Wacker Drive Secretary and Assistant General Counsel of
Chicago, IL 60606 John Nuveen & Co. Incorporated;
Vice President and Assistant
Secretary of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.; Assistant Secretary of The
John Nuveen Company.
- -------------------------------------------------------------------------------------------------------------
Edward F. Neild, IV, 33 Vice President Vice President of Nuveen Advisory
333 West Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp. (since September
1996); prior thereto, Assistant
Vice President of Nuveen Advisory
Corp. (from December 1993 to
September 1996) and Nuveen
Institutional Advisory Corp. (from
May 1995 to September 1996;
Chartered Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen S. Peterson, 41 Vice President Vice President (since September
333 W. Wacker Drive 1997); previously Assistant Vice
Chicago, IL 60606 President of Nuveen Advisory Corp.
(since September 1996), Portfolio
Manager prior thereto; Chartered
Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
Stuart W. Rogers, 42 Vice President Vice President of John Nuveen & Co.
333 W. Wacker Drive Incorporated.
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------
Thomas C. Spalding, Jr., 47 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp., Chartered
Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
William S. Swanson, 33 Vice President Vice President of John Nuveen & Co.
333 West Wacker Drive Incorporated (since October 1997),
Chicago, IL 60606 prior thereto, Assistant Vice
President (since September 1996);
formerly, Associate of John Nuveen
& Co. Incorporated; Chartered
Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman, 42 Vice President and Secretary Vice President, Assistant Secretary
333 West Wacker Drive and Associate General Counsel of
Chicago, IL 60606 John Nuveen & Co. Incorporated;
Vice President and Assistant
Secretary of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp., Chartered Financial Analyst.
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At the next annual meeting of the Fund's shareholders, the holders of
MuniPreferred, voting as a separate class, will elect two directors, and holders
of outstanding Common Stock
S-15
<PAGE>
and MuniPreferred, voting together as a single class, will elect five directors.
See "Description of MuniPreferred -- Voting Rights" in the Prospectus.
The Fund has adopted a Directors' Deferred Compensation Plan pursuant to
which a director of the Fund may elect to have all or a portion of the
director's fee deferred. Directors may defer fees for any calendar quarter by
the execution of a Participation Agreement before the beginning of the calendar
quarter during which the director wishes to begin deferral.
Peter Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Directors. The Executive Committee, which
meets between regular meetings of the Board of Directors, is authorized to
exercise all of the powers of the Board of Directors. Mr. Schwertfeger is a
director or trustee, as the case of may be, of 100 Nuveen open-end and closed-
end funds advised by Nuveen Advisory and Nuveen Institutional Advisory Corp. The
directors of the Fund are directors or trustees, as the case may be, of 42 open-
end funds and 52 Nuveen closed-end funds advised by Nuveen Advisory.
The table below shows, for each director who is not affiliated with
Nuveen or Nuveen Advisory, the aggregate compensation the Fund paid for its
fiscal year ended October 31, 1998 and the total compensation that Nuveen funds
paid to each director during the calendar year 1998. The Fund has no retirement
or pension plans. The officers and directors affiliated with Nuveen serve
without compensation from the Fund.
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE FROM NUVEEN FUNDS
COMPENSATION PAID TO
NAME OF DIRECTOR FROM THE FUND DIRECTORS(l)
- ---------------- ------------- -----------------
<S> <C> <C>
Robert P. Bremner..... $1,764 $71,500
Lawrence H. Brown..... 1,938 79,000
Anne E. Impellizzeri.. 1,764 71,500
Peter R. Sawers....... 1,764 72,000
William J. Schneider.. 1,764 71,500
Judith M. Stockdale... 1,764 72,000
</TABLE>
- ------------
(1) Includes compensation for service on the boards of 37 Nuveen open-end funds
and 52 Nuveen closed-end funds managed by Nuveen Advisory ("NAC Funds").
At March 31, 1999, the Fund's officers and directors as a group owned
less than 1% of the outstanding shares of Common Stock and no shares of
MuniPreferred.
INVESTMENT ADVISER
S-16
<PAGE>
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606, acts as
the investment adviser for, and manages the investment and reinvestment of the
assets of, the Fund. Nuveen Advisory also administers the Fund's business
affairs, provides office facilities and equipment and certain clerical,
bookkeeping and administrative services, and permits any of its officers or
employees to serve without compensation as directors or officers of the Fund if
elected to such positions.
Under the Management Agreement the Fund has agreed to pay an annual
management fee as follows:
MANAGEMENT FEE SCHEDULE
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS RATE
------------------------ ----
<S> <C>
Up to $125 million.................................. .6500%
$125 to $250 million................................ .6375
$250 to $500 million................................ .6250
$500 million to $1 billion.......................... .6125
$1 billion to $2 billion............................ .6000
$2 billion and over................................. .5875
</TABLE>
The Fund paid aggregate management fees of $9,000,100, $8,134,838 and
$8,045,628 for the fiscal years ended October 31, 1998, 1997 and 1996, for an
effective management fee rate of .62%, .62% and .62%, respectively.
Nuveen Advisory was organized in 1976 and is a wholly-owned subsidiary
of John Nuveen & Co. Incorporated ("Nuveen"), 333 West Wacker Drive, Chicago,
Illinois 60606. Nuveen is the co-managing underwriter of the Fund's shares.
Founded in 1898, Nuveen currently sponsors 100 investment company portfolios
(including the Fund). 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 management company of St. Paul, Minnesota, principally
engaged in providing property-liability insurance through subsidiaries.
The names, addresses and principal occupations of the principal
executive officers and the directors of Nuveen Advisory are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS
---------------- ---------------------
<S> <C>
Timothy R. Schwertfeger..................Chairman of the Board and Director
333 West Wacker Drive (Principal Executive Officer),
John Nuveen & Co. Incorporated
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
Chicago, Illinois 60606
John P. Amboian....................President, John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, Illinois 60606
</TABLE>
PORTFOLIO TRANSACTIONS
Nuveen Advisory, in effecting purchases and sales of portfolio
securities for the account of the Fund, places orders in such manner as, in the
opinion of its management, offers the best price and market for the execution of
each transaction. Portfolio securities are normally 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
elsewhere. Portfolio securities are not purchased from Nuveen or its affiliates
except in compliance with the 1940 Act.
Generally, all portfolio transactions are effected on a principal (as
opposed to an agency) basis and, accordingly, the Fund has not paid and does not
expect to pay any brokerage commissions. Purchases from underwriters include a
commission or concession the issuer pays to the underwriter, and purchases from
dealers include the spread between the bid and asked price. Given the best price
and execution obtainable, it is the practice of the Fund to select dealers
which, in addition, furnish research information (primarily credit analyses of
issuers) and statistical and other services to Nuveen Advisory. It is not
possible to place a dollar value on information, statistical and other services
received from dealers. Since it is only supplementary to Nuveen Advisory's own
research efforts, the receipt of research information is not believed to reduce
significantly Nuveen Advisory's expenses. Any research benefits obtained are
available to all of Nuveen Advisory's other clients. While Nuveen Advisory is
primarily responsible for the placement of the business of the Fund, the
policies and practices of Nuveen Advisory in this regard must be consistent with
the foregoing and are at all times subject to Board review.
Nuveen Advisory reserves the right to, and does, manage other investment
accounts and investment companies for other clients which may have investment
objectives similar or identical to those of the Fund. Subject to applicable laws
and regulations, Nuveen Advisory will attempt to allocate equitably portfolio
transactions among the Fund and the portfolios of its other clients purchasing
or selling securities whenever Nuveen Advisory decides to purchase or sell
securities for the Fund and one or more other clients simultaneously. In making
these allocations, the main factors to be considered will be the respective
investment objectives of the Fund and such other clients, the relative size of
the portfolio holdings of the same or comparable securities, the availability of
cash for investment by the Fund and such other clients, the size of investment
commitments the Fund and other clients generally hold, and opinions of the
persons responsible for recommending investments to the Fund and such other
clients. 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 that the benefits available from Nuveen Advisory's
S-18
<PAGE>
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions. Notwithstanding the similarity of the investment
objective of the Fund with that of other funds Nuveen Advisory manages, the Fund
will be separately managed and the composition of its investment portfolio is
likely to differ. Accordingly, the investment performance of the Fund will
likely not be the same as other funds.
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 obligations
the Fund may purchase and the amount of Municipal Obligations the Fund may
purchase in any one issue. In addition, the Board must approve at least
quarterly purchases of securities made pursuant to the terms of the Rule,
including a majority of the directors who are not interested persons of the
Fund.
For the fiscal years ended October 31, 1998, October 31, 1997 and
October 31, 1996, the Fund did not pay any brokerage commissions.
S-19
<PAGE>
NET ASSET VALUE
In determining the net asset value of the Fund, the Fund's custodian
uses the valuations of portfolio securities a pricing service approved by the
Board furnishes. 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
(which will constitute a majority of the securities the Fund holds) are valued
at fair value as the pricing service determines using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The pricing service may employ
electronic data processing techniques or a matrix system, or both, to determine
valuations. The officers of the Fund, under the general supervision of the
Board, review procedures of the pricing service and its valuations.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR MUNIPREFERRED
GENERAL
Note: Capitalized terms used in the following section have the meaning
assigned to them in the Statement of Preferences, which is included as Appendix
B to this Statement of Additional Information.
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 the
Fund selected, which provide for the participation of those Broker-Dealers in
Auctions for MuniPreferred shares. See "Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members for shares of each series of
MuniPreferred. One certificate for all of the shares of each series of
MuniPreferred will be registered in the name of Cede, as nominee of the
Securities Depository. The certificate will bear a legend to the effect that the
certificate is issued subject to the provisions restricting transfers of
MuniPreferred shares 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 directors, 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
these shares will not be entitled to receive certificates representing their
ownership interest in these shares.
S-20
<PAGE>
DTC, a New York-chattered 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) each participant holds
(the "Agent Member") in MuniPreferred shares, whether for its own account or as
a nominee for another person.
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 it makes in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of MuniPreferred shares, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other person, if the Fund permits) with respect to transfers described under
"Description of MuniPreferred -- The Auction -- Secondary Market Trading" in the
Prospectus and notices from the Fund. TheAuction Agent is not required to accept
any such notice for an Auction unless it receives the notice 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 before the removal the Fund shall have entered into such an
agreement with a successor Auction Agent.
S-21
<PAGE>
TAX MATTERS
The following is based upon the advice of Morgan, Lewis & Bockius LLP,
counsel to the Fund.
The Fund intends to qualify under Subchapter M of the Code as a
regulated investment company and satisfy conditions which enable dividends on
Common Stock or MuniPreferred shares 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) net investment income (i.e., 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 issuer; and (ii) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies, or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses). In meeting these
requirements of Subchapter M of the Code, the Fund may be restricted in the
utilization of certain of the investment techniques described under "Investment
Objective and Policies -- Investment Restrictions" above. If in any year the
Fund should fail to qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund
S-22
<PAGE>
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
Tach 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.
The Fund intends to qualify to pay "exempt-interest" dividends on its
shares of Common Stock and MuniPreferred shares 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 Obligations, the Fund shall
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) the Fund pays that are attributable to interest on Municipal
Obligations and that the Fund so designates. Exempt-interest dividends will be
exempt from Federal income tax, subject to the possible application of the
Federal alternative minimum tax. Insurance proceeds the Fund received under any
insurance policies for scheduled interest payments on defaulted Municipal
Obligations, as described herein, will be excludable from Federal gross income
under Section 103(a) of the Code. 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 of net income
received, if any, from taxable temporary investments and net short-term capital
gains, if any, the Fund realizes will be taxable to its shareholders as ordinary
income. Distributions of net capital gain (i.e., the excess of the Fund's net
long-term capital gain over net short-term capital loss), if any, are taxable as
long-term capital gain, regardless of the length of time the shareholder has '
owned shares of Common Stock or MuniPreferred shares of the Fund. The amount of
taxable income allocable to the Fund's MuniPreferred shares will depend upon the
amount of this income the Fund realizes, but is not generally expected to be
significant. Except for dividends paid on MuniPreferred shares which include an
allocated portion of any net capital gain or other taxable income, the Fund
anticipates that all other dividends paid on its MuniPreferred shares will
constitute exempt-interest dividends for Federal income tax purposes. Because
the taxable portion of the Fund's investment income consists primarily of
interest, 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 IRS currently 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. Under a special
"grandfather" provision contained in Revenue Ruling 89-81, regulated investment
companies can make non-proportionate designations pursuant to a rule described
in a registration statement filed with the Securities and Exchange Commission
prior to June 13, 1989. In the past, the Fund has designated exempt-interest
dividends disproportionately to holders of Preferred Stock and designated net
capital gain and investment company taxable income to holders of its Common
Stock pursuant to this "grandfather" provision.
S-23
<PAGE>
The Fund intends each year to allocate, to the fullest extent practicable, net
tax-exempt interest, net capital gain and other taxable income, if any, between
its shares of Common Stock and MuniPreferred shares in proportion to the total
dividends paid to each class for that year. To the extent permitted under
applicable law, and consistent with the Fund's objectives, the Fund reserves the
right to make special allocations of income within a class, as follows. 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 of any net capital gain 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
gain 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 the Statement requires solely by reason of the fact that such
allocation is made retroactively as a result of the redemption of all or a
portion of the outstanding shares of its MuniPreferred or the liquidation of the
Fund or (b) in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund allocates any net capital gain or other taxable income for
Federal income tax purposes to its MuniPreferred shares, the Fund will arrange
to make certain payments to owners of its MuniPreferred shares to which such
allocation was made to offset the Federal income tax effect thereof as described
under "Description of MuniPreferred -- Dividends and Rate Periods -Gross-up
Payments" in the Prospectus.
The Fund has received an opinion of counsel to the effect that the
manner in which the Fund intends to allocate items of tax-exempt income, net
capital gain and other taxable income, if any, between its shares of Common
Stock and MuniPreferred shares will be respected for Federal income tax
purposes. This opinion of counsel represents only counsel's best legal judgment,
and is not binding on the IRS or the courts. Currently there is no guidance from
the IRS or other sources specifically addressing whether the Fund's method for
making such allocations will be respected for Federal income tax purposes, and
it is possible that the IRS could disagree with counsel's opinion. If the IRS
were to disagree with the Fund's allocation, it either could assert the need to
reallocate the Fund's net capital gain or other taxable income or it could
disallow a portion of the Fund's dividends paid deduction. In the event of a
reallocation, some of the dividends the Fund identified as tax-exempt to owners
of its MuniPreferred shares may be recharacterized as additional capital gain or
other taxable income. Under these circumstances, the Fund would not be required
to make gross-up payments to such owners to offset the tax effect of such
reallocation. In addition, a reallocation or a disallowance of part of the
Fund's dividends paid deduction would likely cause the Fund to be liable for
income tax on any reallocated taxable income and possibly an excise tax.
Counsel
S-24
<PAGE>
has advised the Fund that, in its opinion, if the IRS were to challenge in court
the Fund's allocations of income and gain, the IRS should not prevail.
In order for any distributions to owners of the Fund's MuniPreferred
shares to be eligible to be treated as exempt-interest dividends, such
MuniPreferred shares must be treated as stock for Federal income tax purposes.
The Fund received an opinion of counsel, at the time the Fund first issued
MuniPreferred shares, to the effect that its MuniPreferred shares will
constitute stock of the Fund for Federal income tax purposes and, therefore,
distributions declared and paid at the Applicable Rate as dividends with respect
to the Fund's MuniPreferred shares, to the extent paid out of current or
accumulated earnings and profits of the Fund, will constitute dividends for
Federal income tax purposes. The opinion of counsel is based, among other
things, on (a) a revenue ruling the IRS published in 1990, which holds that
preferred stock that has its dividend rate periodically set pursuant to an
auction process substantially similar to the auction process to be established
for the Fund's MuniPreferred shares is treated as stock for Federal income tax
purposes and (b) the Fund's representation to counsel that there is no express
or implied agreement between or among a Broker-Dealer or any other party and the
Fund, Nuveen or any owner of the Fund's shares of MuniPreferred that the Broker-
Dealer or other party will guarantee or otherwise arrange to ensure that an
owner of such shares will be able to sell such shares. This opinion represents
only counsel's best legal judgment and is not binding on the IRS or the courts.
If at any time when the Fund's MuniPreferred shares 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 shares of Common Stock until such maintenance amount or asset
coverage, as the case may be, is restored. See "Description of MuniPreferred -
Dividends and Rate Periods -- Restrictions on Dividends and Other Distributions"
in the Prospectus. This may prevent the Fund from distributing at least 90% of
its net investment 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 an income 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
MuniPreferred shares 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 the IRS uses 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.
S-25
<PAGE>
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 these
bonds financed or a "related person" of a "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 their
spouses and minor children), an S corporation and each of its shareholders (and
their spouses and minor children) and various combinations of these
relationships. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person."
The Fund may, at its option, redeem its MuniPreferred shares in whole or
in part, and is required to redeem its MuniPreferred shares 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 MuniPreferred shares will be taxed as gain or loss from the sale or
exchange of the MuniPreferred shares 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) for non-corporate owners, is in partial liquidation of the
Fund. For purposes of (a), (b) and (c) above, an owner's common share 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 an applicable tax treaty provides) on
distributions of taxable net investment income (which term includes net short-
term capital gain). To the extent received by foreign investors, exempt-interest
dividends, distributions of net capital gain and any gain from the sale or other
disposition of the MuniPreferred shares 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.
The sale or other disposition of MuniPreferred shares of the Fund will
normally result in capital gain or loss to shareholders. Present law taxes both
long-term and short-term capital gain of corporations at the rates applicable to
ordinary income. For non-corporate taxpayers, however,
S-26
<PAGE>
under current law, short-term capital gain and ordinary income will be taxed at
a maximum rate of 39.6% while long-term capital gain of non-corporate taxpayers
may be taxed at more favorable rates. 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 a shareholder realizes 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 net capital gain received with respect to such
shares.
Non-corporate investors who dispose of capital assets held for more than
twelve (12) months generally will pay tax upon disposition of those assets at a
10% rate if they are in the lowest tax bracket (for 1999, singles with taxable
income of $42,350 or less and married couples filing jointly with taxable income
of $43,050 or less), and at a 20% rate if they are in higher tax brackets. In
addition, beginning in the year 2001, for certain capital assets held for more
than five years, the 10% maximum capital gains rate will be lowered to 8%, and
in 2006 the 20% maximum capital gains rate will be lowered to 18%.
Federal tax law imposes an alternative minimum tax on 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 it paid, 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 the Fund makes 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. A corporation qualifies for such exemption provided that (i) for the
corporation's first taxable year beginning after December 31, 1996, its average
annual gross receipts for the three prior taxable year period does not exceed
$5,000,000 and (ii) the corporation's average annual gross receipts for each
three prior taxable year period thereafter does not exceed $7,500,000.
S-27
<PAGE>
Tax-exempt income, including exempt-interest dividends the Fund pays, 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 the return the amount of tax-exempt
interest received during the taxable year, including any exempt-interest
dividends received from the Fund.
This is a general, abbreviated 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 change may be retroactive with
respect to the Fund's transactions. 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 Federal-income
tax matters.
CERTAIN OWNERS OF RECORD
As of March 31, 1999, no person is known to the Fund to own of record or
beneficially five percent or more of the outstanding shares of Common Stock or
MuniPreferred.
EXPERTS
The Statement of Net Assets of the Fund as of October 31, 1998 appearing
in this Prospectus 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-28
<PAGE>
Report of Independent Auditors
The Boards of Directors and Shareholders
Nuveen Premium Income Municipal Fund, Inc.
Nuveen Premium Income Municipal Fund 2, Inc.
Nuveen Premium Income Municipal Fund 4, Inc.
We have audited the accompanying statements of net assets, including the
portfolios of investments, of Nuveen Premium Income Municipal Fund, Inc., Nuveen
Premium Income Municipal Fund 2, Inc. and Nuveen Premium Income Municipal Fund
4, Inc. as of October 31, 1998, and the related statements of operations,
changes in net assets and the financial highlights for the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the-financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
October 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
Nuveen Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund
2, Inc. and Nuveen Premium Income Municipal Fund 4, Inc. at October 31, 1998,
and the results of their operations, changes in their net assets and financial
highlights for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
December 11, 1998
S-29
<PAGE>
Portfolio of Investments
Nuveen Premium Income Municipal Fund, Inc. (NPI)
October 31, 1998
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona - 1.1%
$11,630,000 The Industrial Development Authority of the County of Pima
(Arizona), Industrial Development Lease Obligation
Refunding Revenue Bonds, 1988 Series A (Irvington Project),
7.250%, 7/15/10 1/02 at 103 AAA $13,010,365
2,900,000 The Industrial Development Authority of the County of Pima,
Single Family Mortgage Revenue Bonds (GNMA Mortgage-Backed
Securities Program), Series 1988, 8.125%, 9/01/20
(Alternative Minimum Tax) 3/99 at 102 AAA 2,974,037
- -----------------------------------------------------------------------------------------------------------------------
Arkansas - 0.4%
5,250,000 Arkansas Development Finance Authority, Driver's License
Revenue Bonds (Arkansas State Police - Headquarters and
Wireless Data Equipment), Series 1997, 5.400%, 6/01/18 6/07 at 100 AAA 5,447,978
- -----------------------------------------------------------------------------------------------------------------------
California - 14.0%
13,000,000 State of California, Various Purpose General Obligation
Refunding Bonds, 5.150%, 10/01/19 10/03 at 102 Aa3 13,138,840
State of California, Veterans General Obligation Bonds,
Series SH:
10,250,000 5.250%, 12/01/12 (Alternative Minimum Tax) 12/08 at 101 AAA 10,395,858
6,000,000 5.600%, 12/01/32 (Alternative Minimum Tax) 12/03 at 102 Aa3 6,194,220
15,975,000 State of California Department of Transportation East Bay
State Building Authority, Certificates of Participation,
Series 1991A, 6.500%, 3/01/16 (Pre-refunded to 3/01/01) 3/01 at 102 Al*** 17,361,950
23,725,000 State Public Works Board of the State of California, Lease
Revenue Refunding Bonds (The Regents of the University of
California), 1993 Series A (Various University of
California Projects), 5.500%, 6/01/21 6/03 at 102 Aa3 24,726,907
11,395,000 State Public Works Board of the State of California, Lease
Revenue Bonds (Department of Corrections), 1993 Series E
(California State Prison-Madera County (II)), 5.500%, 6/01/15 No Opt. Call A 12,306,372
15,420,000 Los Angeles Convention and Exhibition Center Authority,
Lease Revenue Bonds, 1993 Refunding Series A, The City of
Los Angeles (California), 5.375%, 8/15/18 8/03 at 102 AAA 15,870,881
5,000,000 Department of Water and Power of the City of Los Angeles,
California, Electric Plant Refunding Revenue Bonds, Second
Issue of 1993, 4.750%, 11/15/19 11/03 at 102 AAA 4,822,550
12,250,000 Los Angeles County Transportation Commission (California),
Sales Tax Revenue Refunding Bonds, Series 1991-B,
5.750%, 7/01/18 7/01 at 100 AA- 12,650,453
1,285,000 City of Martinez (California), Home Mortgage Revenue Bonds,
1983 Issue A, 10.750%, 2/01/16 No Opt. Call AAA 2,012,143
4,125,000 Redevelopment Agency of the City of Moorpark, Moorpark
Redevelopment Project, 1993 Tax Allocation Bonds,
6.125%, 10/01/18 10/03 at 102 A- 4,403,685
20,000,000 City of Pomona, California, Single Family Mortgage Revenue
Refunding Bonds (GNMA and FNMA Mortgage-Backed Securities),
Series 1990A, 7.600%, 5/01/23 No Opt. Call AAA 26,766,800
5,000,000 Sacramento, California, Municipal Utility District,
Electric Revenue Refunding Bonds, 1993 Series D,
5.250%, 11/15/20 11/03 at 102 AAA 5,101,550
San Bernardino Joint Powers Financing Authority, Tax
Allocation Refunding Bonds, Series 1995A:
6,675,000 5.750%, 10/01/15 10/05 at 102 AAA 7,270,477
12,500,000 5.750%, 10/01/25 10/05 at 102 AAA 13,515,625
3,000,000 San Diego Public Facilities Financing Authority, Sewer
Revenue Bonds, Series 1993, 5.250%, 5/15/20 5/03 at 102 AAA 3,057,240
10,000,000 San Joaquin Hills Transportation Corridor Agency, Toll Road
Refunding Revenue Bonds, Series 1997A, 5.250%, 1/15/30 1/07 at 102 AAA 10,249,500
17,540,000 University of California, 4.750%, 9/01/21 9/03 at 102 AAA 16,888,038
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Colorado - 3.1%
$ 3,000,000 Colorado Housing and Finance Authority, Single
Family Program, 1997 Series B-2 Senior Bonds,
7.000%, 5/01/26 (Alternative Minimum Tax) 5/07 at 105 Aa2 $ 3,372,210
4,500,000 Colorado Housing and Finance Authority, Single
Family Program, 1997 Series C-2 Senior Bonds,
6.875%, 11/01/28 (Alternative Minimum Tax) 11/07 at 105 Aa2 5,083,200
City and County of Denver, Colorado, Airport
System Revenue Bonds, Series 1991D:
9,450,000 7.750%, 11/15/13 (Alternative Minimum Tax) No Opt. Call Baal 12,090,330
1,725,000 7.750%, 11/15/21 (Pre-refunded to 11/15/01)
(Alternative Minimum Tax) 11/01 at 102 Aaa 1,957,202
6,550,000 7.750%, 11/15/21 (Alternative Minimum Tax) 11/01 at 102 Baal 7,281,897
City and County of Denver, Colorado, Airport
System Revenue Bonds, Series 1992B:
715,000 7.250%, 11/15/23 (Pre-refunded to 11/15/02)
(Alternative Minimum Tax) 11/02 at 102 Aaa 821,735
2,785,000 7.250%, 11/15/23 (Alternative Minimum Tax) 11/02 at 102 Baal 3,105,581
City and County of Denver, Colorado, Airport
System Revenue Bonds, Series 1992C:
1,830,000 6.750%, 11/15/22 (Pre-refunded to 11/15/02)
(Alternative Minimum Tax) 11/02 at 102 Aaa 2,067,644
6,870,000 6.750%, 11/15/22 (Alternative Minimum Tax) 11/02 at 102 Baal 7,521,963
2,050,000 Colorado Local Single Family Mortgage Revenue Bonds
(City and County of Denver, Colorado, GNMA
Mortgage-Backed Securities Program), Series 1988A,
8.125%, 12/01/20 (Alternative Minimum Tax) 12/98 at 102 AAA 2,093,809
742,859 El Paso County, Colorado, Single Family Mortgage
Revenue Tax-Exempt Refunding Bonds,
Series 1992A Class A-2, 8.750%, 6/01/11 No Opt. Call Aaa 827,768
- ------------------------------------------------------------------------------------------------------------------------------------
District of Columbia - 2.8%
10,470,000 District of Columbia, Hospital Revenue Refunding Bonds
(Providence Hospital Issue), Series 1988A, 7.875%, 12/01/15
(Pre-refunded to 12/01/98) 12/98 at 102 Aa2*** 10,720,757
7,505,000 District of Columbia (Washington, D.C.),
General Obligation Bonds, Series 1998B,
6.000%, 6/01/20 No Opt. Call AAA 8,526,355
14,800,000 District of Columbia Housing Finance Agency,
Collateralized Single Family Mortgage Revenue Bonds,
Series 1988E-4, 6.375%, 6/01/26
(Alternative Minimum Tax) 12/04 at 103 AAA 15,802,700
5,750,000 District of Columbia Revenue Bonds (Association
of American Medical Colleges Issue),
Series 1997A, 5.375%, 2/15/27 8/07 at 102 AAA 5,930,148
- ------------------------------------------------------------------------------------------------------------------------------------
Florida - 1.2%
7,465,000 Florida Housing Finance Agency, GNMA Collateralized
Home Ownership Mortgage Revenue Bonds,
1988 Series Gl Bonds, 8.300%, 6/01/20
(Alternative Minimum Tax) 12/98 at 103 Aaa 7,696,415
9,290,000 State of Florida, Full Faith and Credit Department
of Transportation, Right-of-Way Acquisition
and Bridge Construction Bonds,
Series 1995, 5.800%, 7/01/21 7/05 at 101 AA+ 10,033,665
- ------------------------------------------------------------------------------------------------------------------------------------
Georgia - 1.6%
23,420,000 Development Authority of Monroe County (Georgia),
Pollution Control Revenue Bonds
(Georgia Power Company Plant Scherer Project),
Second Series 1994, 6.750%, 10/01/24 10/99 at 102 A+ 24,316,283
- ------------------------------------------------------------------------------------------------------------------------------------
Illinois - 7.8%
19,220,000 Chicago School Reform Board of Trustees of the
Board of Education of the City of Chicago, Illinois,
Unlimited Tax General Obligation Bonds (Dedicated
Tax Revenues), Series 1997A, 5.250%, 12/01/27 12/07 at 102 AAA 19,501,573
10,595,000 City of Chicago, Chicago- O'Hare International Airport,
Special Facility Revenue Bonds (United Air Lines, Inc. Project),
Series 1988A, 8.400%, 5/01/18 (Alternative Minimum Tax) 5/99 at 103 Baa2 11,110,023
6,280,000 City of Chicago, Chicago O'Hare International Airport,
General Airport Second Lien Revenue Refunding Bonds,
1993 Series C, 5.000%, 1/01/18 1/04 at 102 AAA 6,268,068
4,860,000 City of Chicago, Collateralized Single Family Mortgage
Revenue Bonds, Series 1996-A,
7.000%, 9/01/27 (Alternative Minimuw Tax) 3/06 at 105 Aaa 5,451,899
10,000,000 The County of Cook, Illinois, General Obligation
Bonds, Series 1993A, 5.000%, 11/15/23 11/03 at 100 AAA 9,783,100
8,740,000 Illinois Development Finance Authority, Pollution
Control Refunding Revenue Bonds, 1994 Series A
(Illinois Power Company Project), 5.700%, 2/01/24 2/04 at 102 AAA 9,311,334
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Illinois (continued)
$8,500,000 Illinois Educational Facilities Authority, Revenue
Refunding Bonds, The University of Chicago,
Series 1993B, 5.600%, 7/01/24 7/03 at 102 Aal $ 8,861,420
5,000,000 Illinois Health Facilities Authority, Revenue Bonds,
Series 1992 (Highland Park Hospital),
6.200%, 10/01/22 10/02 at 102 AAA 5,455,050
2,000,000 Illinois Health Facilities Authority, Revenue Bonds,
Series 1997A (Highland Park Hospital Project),
5.750%, 10/01/26 10/07 at 102 AAA 2,141,480
17,545,000 Illinois Health Facilities Authority, Revenue Bonds,
Series 1997 (Sherman Health Systems),
5.250%, 8/01/27 8/07 at 101 AAA 17,650,972
11,900,000 Illinois Health Facilities Authority, Revenue Bonds,
Series 1988B (Evangelical Hospitals Corporation),
8.100%, 1/01/08 (Pre-refunded to 1/01/99) 1/99 at 102 Aaa 12,233,676
4,925,000 Regional Transportation Authority, Cook, DuPage,
Kane, Lake, McHenry and Will Counties, Illinois,
General Obligation Bonds, Series 1992A, 9.000%, 6/01/06 No Opt. Call AAA 6,486,373
785,000 Regional Transportation Authority, Cook, DuPage,
Kane, Lake, McHenry and Will Counties, Illinois,
General Obligation Bonds, Series 1992B, 9.000%, 6/01/06 No Opt. Call AAA 1,033,869
- ----------------------------------------------------------------------------------------------------------------------------------
Indiana - 1.3%
4,300,000 Indiana State Office Building Commission,
Correctional Facilities Program Revenue Bonds,
Series 1995A, 5.500%, 7/01/20 7/05 at 102 AAA 4,522,009
8,000,000 Metropolitan School District of Steuben County,
Middle School Building Corporation, First Mortgage
Bonds, Series 1995, Steuben County, Indiana,
6.375%, 7/15/16 (Pre-refunded to 7/15/05) 7/05 at 102 AAA 9,243,120
5,300,000 Whitley County Middle School Building Corporation, First
Mortgage Bonds, Series 1994, Columbia City, Indiana,
6.250%, 7/15/15 (Pre-refunded to 1/15/04) 1/04 at 102 AAA 5,966,899
- ----------------------------------------------------------------------------------------------------------------------------------
Iowa - 1.3%
3,000,000 Iowa Finance Authority, Private College Refunding
Revenue Bonds (Drake University Project),
Series 1996, 5.400%, 12/01/16 12/05 at 102 AAA 3,126,900
5,565,000 Iowa Finance Authority, Variable Rate Demand
Industrial Revenue Refunding Bonds, Series A 1989
(Urbandale Hotel Corporation Project), 8.500%,
8/01/16 (Pre-refunded to 7/15/14)
(Alternative Minimum Tax) 7/14 at 100 AAA 7,834,574
8,000,000 Iowa Finance Authority, Hospital Facilities Revenue
Bonds, Series 1998 A (Iowa Health System),
5.125%, 1/01/28 7/08 at 102 AAA 7,939,520
- ----------------------------------------------------------------------------------------------------------------------------------
Kentucky - 0.4%
5,890,000 Kentucky Development Finance Authority
(St. Elizabeth Medical Center), 9.000%, 11/01/00 No Opt. Call AAA 6,245,108
- ----------------------------------------------------------------------------------------------------------------------------------
Louisiana - 2.5%
91000,000 Louisiana Public Facilities Authority, Hospital
Revenue Bonds (Franciscan Missionaries of Our
Lady Health System Project), Series 1998C, 5.000%, 7/01/28 7/08 at 101 AAA 8,828,730
4,000,000 Louisiana Public Facilities Authority, Hospital Revenue
Refunding Bonds (Louisiana Health System
Corporation Project), Series 1998, 5.000%, 10/01/22 10/08 at 102 AAA 3,931,360
11,860,000 Louisiana Stadium and Exposition District Hotel
Occupancy Tax Bonds, Series 1995-B, 6.375%, 7/01/25 7/05 at 102 AAA 13,470,114
7,660,000 Louisiana Public Facilities Authority, Extended
Care Facilities Revenue Bonds (Comm-Care
Corporation Project), Series 1994, 11.000%, 2/01/14 No Opt. Call BBB 11,027,106
- ----------------------------------------------------------------------------------------------------------------------------------
Massachusetts - 2.2%
2,900,000 Massachusetts Industrial Finance Agency,
Resource Recovery Revenue Bonds, SEMASS Project,
Series 1991B, 9.250%, 7/01/15 (Alternative Minimum Tax) 7/01 at 103 N/R 3,227,613
15,000,000 Massachusetts Industrial Finance Agency,
General Obligation Bonds, Suffolk University,
Series 1997, 5.250%, 7/01/27 7/07 at 102 AAA 15,262,650
5,000,000 Massachusetts Turnpike Authority, Metropolitan
Highway System Revenue Bonds, 1997 Series C
(Senior), 5.000%, 1/01/37 1/07 at 102 AAA 4,887,150
8,800,000 Massachusetts Water Resources Authority,
General Revenue Bonds, 1992 Series A, 5.500%, 7/15/22
(Pre-refunded to 7/15/02) 7/02 at 100 Aaa 9,354,312
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michigan - 2.9%
$ 4,000,000 School District of the City of Detroit, Wayne County,
Michigan, School Building and Site Improvement and
Refunding Bonds (Unlimited Tax General Obligation),
Series 1993, 5.400%, 5/01/13 5/03 at 102 AA+ $ 4,238,520
10,550,000 City of Detroit, Michigan, Sewage Disposal System Revenue
Refunding Bonds, Series 1995-B, 5.000%, 7/01/25 7/05 at 100 AAA 10,403,988
Hudsonville Public Schools, Counties of Ottawa and Allegan,
State of Michigan, 1997 School Building and Site and
Refunding Bonds (General Obligation Unlimited Tax):
10,510,000 5.150%, 5/01/22 5/08 at 100 Aaa 10,576,739
8,145,000 5.150%, 5/01/27 5/08 at 100 Aaa 8,190,612
9,625,000 Livonia Public School District, General Obligation Bonds,
5.500%, 5/01/21 5/03 at 102 AAA 10,065,825
- ------------------------------------------------------------------------------------------------------------------------------------
Minnesota - 2.8%
2,910,000 The Minneapolis/Saint Paul Housing Finance Board, Single
Family Mortgage Revenue Bonds (Minneapolis/Saint Paul
Family Housing Program, Phase X, FNMA and GNMA Mortgage
Backed Securities Program), Series 1994
(Alternative Minimum Tax) 11/04 at 102 AAA 3,136,049
21,375,000 The Housing and Redevelopment Authority of the City of Saint
Paul, Minnesota, Sales Tax Revenue Refunding Bonds (Civic
Center Project), Series 1996, 7.100%, 11/01/23 11/15 at 103 AAA 26,909,843
2,877,000 The Housing and Redevelopment Authority of the
City of Saint Paul, Minnesota, Single Family Mortgage Revenue Bonds,
Refunding Series 1991-B, 7.250%, 9/01/11 No Opt. Call Aaa 3,144,043
7,675,000 Port Authority of the City of Saint Paul, Energy Park Tax
Increment Revenue Refunding Bonds, Series 1988,
8.000%, 12/01/07 (Pre-refunded to 12/01/98) 12/98 at 102 AAA 7,860,198
- ------------------------------------------------------------------------------------------------------------------------------------
Missouri - 1.5%
6,540,000 Missouri Housing Development Commission, Single Family
Mortgage Revenue Bonds (Homeownership Loan Program),
1996 Series C, 7.450%, 9/01/27 (Alternative Minimum Tax) 3/07 at 105 AAA 7,472,669
11,120,000 Francis Howell School District, St. Charles County, Missouri,
General Obligation Refunding Bonds,
Series 1994A, 7.800%, 3/01/08 No Opt. Call AAA 14,181,558
- ------------------------------------------------------------------------------------------------------------------------------------
Nevada - 2.1%
29,410,000 State of Nevada, Colorado River Commission, General
Obligation (Limited Tax) Revenue Supported Bonds,
Series 1994, 5.500%, 7/01/27 7/04 at 101 AA 30,562,284
- ------------------------------------------------------------------------------------------------------------------------------------
New Hampshire - 2.1%
11,000,000 New Hampshire Housing Finance Authority, Single Family
Mortgage Revenue Bonds, 1993 Series B,
6.050%, 7/01/25 7/03 at 102 Aa 11,520,300
10,000,000 Business Finance Authority of the State of New Hampshire,
Pollution Control Refunding Revenue Bonds (The United
Illuminating Company Project), 1993 Series A,
5.875%, 10/01/33 10/03 at 102 BBB- 10,206,500
8,560,000 New Hampshire Housing Finance Authority, Single Family
Mortgage Acquisition Revenue Bonds, 1996 Series B,
6.400%, 1/01/27 (Alternative Minimum Tax) 7/06 at 102 Aa3 9,130,952
- ------------------------------------------------------------------------------------------------------------------------------------
New Jersey - 1.1%
15,000,000 New Jersey Housing and Mortgage Finance Agency, Home Buyer
Revenue Bonds, 1997 Series U,
5.850%, 4/01/29 (Alternative Minimum Tax) 10/07 at 101 1/2 AAA 15,842,250
- ------------------------------------------------------------------------------------------------------------------------------------
New Mexico - 0.3%
4,780,000 New Mexico Mortgage Finance Authority, Single Family
Mortgage Purchase Refunding Senior Bonds, 1992 Series A,
6.900%, 7/01/24 7/02 at 102 Aal 5,084,056
- ------------------------------------------------------------------------------------------------------------------------------------
New York - 9.7%
10,650,000 Long Island Power Authority (New York), Electric System
General Revenue Bonds, Series 1998A, 5.250%, 12/01/26 6/08 at 101 A- 10,829,985
7,500,000 The City of New York, General Obligation Bonds, Fiscal 1991
Series B, 9.500%, 6/01/03 No Opt. Call A- 9,189,450
10,000,000 The City of New York, General Obligation Bonds, Fiscal 1996
Series G, 5.750%, 2/01/07 2/06 at 101 1/2 A- 10,979,500
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York (continued)
The City of New York, General Obligation Bonds,
Fiscal 1997 Series G:
$ 100,000 6.000%, 10/15/26 (Pre-refunded to 10/15/07) 10/07 at 101 A-*** $ 115,021
9,900,000 6.000%, 10/15/26 10/07 at 101 A- 10,787,238
16,000,000 New York City (New York), Municipal Water Finance
Authority, Water and Sewer System Revenue Bonds,
Fiscal 1996 Series B,
5.750%, 6/15/26 6/06 at 101 AAA 17,216,960
New York City Transitional Finance Authority,
Future Tax Secured Bonds, Fiscal 1998 Series C:
31,625,000 4.750%, 5/01/23 5/08 at 101 AA 30,364,111
11,000,000 5.000%, 5/01/26 5/08 at 101 AA 10,814,320
12,365,000 New York State Energy Research and Development
Authority, Facilities Revenue Bonds, Series 1993 A
(Consolidated Edison Company of New York, Inc.
Project), 6.000%, 3/15/28 (Alternative Minimum Tax) 3/03 at 102 A+ 13,126,808
10,000,000 New York Local Government Assistance Corporation,
Series 1993 B, Refunding Bonds, 5.000%, 4/01/23 4/04 at 100 A+ 9,785,700
18,735,000 New York State Medical Care Facilities Finance
Agency, Hospital and Nursing Home FHA-Insured
Mortgage Revenue Bonds, 1993 Series B, 5.500%, 2/15/22 2/04 at 102 AAA 19,340,328
- ------------------------------------------------------------------------------------------------------------------------------------
Ohio - 1.3%
5,095,000 Ohio Housing Finance Agency, Single Family Mortgage
Revenue Bonds (GNMA Mortgage-Backed Securities Program),
1988 Series B, 8.250%, 12/15/19 (Alternative Minimum Tax) 12/98 at 102 AA+ 5,271,440
12,360,000 State of Ohio, Turnpike Revenue Bonds, 1994 Series A,
Issued by the Ohio Turnpike Commission, 5.750%, 2/15/24 2/04 at 102 AA 13,641,361
- ------------------------------------------------------------------------------------------------------------------------------------
Oklahoma - 1.1%
9,560,000 Oklahoma Housing Finance Agency, GNMA Collateralized Single
Family Mortgage Revenue Bonds, Series 1988A, 8.250%,
12/01/20 (Alternative Minimum Tax) 12/98 at 102 AAA 9,769,651
6,455,000 Washington County Medical Authority (Bartlesville, Oklahoma),
Hospital Revenue Bonds (Jane Phillips Episcopal Hospital),
Series 1989A, 8.500%, 11/01/10 (Pre-refunded to 5/01/99) 5/99 at 102 N/R*** 6,756,836
- ------------------------------------------------------------------------------------------------------------------------------------
Pennsylvania - 2.0%
12,875,000 Allegheny County Hospital Development Authority
(Pennsylvania), Health Center Revenue Bonds, Series 1992A
(Presbyterian University Health System, Inc. Project),
6.250%, 11/01/23 (Pre-refunded to 11/01/02) 11/02 at 100 AAA 14,085,121
10,000,000 Pennsylvania Housing Finance Agency, Single Family
Mortgage Revenue Bonds, Series 1993 - 37A, 5.450%,
10/01/17 10/03 at 102 AA+ 10,219,000
5,295,000 The School District of Philadelphia, Pennsylvania,
General Obligation Bonds, Series B of 1995, 5.500%,
9/01/25 9/05 at 101 AAA 5,560,968
- ------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico - 0.4%
5,250,000 Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series X, 5.500%, 7/01/25 7/05 at 100 BBB+ 5,413,433
- ------------------------------------------------------------------------------------------------------------------------------------
Rhode Island - 0.9%
13,200,000 Rhode Island Health and Educational Building Corporation,
Hospital Financing Revenue Bonds, Lifespan Obligated Group
Issue, Series 1996, 5.250%, 5/15/26 5/07 at 102 AAA 13,279,332
- ------------------------------------------------------------------------------------------------------------------------------------
South Carolina - 1.2%
17,250,000 South Carolina Jobs-Economic Development Authority, Hospital
Revenue Bonds (Anderson Area Medical Center, Inc.),
Series 1996, 5.250%, 2/01/26 2/06 at 102 AAA 17,393,175
- ------------------------------------------------------------------------------------------------------------------------------------
Texas - 7.7%
10,305,000 Alliance Airport Authority, Inc., Special Facilities Revenue
Bonds, Series 1990 (American Airlines, Inc. Project),
7.500%, 12/01/29 (Alternative Minimum Tax) 12/00 at 102 Baa2 11,049,948
11,020,000 Brazos River Authority (Texas), Collateralized Pollution
Control Revenue Bonds (Texas Utilities Electric Company
Project), Series 1994A, 7.875%, 3/01/21 (Alternative
Minimum Tax) 3/01 at 102 BBB+ 11,993,286
23,000,000 Brazos River Authority (Texas), Revenue Refunding Bonds
(Houston Industries Incorporated Project), Series 1998C,
5.125%, 5/01/19 5/08 at 102 AAA 23,059,570
5,615,000 Dallas-Fort Worth International Airport Facility Improvement
Corporation, American Airlines, Inc. Revenue Bonds,
Series 1990, 7.500%, 11/01/25 (Alternative Minimum Tax) 11/00 at 102 Baa2 6,012,261
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings** Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Texas (continued)
$ 40,000,000 Harris County (Texas), Health Facilities Development
Corporation, Adjustable Convertible Extendable
Securities (Greater Houston Pooled Health Care Loan Program),
Series 1985B, 7.375%, 12/01/25 12/98 at 100 Al $ 40,136,400
15,000,000 Harris County, Texas, Toll Road Senior Lien Revenue
Refunding Bonds, Series 1994, 5.300%, 8/15/13 8/04 at 102 AAA 15,900,600
4,750,000 Matagorda County Navigation District Number One (Texas),
Pollution Control Revenue Refunding Bonds (Central Power
and Light Company Project), Series 1995, 6.100%, 7/01/28 7/00 at 102 AAA 5,009,635
- ------------------------------------------------------------------------------------------------------------------------------------
Utah - 1.9%
15,000,000 Intermountain Power Agency (Utah), Power Supply Revenue
Refunding Bonds, 1998 Series A, 5.000%, 7/01/20 7/08 at 101 AAA 14,832,600
8,000,000 Utah Housing Finance Agency, Single Family Mortgage Bonds,
1997 Series F, 5.750%, 7/01/28 (Alternative Minimum Tax) 7/07 at 101 1/2 AAA 8,296,480
4,780,000 Utah Housing Finance Agency, Single Family Mortgage Senior
Bonds, Series 1998F2, 5.100%, 7/01/28
(Alternative Minimum Tax) (DD) 7/08 at 101 1/2 AAA 4,743,529
- ------------------------------------------------------------------------------------------------------------------------------------
Vermont - 0.9%
12,510,000 Vermont Housing Finance Agency, Single Family Housing Bonds,
Series 9, 5.900%, 5/01/29 (Alternative Minimum Tax) 6/07 at 101 1/2 AAA 13,246,714
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia - 0.7%
10,000,000 Prince William County Service Authority (Virginia), Water
and Sewer System Refunding Revenue Bonds, Series 1993,
5.000%, 7/01/21 7/03 at 102 AAA 9,872,400
1,000,000 Virginia Housing Development Authority, Commonwealth
Mortgage Bonds, 1987 Series C, Subseries C-7,
8.375%, 1/01/28 (Alternative Minimum Tax) 1/99 at 102 AA+ 1,007,940
- ------------------------------------------------------------------------------------------------------------------------------------
Washington - 16.9%
19,820,000 Public Utility District No. 1 of Chelan County, Washington,
Chelan Hydro Consolidated System Revenue Bonds, Series 1997A,
5.650%, 7/01/32 (Alternative Minimum Tax) 7/07 at 102 AA 20,748,567
8,525,000 King County, Washington, Limited Tax General Obligation
Refunding Bonds (Payable from Sewer Revenues), Series 1998B,
4.750%, 1/01/18 1/08 at 101 AA+ 8,371,891
17,050,000 Municipality of Metropolitan Seattle, Washington, Sewer
Refunding Revenue Bonds, Series Z, 5.500%, 1/01/33 1/03 at 102 AAA 17,721,088
6,360,000 Public Utility District No. 1 of Snohomish County,
Washington, Generation System Revenue Bonds, Series 1993,
5.500%, 1/01/14 1/03 at 100 AAA 6,676,537
7,000,000 City of Spokane, Washington, Regional Solid Waste Management
System Revenue Bonds, Series 1989B, 7.750%, 1/01/11
(Alternative Minimum Tax) 1/99 at 102 AAA 7,193,550
10,000,000 Washington Health Care Facilities Authority, Revenue Bonds,
Series 1998 (Swedish Health Services), 5.125%, 11/15/22 11/08 at 101 Aaa 9,877,200
11,000,000 Washington Health Care Facilities Authority, Revenue Bonds,
Series 1998 (Harrison Memorial Hospital), 5.000%, 8/15/28 (DD) 8/13 at 102 AAA 10,643,490
4,300,000 Washington Public Power Supply System, Nuclear Project
No. 1, Refunding Revenue Bonds, Series 1989B,
7.250%, 7/01/15 (Pre-refunded to 1/01/00) 1/00 at 102 AAA 4,570,341
12,950,000 Washington Public Power Supply System, Nuclear Project
No. 1, Refunding Revenue Bonds, Series 1993A,
5.700%, 7/01/17 7/03 at 102 AAA 13,504,778
29,870,000 Washington Public Power Supply System, Nuclear Project
No. 1, Refunding Revenue Bonds, Series 1993B,
5.600%, 7/01/15 7/03 at 102 AAA 31,257,760
Washington Public Power Supply System, Nuclear Project
No. 1, Refunding Revenue Bonds, Series 1989A:
4,060,000 7.500%, 7/01/15 (Pre-refunded to 7/01/99) 7/99 at 102 AAA 4,262,472
11,900,000 7.500%, 7/01/15 (Pre-refunded to 7/01/99) 7/99 at 102 Aaa 12,491,073
7,500,000 Washington Public Power Supply System, Nuclear Project
No. 2, Refunding Revenue Bonds, Series 1991A,
6.000%, 7/01/12 (Pre-refunded to 7/01/01) 7/01 at 100 Aal*** 7,944,975
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
Principal Optional Call Market
Amount Description Provisions* Ratings* Value
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Washington (continued)
$ 14,440,000 Washington Public Power Supply System, Nuclear Project
No. 2, Refunding Revenue Bonds, Series 1993A,
5.750%, 7/01/12 7/03 at 102 Aa1 $ 15,530,798
6,770,000 Washington Public Power Supply System, Nuclear Project
No. 2, Refunding Revenue Bonds, Series 1993B,
5.625%, 7/01/12 7/03 at 102 Aal 7,079,186
14,500,000 Washington Public Power Supply System, Nuclear Project
No. 2, Refunding Revenue Bonds, Series 1998A,
5.000%, 7/01/12 7/08 at 102 Aal 14,736,349
13,500,000 Washington Public Power Supply System, Nuclear Project
No. 3, Refunding Revenue Bonds, Series 1989B,
7.250%, 7/01/15 (Pre-refunded to 1/01/00) 1/00 at 102 AAA 14,348,744
22,880,000 Washington Public Power Supply System, Nuclear Project
No. 3, Refunding Revenue Bonds, Series 1993C,
5.375%, 7/01/15 7/03 at 102 Aal 23,379,469
9,350,000 Washington Public Power Supply System, Nuclear Project
No. 3, Refunding Revenue Bonds, Series 1997A,
5.250%, 7/01/15 7/07 at 102 Aal 9,536,906
7,275,000 Washington Public Power Supply System, Nuclear Project
No. 3, Refunding Revenue Bonds, Series 1998A,
5.125%, 7/01/18 7/08 at 102 Aal 7,221,019
- ------------------------------------------------------------------------------------------------------------------------------------
West Virginia - 1.1%
15,000,000 West Virginia Housing Development Fund, Housing Finance
Bonds, 1992 Series D, 7.050%, 11/01/24 5/02 at 102 AAA 16,180,499
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,370,784,859 Total Investments - (cost $1,359,473,254) - 98.3% 1,448,475,312
================ -------------------------------------------------------------------------------------------------------
Temporary Investments in Short-Term Municipal Securities - 0.1%
1,000,000 Industrial Development Authority of the City of Roanoke,
Virginia, Hospital Revenue Bonds (Carilion Health System
Obligated Group), Series 1997A, Variable Rate Demand Bonds,
3.700%, 7/01/27+ VMIG-1 1,000,000
1,000,000 Roanoke Industrial Development Authority, Hospital Revenue
Demand Bonds, Series 1995A (Carilion Health System),
Variable Rate Demand Bonds, 3.700%, 7/01/19+ VMIG-1 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
$ 2,000,000 Total Temporary Investments - 0.1% 2,000,000
================ -------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.6% 23,280,105
-------------------------------------------------------------------------------------------------------
Net Assets - 100% $1,473,755,417
=======================================================================================================
* Optional Call Provisions (not covered by the report of independent auditors): 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 (not covered by the report of independent auditors): Using the higher of Standard & Poor's or
Moody's rating.
*** Security is backed by an escrow or trust containing sufficient U.S. government or U.S. government
agency securities which ensures the timely payment of principal and interest. Security is normally
considered to be equivalent to AAA rated securities.
+ The 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.
N/R Investment is not rated.
(DD) Security purchased on a delayed delivery basis (note 1).
See accompanying notes to financial statements.
</TABLE>
S-36
<PAGE>
Statement of Net Assets
October 31, 1998
<TABLE>
<CAPTION>
Premium Income Premium Income 2 Premium Income 4
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Investments in municipal securities, at market value (note 1) $1,448,475,312 $945,367,447 $906,909,232
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value (note 1) 2,000,000 800,000 2,000,000
Cash 82,256 -- 82,347
Receivables:
Interest 28,864,254 17,112,680 17,102,193
Investments sold 14,837,228 559,737 580,000
Other assets 715,561 18,422 53,732
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 1,494,974,611 963,858,286 926,727,504
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Cash overdraft -- 614 --
Payable for investments purchased 15,434,819 -- --
Accrued expenses:
Management fees (note 6) 774,443 510,147 491,486
Other 306,363 239,347 342,260
Preferred share dividends payable 174,804 100,994 112,440
Common share dividends payable 4,528,765 3,167,289 2,777,643
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 21,219,194 4,018,391 3,723,829
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets (note 7) $1,473,755,417 $959,839,895 $923,003,675
====================================================================================================================================
Preferred shares, at liquidation value $ 475,000,000 $300,000,000 $308,400,000
====================================================================================================================================
Preferred shares outstanding 19,000 12,000 12,336
====================================================================================================================================
Common shares outstanding 63,785,431 40,868,247 40,847,681
====================================================================================================================================
Net asset value per Common share outstanding (net assets less Preferred shares
at liquidation value,
divided by Common shares outstanding) $ 15.66 $ 16.15 $ 15.05
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
S-37
<PAGE>
Statement of Operations
Year Ended October 31, 1998
<TABLE>
<CAPTION>
Premium Income Premium Income 2 Premium Income 4
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Income (note 1) $ 84,351,074 $55,123,603 $51,010,547
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses
Management fees (note 6) 9,000,100 5,931,563 5,712,194
Preferred shares - auction fees 1,187,498 749,998 771,000
Preferred shares - dividend disbursing agent fees 50,001 46,383 70,000
Shareholders' servicing agent fees and expenses 231,194 76,753 114,505
Custodian's fees and expenses 165,221 121,193 120,757
Directors' fees and expenses (note 6) 13,966 8,792 8,445
Professional fees 26,586 21,160 21,225
Shareholders' reports - printing and mailing expenses 312,275 214,315 215,337
Stock exchange listing fees 54,582 35,449 35,511
Investor relations expense 123,848 74,399 76,291
Other expenses 72,035 51,037 45,741
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 11,237,306 7,331,042 7,191,006
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 73,113,768 47,792,561 43,819,541
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and Unrealized Gain from Investments
Net realized gain from investment transactions (notes 1 and 4) 5,695,107 2,300,084 4,094,161
Net change in unrealized appreciation or depreciation of investments 22,102,303 16,299,650 12,806,701
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain from investments 27,797,410 18,599,734 16,900,862
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations $100,911,178 $66,392,295 $60,720,403
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
S-38
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Premium Income Premium Income 2 Premium Income 4
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
10/31/98 10/31/97 10/31/98 10/31/97 10/31/98 10/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income $ 73,113,768 $ 72,579,397 $ 47,792,561 $ 48,365,729 $ 43,819,541 $ 44,221,844
Net realized gain from investment
transactions (notes 1 and 4) 5,695,107 4,421,843 2,300,084 4,884,470 4,094,161 3,879,483
Net change in unrealized
appreciation or depreciation of
investments 22,102,303 19,245,861 16,299,650 21,383,160 12,806,701 19,479,315
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
operations 100,911,178 96,247,101 66,392,295 74,633,359 60,720,403 67,580,642
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders
(note 1) From undistributed
net investment income:
Common shareholders (56,136,763) (59,703,177) (37,981,891) (38,015,000) (33,322,374) (33,488,322)
Preferred shareholders (16,253,788) (12,807,342) (9,776,494) (10,633,759) (10,741,953) (10,890,755)
From accumulated net realized gains
from investment transactions:
Common shareholders (3,623,618) (1,862,537) (3,704,032) -- -- --
Preferred shareholders (801,154) -- (896,110) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from
distributions to shareholders (76,815,323) (74,373,056) (52,358,527) (48,648,759) (44,064,327) (44,379,077)
- -----------------------------------------------------------------------------------------------------------------------------------
Capital share Transactions (note 2)
Common shares - net proceeds
from shares issued to shareholders
due to reinvestment of distributions -- -- 2,218,879 -- 583,436 --
Preferred shares - net proceeds from
sale of shares -- 123,593,750 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
capital share transactions -- 123,593,750 2,218,879 -- 583,436 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets 24,095,855 145,467,795 16,252,647 25,984,600 17,239,512 23,201,565
Net assets at beginning of year 1,449,659,562 1,304,191,767 943,587,248 917,602,648 905,764,163 882,562,598
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,473,755,417 $1,449,659,562 $959,839,895 $943,587,248 $923,003,675 $905,764,163
- -----------------------------------------------------------------------------------------------------------------------------------
Balance of undistributed net
investment income at end of year $ 1,479,619 $ 756,402 $ 2,110,492 $ 2,076,316 $ 1,228,635 $ 1,473,421
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
S-39
<PAGE>
Notes to Financial Statements
1. General Information and Significant Accounting Policies
The National Funds (the "Funds") covered in this report and their corresponding
New York Stock Exchange symbols are Nuveen Premium Income Municipal Fund, Inc.
(NPI), Nuveen Premium Income Municipal Fund 2, Inc. (NPM) and Nuveen Premium
Income Municipal Fund 4, Inc. (NPT).
Each Fund invests primarily in a diversified portfolio of municipal obligations
issued by state and local government authorities. The Funds are registered under
the Investment Company Act of 1940 as closed-end, diversified management
investment companies.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements in accordance with
generally accepted accounting principles.
Securities Valuation
The prices of municipal bonds in each Fund's investment portfolio are provided
by a pricing service approved by the Fund's Board of Directors. When price
quotes are not readily available (which is usually the case for municipal
securities), the pricing service establishes fair market value based on yields
or prices of municipal bonds of comparable quality, type of issue, coupon,
maturity and rating, indications of value from securities dealers and general
market conditions. Temporary investments in securities that have variable rate
and demand features qualifying them as short-term securities are valued at
amortized cost, which approximates market value.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains and
losses from such transactions are determined on the specific identification
method. Securities purchased or sold on a when-issued or delayed delivery basis
may have extended settlement periods. The securities so purchased are subject to
market fluctuation during this period. The Funds have instructed the custodian
to segregate assets in a separate account with a current value at least equal to
the amount of the when-issued and delayed delivery purchase commitments. At
October 31, 1998, Premium Income had outstanding delayed delivery purchase
commitments of $15,434,819. There were no such outstanding purchase commitments
in either of the other two funds.
Investment Income
Interest income is determined on the basis of interest accrued, adjusted for
amortization of premiums and accretion of discounts on long-term debt securities
when required for federal income tax purposes.
Federal Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund
intends to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of its tax-exempt net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount realized from investment transactions. The
Funds currently consider significant net realized capital gains and/or market
discount as amounts in excess of $.01 per Comm6n share. Furthermore, each Fund
intends to satisfy conditions which will enable interest from municipal
securities, which is exempt from regular federal income tax, to retain such tax-
exempt status when distributed to shareholders of the Funds. All monthly tax-
exempt income dividends paid during the fiscal year ended October 31, 1998, have
been designated Exempt Interest Dividends. Net realized capital gain and market
discount distributions are subject to federal taxation.
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared as a dividend monthly and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
from investment transactions, if any, are distributed to shareholders not less
frequently than annually. Furthermore, capital gains are distributed only to the
extent they exceed available capital loss carryforwards.
Distributions to shareholders of tax-exempt net investment income, net realized
capital gains and/or market discount are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles. Accordingly, temporary over-distributions as a result of these
differences may occur and will be classified as either distributions in excess
of net investment income, distributions in excess of net realized gains and/or
distributions in excess of net ordinary taxable income from investment
transactions, where applicable.
S-40
<PAGE>
Preferred Shares
The Funds have issued and outstanding $25,000 stated value Preferred shares.
Each Fund's Preferred shares are issued in more than one Series. The dividend
rate on each Series may change every seven days, as set by the auction agent.
The number of shares outstanding, by Series and in total, for each of the Funds
is as follows:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- -------------------------------------------------------
<S> <C> <C> <C>
Number of Shares:
Series M 3,800 2,000 2,200
Series T 3,800 3,000 2,000
Series T2 -- -- 1,328
Series W 3,800 2,000 1,680
Series Th 3,800 3,000 2,000
Series F 3,800 2,000 1,800
Series F2 -- -- 1,328
- -------------------------------------------------------
Total 19,000 12,000 12,336
=======================================================
</TABLE>
Effective August 12, 1997, the terms of Premium Income's preferred stock were
amended, whereby the Fund's preferred shares were converted from Remarketed
Preferred (dividend rates established primarily every 28 days by a remarketing
process) to MuniPreferred (dividend rates established every seven days by a
"Dutch auction" process), as approved by shareholders on August 6, 1997. In
addition, the Fund issued an additional 5,000 preferred shares, comprising 1,000
shares each of Series M, T, W, Th and F between September 30, 1997 and October
6, 1997.
Derivative Financial Instruments
The Funds may invest in transactions in certain derivative financial instruments
including futures, forward, swap and option contracts, and other financial
instruments with similar characteristics. Although the Funds are authorized to
invest in such financial instruments, and may do so in the future, they did not
make any such investments during the fiscal year ended October 31, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results may differ
from those estimates.
2. Fund Shares
Transactions in Common and Preferred shares were as follows:
<TABLE>
<CAPTION>
Premium Income Premium Income 2
- ---------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
10/31/98 10/31/97 10/31/98 10/31/97
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common shares issued to shareholders
due to reinvestment of distributions -- -- 137,128 --
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Premium Income 4
- ---------------------------------------------------------------------------------------------------
Year Ended Year Ended
10/31/98 10/31/97
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Common shares issued to shareholders
due to reinvestment of distributions 39,216 --
- ---------------------------------------------------------------------------------------------------
</TABLE>
Premium Income issued 5,000 additional preferred shares, comprising 1,000 shares
of each M, T, W, Th and F, during the fiscal year ended October 31, 1997.
3. Distributions to Common Shareholders
The Funds declared Common share dividend distributions from their tax-exempt net
investment income which were paid on December 1, 1998, to shareholders of record
on November 15, 1998, as follows:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- ---------------------------------------------------------
<S> <C> <C> <C>
Dividend per share $.0710 $.0775 $.0680
=========================================================
</TABLE>
<PAGE>
Notes to Financial Statements (continued)
4. Securities Transactions
Purchases and sales (including maturities) of investments in municipal
securities and temporary municipal investments for the fiscal year ended
October 31, 1998, were as follows:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases:
Investments in municipal securities $290,272,414 $80,762,778 $211,191,134
Temporary municipal investments 216,380,000 39,500,000 133,450,000
Sales and Maturities:
Investments in municipal securities 274,000,685 64,982,754 188,925,826
Temporary municipal investments 242,380,000 54,500,000 131,450,000
================================================================================
</TABLE>
At October 31, 1998, the identified cost of investments owned for federal income
tax purposes was the same as the cost for financial reporting purposes for each
Fund.
At October 31, 1998, Premium Income 4 had unused capital loss carryforwards of
$13,256,518 available for federal income tax purposes to be applied against
future capital gains, if any. If not applied, $8,044,841 of the carryforwards
will expire in the year 2002 and $5,211,677 will expire in the year 2003.
5. Unrealized Appreciation (Depreciation)
Gross unrealized appreciation and gross unrealized depreciation of investments
at October 31, 1998, were as follows:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross unrealized:
appreciation $89,049,157 $87,820,980 $61,908,128
depreciation (47,099) (58,439) (51,591)
- -------------------------------------------------------------------------------
Net unrealized appreciation $89,002,058 $87,762,541 $61,856,537
===============================================================================
</TABLE>
6. Management Fee and Other Transactions with Affiliates
Under the Funds' investment management agreements with Nuveen Advisory Corp.
(the "Adviser"), a wholly owned subsidiary of The John Nuveen Company, each Fund
pays an annual management fee, payable monthly, at the rates set forth below,
which are based upon the average daily net asset value of each Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Management Fee
- --------------------------------------------------------------------------------
<S> <C>
For the first $125 million .6500 of 1%
For the next $125 million .6375 of 1
For the next $250 million .6250 of 1
For the next $500 million .6125 of 1
For the next $1 billion .6000 of 1
For net assets over $2 billion .5875 of 1
================================================================================
</TABLE>
The fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Funds pay no
compensation directly to those of its Directors who are affiliated with the
Adviser or to their officers, all of whom receive remuneration for their
services to the Funds from the Adviser.
S-42
<PAGE>
7. Composition of Net Assets At October 31, 1998, net assets consisted of:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred shares, $25,000 stated value per share, at liquidation value $ 475,000,000 $300,000,000 $308,400,000
Common shares, $.01 par value per share 637,854 408,682 408,477
Paid-in surplus 901,946,522 567,631,874 564,371,822
Balance of undistributed net investment income 1,479,619 2,110,492 1,228,635
Accumulated net realized gain (loss) from investment transactions 5,689,364 1,926,306 (13,261,796)
Net unrealized appreciation of investments 89,002,058 87,762,541 61,856,537
- ------------------------------------------------------------------------------------------------------------------------
Net assets $1,473,755,417 $959,839,895 $923,003,675
========================================================================================================================
Authorized shares:
Common 200,000,000 200,000,000 200,000,000
Preferred 1,000,000 1,000,000 1,000,000
========================================================================================================================
</TABLE>
8. Investment Composition
At October 31, 1998, the revenue sources by municipal purpose, expressed as a
percent of total investments, were as follows:
<TABLE>
<CAPTION>
Premium Premium Premium
Income Income 2 Income 4
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Education and Civic Organizations 5% 2% 4%
Financials 3 -- --
Health Care 8 7 17
Housing/Multifamily -- 8 8
Housing/Single Family 12 12 7
Tax Obligation/General 13 16 10
Tax Obligation/Limited 13 9 7
Transportation 8 8 7
U.S. Guaranteed 12 26 15
Utilities 21 8 17
Water and Sewer 4 3 7
Other 1 1 1
- --------------------------------------------------------------------------------
100% 100% 100%
================================================================================
</TABLE>
Certain long-term and intermediate-term investments owned by the Funds are
either covered by insurance issued by several private insurers or are backed by
an escrow or trust containing U.S. government or U.S. government agency
securities, both of which ensure the timely payment of principal and interest in
the event of default (53% for Premium Income, 46% for Premium Income 2 and 43%
for Premium Income 4). Such insurance or escrow, however, does not guarantee the
market value of the municipal securities or the value of any of the Funds'
shares.
All temporary investments in short-term municipal securities have credit
enhancements (letters of credit, guarantees or insurance) issued by third party
domestic or foreign banks or other institutions.
For additional information regarding each investment security, refer to the
Portfolio of Investments of each Fund.
S-43
<PAGE>
Financial Highlights
Selected data for a Common share outstanding
throughout each period is as follows:
<TABLE>
<CAPTION>
Investment Operations
- -------------------------------------------------------------------------------------------------------
Net Realized/
Beginning Net Unrealized
Net Asset Investment Investment
Value Income Gain (Loss) Total
- -------------------------------------------------------------------------------------------------------
Premium Income
Year Ended 10/31:
<S> <C> <C> <C> <C>
1998 $15.28 $1.15 $ .43 $ 1.58
1997 14.96 1.14 .37 1.51
1996 15.11 1.16 (.09) 1.07
1995 14.14 1.24 1.01 2.25
1994 16.30 1.26 (2.02)** (.76)
Premium Income 2
Year Ended 10/31:
1998 15.80 1.17 .46 1.63
1997 15.16 1.18 .65 1.83
1996 14.89 1.19 .27 1.46
1995 13.03 1.20 1.88 3.08
1994 15.60 1.18 (2.53) (1.35)
Premium Income 4
Year Ended 10/31:
1998 14.64 1.07 .42 1.49
1997 14.07 1.08 .58 1.66
1996 13.87 1.10 .19 1.29
1995 12.09 1.10 1.81 2.91
1994 14.87 1.07 (2.76) (1.69)
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
- -------------------------------------------------------------------------------------------------------
Net Net
Investment Investment Capital Capital
Income Income Gains Gains
To Common To Preferred To Common To Preferred
Shareholders Shareholders+ Shareholders Shareholders+ Total
- -------------------------------------------------------------------------------------------------------
Premium Income
Year Ended 10/31:
<S> <C> <C> <C> <C> <C>
1998 $ (.88) $(.25) $(.06) $(.01) $(1.20)
1997 (.94) (.20) (.03) -- (1.17)
1996 (.97) (.20) (.05) -- (1.22)
1995 (1.06) (.22) -- -- (1.28)
1994 (1.17) (.16) (.07) -- (1.40)
Premium Income 2
Year Ended 10/31:
1998 (.93) (.24) (.09) (.02) (1.28)
1997 (.93) (.26) -- -- (1.19)
1996 (.93) (.26) -- -- (1.19)
1995 (.92) (.30) -- -- (1.22)
1994 (.94) (.24) (.03) (.01) (1.22)
Premium Income 4
Year Ended 10/31:
1998 (.82) (.26) -- -- (1.08)
1997 (.82) (.27) -- -- (1.09)
1996 (.82) (.27) -- -- (1.09)
1995 (.84) (.29) -- -- (1.13)
1994 (.84) (.20) (.03) (.01) (1.08)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total Returns
Organization and
Offering Costs and
Preferred Share Ending
Underwriting Net Asset Ending Based on Based on Net
Discounts Value Market Value Market Value* Asset Value*
- -------------------------------------------------------------------------------------------------------
Premium Income
Year Ended 10/31:
<S> <C> <C> <C> <C> <C>
1998 $ -- $15.66 $15.1875 10.60% 8.86%
1997 (.02) 15.28 14.6250 7.81 8.89
1996 -- 14.96 14.5000 8.24 5.92
1995 -- 15.11 14.3750 16.88 14.84
1994 -- 14.14 13.2500 (19.13) (5.88)
Premium Income 2
Year Ended 10/31:
1998 -- 16.15 16.8750 15.98 8.93
1997 -- 15.80 15.5000 16.76 10.72
1996 -- 15.16 14.1250 14.94 8.28
1995 -- 14.89 13.1250 24.22 22.06
1994 -- 13.03 11.3750 (17.76) (10.64)
Premium Income 4
Year Ended 10/31:
1998 -- 15.05 14.8125 14.54 8.58
1997 -- 14.64 13.6875 14.70 10.20
1996 -- 14.07 12.6880 11.57 7.53
1995 -- 13.87 12.1250 21.32 22.41
1994 (.01) 12.09 10.7500 (19.12) (13.29)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Ratio of Investment
Ending Expenses to Income to Portfolio
Net Assets Average Average Turnover
(000) Net Assets++ Net Assets++ Rate
- -----------------------------------------------------------------------------------------------------------------------
Premium Income
Year Ended 10/31:
<S> <C> <C> <C> <C>
1998 $1,473,755 .77% 5.00% 19%
1997 1,449,660 .76 5.51 10
1996 1,304,192 .75 5.67 16
1995 1,313,673 .76 6.13 12
1994 1,252,208 .77 6.08 15
Premium Income 2
Year Ended 10/31:
1998 959,840 .77 5.03 7
1997 943,587 .77 5.23 19
1996 917,603 .77 5.34 24
1995 906,547 .77 5.60 27
1994 830,600 .76 5.41 26
Premium Income 4
Year Ended 10/31:
1998 923,004 .79 4.79 21
1997 905,764 .79 4.98 26
1996 882,563 .79 5.11 20
1995 874,337 .80 5.35 32
1994 801,617 .88 5.15 47
</TABLE>
* Total Return on Market Value is the combination of reinvested dividend
income, reinvested capital gains distributions, if any, and changes in
stock price per share.
Total Return on Net Asset Value is the combination of reinvested dividend
income, reinvested capital gains distributions, if any, and changes in net
asset value per share.
Total returns are not annualized.
** Includes $(.19) effect of the Fund's Rights Offering of shares at a price
below NAV and costs of the offering.
+ The amounts shown are based on Common share equivalents.
++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders.
S-44
<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP -- A brief description of the applicable
Standard & Poor's Ratings Group ("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.
A-1
<PAGE>
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", "CLARK CURBO" 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 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.
CLARK CURBO The rating "CLARK CURBO" 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
A-2
<PAGE>
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 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.
* 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:
A-3
<PAGE>
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, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation.
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.
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-4
<PAGE>
A commercial paper 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 that 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 that 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 that 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 that 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.
A-5
<PAGE>
B Bonds that 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 that 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 that 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 that 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.
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: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/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.
MIG 4/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.
A-6
<PAGE>
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 positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- 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.
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.
A-7
<PAGE>
APPENDIX B
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED STOCK ("MUNIPREFERRED(R)")
SERIES M2
Nuveen Premium Income Municipal Fund, Inc., a Minnesota corporation (the
"Corporation"), hereby certifies to the Secretary of State of Minnesota as
follows:
First: Pursuant to authority expressly vested in the Board of Directors
of the Corporation by its amended and restated articles of incorporation, the
Board of Directors has, by resolution duly adopted on December 18, 1998,
authorized the issuance of a series of its authorized Preferred Stock designated
as its Municipal Auction Rate Cumulative Preferred Stock, Series M2.
Second: The rights and preferences of the shares of such series of stock
are as follows:
<PAGE>
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS............................................ B-1
"AA" Composite Commercial Paper Rate............... B-1
Accountant's Confirmation.......................... B-2
Affiliate.......................................... B-2
Agent Member....................................... B-2
Anticipation Notes................................. B-2
Applicable Rate.................................... B-2
Articles........................................... B-2
Auction............................................ B-2
Auction Agency Agreement........................... B-2
Auction Agent...................................... B-2
Auction Date....................................... B-2
Auction Procedures................................. B-2
Available MuniPreferred............................ B-2
Benchmark Rate..................................... B-2
Beneficial Owner................................... B-2
Bid and "Bids"..................................... B-2
Bidder and Bidders................................. B-2
Board of Directors................................. B-3
Broker-Dealer...................................... B-3
Broker-Dealer Agreement............................ B-3
Business Day....................................... B-3
Code............................................... B-3
Commercial Paper Dealers........................... B-3
Common Stock....................................... B-3
Cure Date.......................................... B-3
Date of Original Issue............................. B-3
Deposit Securities................................. B-3
Discounted Value................................... B-3
[Reserved]......................................... B-3
[Reserved]......................................... B-3
Dividend Payment Date.............................. B-3
Dividend Period.................................... B-4
Existing Holder.................................... B-4
Failure to Deposit................................. B-4
Federal Tax Rate Increase.......................... B-4
Fund............................................... B-4
Gross-up Payment................................... B-4
Holder............................................. B-4
Hold Order and Hold Orders......................... B-4
Independent Accountant............................. B-4
Initial Rate Period................................ B-4
Interest Equivalent................................ B-4
Issue Type Category................................ B-4
Kenny Index........................................ B-4
Late Charge........................................ B-5
Liquidation Preference............................. B-5
Market Value....................................... B-5
Maximum Potential Gross-up Payment Liability....... B-5
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Maximum Rate................................................ B-5
[Reserved].................................................. B-6
Minimum Rate Period......................................... B-6
Moody's..................................................... B-6
Moody's Discount Factor..................................... B-6
Moody's Eligible Asset...................................... B-6
Moody's Exposure Period..................................... B-6
Moody's Volatility Factor................................... B-6
MuniPreferred............................................... B-6
MuniPreferred Basic Maintenance Amount...................... B-6
MuniPreferred Basic Maintenance Cure Date................... B-7
MuniPreferred Basic Maintenance Report...................... B-7
Municipal Obligations....................................... B-7
1940 Act.................................................... B-7
1940 Act Cure Date.......................................... B-8
1940 Act MuniPreferred Asset Coverage....................... B-8
Notice of Redemption........................................ B-8
Notice of Special Rate Period............................... B-8
Order and Orders............................................ B-8
Original Issue Insurance.................................... B-8
Other Issues................................................ B-8
Outstanding................................................. B-8
Permanent Insurance......................................... B-8
Person...................................................... B-8
Portfolio Insurance......................................... B-8
Potential Beneficial Owner.................................. B-8
Potential Holder............................................ B-8
Preferred Stock............................................. B-9
Quarterly Valuation Date.................................... B-9
Rate Multiple............................................... B-9
Rate Period................................................. B-9
Rate Period Days............................................ B-9
Receivables for Municipal Obligations Sold.................. B-9
Redemption Price............................................ B-9
Reference Rate.............................................. B-9
Registration Statement...................................... B-9
S&P......................................................... B-9
S&P Discount Factor......................................... B-9
S&P Eligible Asset.......................................... B-9
S&P Exposure Period......................................... B-9
S&P Volatility Factor....................................... B-10
Secondary Market Insurance.................................. B-10
Securities Depository....................................... B-10
Sell Order and Sell Orders.................................. B-10
Special Rate Period......................................... B-10
Special Redemption Provisions............................... B-10
Submission Deadline......................................... B-10
Submitted Bid and Submitted Bids............................ B-10
Submitted Hold Order and Submitted Hold Orders.............. B-10
Submitted Order and Submitted Orders........................ B-10
Submitted Sell Order and Submitted Sell Orders.............. B-10
Subsequent Rate Period...................................... B-10
Substitute Commercial Paper Dealer.......................... B-10
Substitute U.S. Government Securities Dealer................ B-10
</TABLE>
ii
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Sufficient Clearing Bids................................................................................. B-11
Taxable Allocation....................................................................................... B-11
Taxable Income........................................................................................... B-11
Taxable Equivalent of the Short-Term Municipal Bond Rate................................................. B-11
Transitional Rate Period................................................................................. B-11
Treasury Bill............................................................................................ B-11
Treasury Bill Rate....................................................................................... B-11
Treasury Note............................................................................................ B-11
Treasury Note Rate....................................................................................... B-11
U.S. Government Securities Dealer........................................................................ B-12
Valuation Date........................................................................................... B-12
Volatility Factor........................................................................................ B-12
Voting Period............................................................................................ B-12
Winning Bid Rate......................................................................................... B-12
PART I........................................................................................................ B-13
1. Number of Authorized Shares.............................................................................. B-13
2. Dividends................................................................................................ B-13
(a) Ranking............................................................................................. B-13
(b) Cumulative Cash Dividends........................................................................... B-13
(c) Dividends Cumulative From Date of Original Issue.................................................... B-13
(d) Dividend Payment Dates and Adjustment Thereof....................................................... B-13
(e) Dividend Rates and Calculation of Dividends......................................................... B-13
(i) Dividend Rates............................................................................... B-14
(ii) Calculation of Dividends..................................................................... B-15
(f) Curing a Failure to Deposit......................................................................... B-15
(g) Dividend Payments by Fund to Auction Agent.......................................................... B-15
(h) Auction Agent as Trustee of Dividend Payments by Fund............................................... B-15
(i) Dividends Paid to Holders........................................................................... B-16
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends................................ B-16
(k) Dividends Designated as Exempt-Interest Dividends................................................... B-16
3. Gross-up Payments........................................................................................ B-16
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or Fewer....................... B-16
(b) Special Rate Periods of More Than 28 Rate Period Days............................................... B-16
(c) No Gross-up Payments In the Event of a Reallocation................................................. B-16
4. Designation of Special Rate Periods...................................................................... B-16
(a) Length of and Preconditions for Special Rate Period................................................. B-16
(b) Adjustment of Length of Special Rate Period......................................................... B-17
(c) Notice of Proposed Special Rate Period.............................................................. B-17
(d) Notice of Special Rate Period....................................................................... B-17
(e) Failure to Deliver Notice of Special Rate Period.................................................... B-18
5. Voting Rights............................................................................................ B-18
(a) One Vote Per Share of MuniPreferred................................................................. B-18
(b) Voting For Additional Directors..................................................................... B-18
(i) Voting Period................................................................................ B-18
(ii) Notice of Special Meeting.................................................................... B-19
(iii) Terms of Office of Existing Directors........................................................ B-19
(iv) Terms of Office of Certain Directors to Terminate Upon Termination of Voting Period.......... B-19
(c) Holders of MuniPreferred To Vote On Certain Other Matters........................................... B-19
(i) Increases in Capitalization.................................................................. B-19
(ii) 1940 Act Matters............................................................................. B-20
(d) Board May Take Certain Actions Without Shareholder Approval......................................... B-20
(e) Voting Rights Set Forth Herein Are Sole Voting Rights............................................... B-21
</TABLE>
iii
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(f) No Preemptive Rights or Cumulative Voting........................................................... B-21
(g) Voting for Directors Sole Remedy for Fund's Failure to Pay Dividends................................ B-21
(h) Holders Entitled to Vote............................................................................ B-21
6. 1940 Act MuniPreferred Asset Coverage.................................................................... B-21
7. MuniPreferred Basic Maintenance Amount................................................................... B-21
8. [Reserved]............................................................................................... B-23
9. Restrictions on Dividends and other Distributions........................................................ B-23
(a) Dividends on Preferred Stock Other Than MuniPreferred............................................... B-23
(b) Dividends and Other Distributions With Respect to Common Stock Under the 1940 Act................... B-23
(c) Other Restrictions On Dividends and Other Distributions............................................. B-23
10. Rating Agency Restrictions............................................................................... B-24
11. Redemption............................................................................................... B-25
(a) Optional Redemption................................................................................. B-25
(b) Mandatory Redemption................................................................................ B-26
(c) Notice of Redemption................................................................................ B-26
(d) No Redemption Under Certain Circumstances........................................................... B-27
(e) Absence of Funds Available for Redemption........................................................... B-27
(f) Auction Agent as Trustee of Redemption Payments by Fund............................................. B-27
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer Outstanding...................... B-27
(h) Compliance With Applicable Law...................................................................... B-27
(i) Only Whole Shares of MuniPreferred May Be Redeemed.................................................. B-28
12. Liquidation Rights....................................................................................... B-28
(a) Ranking............................................................................................. B-28
(b) Distributions Upon Liquidation...................................................................... B-28
(c) Pro Rata Distributions.............................................................................. B-28
(d) Rights of Junior Stock.............................................................................. B-28
(e) Certain Events Not Constituting Liquidation......................................................... B-28
13. Miscellaneous............................................................................................ B-28
(a) Amendment of Appendix A to Add Additional Series.................................................... B-28
(b) Appendix A Incorporated By Reference................................................................ B-29
(c) No Fractional Shares................................................................................ B-29
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise Acquired by the Fund............. B-29
(e) Board May Resolve Ambiguities....................................................................... B-29
(f) Headings Not Determinative.......................................................................... B-29
(g) Notices............................................................................................. B-29
PART II....................................................................................................... B-29
1. Orders................................................................................................... B-29
2. Submission of Orders by Broker-Dealers to Auction Agent.................................................. B-31
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.......................... B-32
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares............ B-34
5. Notification of Allocations.............................................................................. B-36
6. Auction Agent............................................................................................ B-36
7. Transfer of Shares of MuniPreferred...................................................................... B-36
8. Global Certificate....................................................................................... B-36
Appendix A.................................................................................................... B-A-1
Section 1. Designation As To Series..................................................................... B-A-1
Section 2. Number of Authorized Shares Per Series....................................................... B-A-2
Section 3. Exceptions to Certain Definitions............................................................ B-A-2
Section 4. Certain Definitions.......................................................................... B-A-2
Section 5. Initial and Transitional Rate Periods........................................................ B-A-6
Section 6. Date for Purposes of Paragraph (yyy) Contained Under the Heading "Definitions"
in this statement............................................................................ B-A-6
</TABLE>
iv
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Section 7. Party Named for Purposes of the Definition of................................................ B-A-7
Section 8. Additional Definitions....................................................................... B-A-7
Section 9. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this Statement.......... B-A-7
Section 10. Redemption Provisions Applicable to Initial Rate Periods..................................... B-A-8
Section 11. Applicable Rate for Purposes of Subparagraph(b)(iii) of Section 3 of Part II
of this Statement............................................................................ B-A-8
</TABLE>
v
<PAGE>
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC., a Minnesota corporation
(the "Fund"), certifies to the Secretary of State of the State of Minnesota
that:
First: Pursuant to authority expressly vested in the Board of Directors
of the Fund by Article FIFTH of the Fund's Articles of Incorporation, as amended
(which, as hereafter restated or amended from time to time are, together with
this Statement, herein called the "Articles"), the Board of Directors has, by
resolution, designated the preferences, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption of
shares of the Fund's authorized Preferred Stock, par value $.01 per share,
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 "AM 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-1
<PAGE>
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in paragraph
(c) of Section 7 of Part I of this Statement.
(c) "AFFILIATE" shall mean, for purposes of the definition of "Outstanding,"
any Person known to the Auction Agent to be controlled by, in control of or
under common control with the Fund; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Fund shall be
deemed to be an Affiliate nor shall any corporation or any Person controlled by,
in control of or under common control with such corporation one of the
directors, trustees or executive officers of which is a director of the Fund be
deemed to be an Affiliate solely because such director, trustee or executive
officer is also a director 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 (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs) that are rated by S&P.
(f) "APPLICABLE RATE" shall have the meaning specified in subparagraph (e)(i)
of Section 2 of Part I of this Statement.
(g) "ARTICLES" shall have the meaning specified on the first page of this
Statement.
(h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the Fund and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of MuniPreferred so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
(j) "AUCTION AGENT" shall mean the entity appointed as such by a resolution of
the Board of Directors in accordance with Section 6 of Part II of this
Statement.
(k) "AUCTION DATE," with respect to any Rate Period, shall mean the Business
Day next preceding the first day of such Rate Period.
(l) "AUCTION PROCEDURES" shall mean the procedures for conducting Auctions set
forth in Part II of this Statement.
(m) "AVAILABLE MUNIPREFERRED" shall have the meaning specified in paragraph (a)
of Section 3 of Part II of this Statement.
(n) "BENCHMARK RATE" shall have the meaning specified in Section 12 of Appendix
A hereto.
(o) "BENEFICIAL OWNER," with respect to shares of a series of MuniPreferred,
means a customer of a Broker-Dealer who is listed on the records of that Broker-
Dealer (or, if applicable, the Auction Agent) as a holder of shares of such
series.
(p) "BID" and "BIDS" shall have the respective meanings specified in paragraph
(a) of Section 1 of Part II of this Statement.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be
B-2
<PAGE>
permitted to be a Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Fund may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.
(r) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Fund or any
duly authorized committee thereof.
(s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Statement, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Fund and has entered into a Broker-Dealer Agreement that remains
effective.
(t) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Statement.
(u) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
(v) "CODE" means the Internal Revenue Code of 1986, as amended.
(w) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or,
in lieu of any thereof, their respective affiliates or successors, if such
entity is a commercial paper dealer.
(x) "COMMON STOCK" shall mean the common stock, par value $.01 per share, of
the Fund.
(y) "CURE DATE" shall mean the MuniPreferred Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be.
(z) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of
MuniPreferred, shall mean the date on which the Fund initially issued such
shares.
(aa) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations rated at
least A-1+ or SP-1+ 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.
B-3
<PAGE>
(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.
(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 stock 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."
B-4
<PAGE>
(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
Directors. Market Value of any asset shall include any interest accrued thereon.
The pricing service values portfolio securities at the mean between the quoted
bid and asked price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily available are valued
at fair value as determined by the pricing service using methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
type of issue, coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The pricing service may employ
electronic data processing techniques or a matrix system, or both, to determine
valuations.
(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
B-5
<PAGE>
(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.
(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 Stock
outstanding on such date multiplied by the liquidation preference of such
shares), plus any redemption premium applicable to shares of MuniPreferred (or
other Preferred Stock) 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 shares of Preferred
Stock to, but not including, the first respective dividend payment dates for
such other shares that follow such Valuation Date); (C) the aggregate amount of
B-6
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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) fox 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 shares of
Preferred Stock 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 shares of Preferred Stock) (except that (1) if such Valuation Date occurs
at a time when a Failure to Deposit (or, in the case of shares of Preferred
Stock other than MuniPreferred, a failure similar to a Failure to Deposit) has
occurred that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of shares of Preferred Stock 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 shares of Preferred Stock 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.
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<PAGE>
(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 stock, 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 stock of a closed-end investment company as a
condition of declaring dividends on its common 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.
(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.
B-8
<PAGE>
(xxx) "PREFERRED STOCK" shall mean the preferred stock 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.
(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).
B-9
<PAGE>
(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.
(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 Transitional Rate Period (or, if no Transitional Rate Period, 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.
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<PAGE>
(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) [Reserved]
(ddddd) "TREASURY BILL" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
(eeeee) "TREASURY BILL RATE," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
(fffff) "TREASURY NOTE" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
(ggggg) "TREASURY NOTE RATE," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic
B-11
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average of the bid price quotations of the most recently auctioned Treasury Note
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent. If any U.S. Government Securities Dealer does not
quote a rate required to determine the Treasury Bill Rate or the Treasury Note
Rate, the Treasury Bill Rate or the Treasury Note Rate shall be determined on
the basis of the quotation or quotations furnished by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers and any
Substitute U.S. Government Securities Dealers selected by the Fund to provide
such rate or rates not being supplied by any U.S. Government Securities Dealer
or U.S. Government Securities Dealers, as the case may be, or, if the Fund does
not select any such Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.
(hhhhh) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. Government securities dealer.
(iiiii) "VALUATION DATE" shall mean, for purposes of determining whether the
Fund is maintaining the MuniPreferred Basic Maintenance Amount, each Business
Day.
(jjjjj) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the greater of
the Moody's Volatility Factor and the S&P Volatility Factor.
(kkkkk) "VOTING PERIOD" shall have the meaning specified in paragraph (b) of
Section 5 of Part I of this Statement.
(lllll) "WINNING BID RATE" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 8 of Appendix
A hereto shall be incorporated herein and made part hereof by reference thereto.
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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 Stock 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
Directors, out of funds legally available therefor, 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 stock, 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.
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(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
any Transitional Rate Period and for each Subsequent Rate Period of shares of
such series thereafter, the dividend rate on shares of such series shall be
equal to the rate per annum that results from an Auction for shares of such
series on the Auction Date next preceding such Transitional Rate Period or
Subsequent Rate Period, as the case may be; provided, however, that if:
(A) an Auction for any such Transitional Rate Period or Subsequent Rate Period
is not held for any reason other than as described below, the dividend rate on
shares of such series for such Transitional Rate Period or 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 shazes 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 Transitional Rate Period or Subsequent Rate Period thereof
and the dividend rate for shares of such series for such Transitional Rate
Period or Subsequent Rate Period will be the Maximum Rate for shares of such
series on the Auction Date for such Transitional Rate Period or 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 Transitional Rate Period or
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 the Transitional Rate Period or 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 Transitional Rate Period or 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-"); 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 any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured, and, prior to 12:00 Noon, New York
City time, on the fourth Business Day preceding the Auction Date for the Rate
Period subsequent to such Rate Period, such Failure to Deposit shall not have
been cured in accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Fund shall not have paid the applicable
Late Charge to the Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference Rate, the
Reference Rate applicable to a Rate Period (x) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (y) commencing on the date
on which the Rate Period during which Failure to Deposit occurs commenced), no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York City time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares of such series on
the Auction Date for such Subsequent Rate Period (but with the prevailing rating
for shares of such series, for purposes of determining such Maximum Rate, being
deemed to be "Below "ba3"/BB-") (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
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applied by the Auction Agent to the payment of dividends (and any such Late
Charge) will, to the extent permitted by law, be repaid to the Fund at the end
of 90 days from the date on which such moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of MuniPreferred shall
be paid on the Dividend Payment Date therefor to the Holders thereof as their
names appear on the stock 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 stock books of the Fund on such date, not exceeding
15 days preceding the payment date thereof, as may be fixed by the Board of
Directors.
(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 Directors, out of funds legally available
therefor, 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 stock 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 stock 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
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only if (A) notice thereof shall have been given in accordance with paragraph
(c) and subparagraph (d)(i) of this Section 4, (B) an Auction for shares of such
series shall have been held on the Auction Date immediately preceding the first
day of such proposed Special Rate Period and Sufficient Clearing Bids for shares
of such series shall have existed in such Auction, and (C) if any Notice of
Redemption shall have been mailed by the Fund pursuant to paragraph (c) of
Section 11 of this Part I with respect to any shares of such series, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent. In the event the Fund wishes to designate any succeeding
Subsequent Rate Period for shares of a series of MuniPreferred as a Special Rate
Period consisting of more than 28 Rate Period Days, the Fund shall notify S&P
(if S&P is then rating such series) and Moody's (if Moody's is then rating such
series) in advance of the commencement of such Subsequent Rate Period that the
Fund wishes to designate such Subsequent Rate Period as a Special Rate Period
and shall provide S&P (if S&P is then rating such series) and Moody's (if
Moody's is then rating such series) with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Fund wishes
to designate a Subsequent Rate Period as a Special Rate Period, but the day
following what would otherwise be the last day of such Special Rate Period is
not (a) a Tuesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series M MuniPreferred" in Section 1 of Appendix A
hereto, (b) a Wednesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series T 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:
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(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 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
Articles 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 shares of Preferred Stock, including each
share of MuniPreferred, and of shares of Common Stock shall vote together as a
single class; provided, however, that, at any meeting of the shareholders of the
Fund held for the election of directors, the holders of outstanding shares of
Preferred Stock, 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 capital stock of the Fund, to elect two
directors of the Fund, each share of Preferred Stock, including each share of
MuniPreferred, entitling the holder thereof to one vote. Subject to paragraph
(b) of this Section 5, the holders of outstanding shares of Common Stock and
Preferred Stock, including MuniPreferred, voting together as a single class,
shall elect the balance of the directors.
6. VOTING FOR ADDITIONAL DIRECTORS.
(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
directors constituting the Board of Directors shall be automatically increased
by the smallest number that, when added to the two directors elected exclusively
by the holders of shares of Preferred Stock, including shares of MuniPreferred,
would constitute a majority of the Board of Directors as so increased by such
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<PAGE>
smallest number; and the holders of shares of Preferred Stock, 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
capital stock of the Fund), to elect such smallest number of additional
directors, together with the two directors 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 share of
Preferred Stock, 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 shares of Preferred Stock are entitled under the
1940 Act to elect a majority of the directors of the Fund.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the accrual of any
right of the holders of shares of Preferred Stock to elect additional directors
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
shares of Preferred Stock held during a Voting Period at which directors are to
be elected, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the Fund), shall
be entitled to elect the number of directors prescribed in subparagraph (b)(i)
of this Section 5 on a one-vote-per-share basis.
(iii) TERMS OF OFFICE OF EXISTING DIRECTORS. The terms of office of all persons
who are directors of the Fund at the time of a special meeting of Holders and
holders of other Preferred Stock to elect directors shall continue,
notwithstanding the election at such meeting by the Holders and such other
holders of the number of directors that they are entitled to elect, and the
persons so elected by the Holders and such other holders, together with the two
incumbent directors elected by the Holders and such other holders of Preferred
Stock and the remaining incumbent directors elected by the holders of the Common
Stock and Preferred Stock, shall constitute the duly elected directors of the
Fund.
(iv) TERMS OF OFFICE OF CERTAIN DIRECTORS TO TERMINATE UPON TERMINATION OF
VOTING PERIOD. Simultaneously with the termination of a Voting Period, the terms
of office of the additional directors elected by the Holders and holders of
other Preferred Stock pursuant to subparagraph (b)(i) of this Section 5 shall
terminate, the remaining directors shall constitute the directors of the Fund
and the voting rights of the Holders and such other holders to elect additional
directors 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.
(1) 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 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 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
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I, the Board of Directors, 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 Stock 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 Stock 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 Articles, including
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 stock ranking junior to shares of
MuniPreferred with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund,
will be deemed to affect such preferences, rights or powers only if Moody's or
S&P is then rating shares of MuniPreferred and such issuance would, at the time
thereof, cause the Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage
or the MuniPreferred Basic Maintenance Amount. So long as any shares of
MuniPreferred are outstanding, the Fund shall not, without the affirmative vote
or consent of the Holders of at least 66 2/3% of the shares of MuniPreferred
outstanding at the time, in person or by proxy, either in writing or at a
meeting, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent. To the
extent that shares of MuniPreferred constitute a series of stock under Minnesota
law and to the extent the Holders of such shares are empowered under the
Minnesota Business Corporation Act to vote as a class on the actions set forth
above in this subparagraph (c)(i), the Fund shall not approve any such action
without the affirmative vote or consent of the Holders of at least a majority of
the shares of MuniPreferred of such series outstanding at the time, in person or
by proxy, either in writing or at a meeting (voting as a separate class).
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided for in the
Articles, (A) the affirmative vote of the Holders of at least a majority of the
shares of Preferred Stock, 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 shares of Preferred
Stock," 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 shares of Preferred Stock," 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 shares of Preferred
Stock" 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
Directors, 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
Directors 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
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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:
<TABLE>
<CAPTION>
<S> <C>
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act MuniPreferred Asset Coverage
Issue Type Category Other Issues
Market Value Quarterly Valuation Date
maximum Potential Gross-up Payment Liability Receivables for Municipal Obligations Sold
MuniPreferred Basic Maintenance Amount S&P Discount Factor
MuniPreferred Basic Maintenance Cure Date S&P Eligible Asset
MuniPreferred Basic Maintenance Report S&P Exposure Period
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Asset Valuation Date
Moody's Exposure Period Volatility Factor
</TABLE>
(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 DIRECTORS 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 directors 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 Articles, 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
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<PAGE>
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
S&P is then rating the shares of MuniPreferred).
(b) on or before 5:00 P.M., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to satisfy the MuniPreferred Basic
Maintenance Amount, and on the third Business Day after the MuniPreferred Basic
Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to S&P (if S&P is then rating the shares of MuniPreferred),
Moody's (if Moody's is then rating the shares of MuniPreferred) and the Auction
Agent (if either S&P or Moody's is then rating the shares of MuniPreferred) a
MuniPreferred Basic Maintenance Report as of the date of such failure or such
MuniPreferred Basic Maintenance Cure Date, as the case may be, which will be
deemed to have been delivered to the Auction Agent if the Auction Agent receives
a copy or telecopy, telex or other electronic transcription thereof and on the
same day the Fund mails to the Auction Agent for delivery on the next Business
Day the full MuniPreferred Basic Maintenance Report. The Fund shall also deliver
a MuniPreferred Basic Maintenance Report to (i) the Auction Agent (if either
Moody's or S&P is then rating the shares of MuniPreferred) as of (A) the
fifteenth day of each month (or, if such day is not a Business Day, the next
succeeding Business Day) and (B) the last Business Day of each month, (ii)
Moody's (if Moody's is then rating the shares of MuniPreferred) and S&P (if S&P
is then rating the shares of MuniPreferred) as of any Quarterly Valuation Date,
in each case on or before the third Business Day after such day, and (iii) S&P,
if and when requested for any Valuation Date, on or before the third Business
Day after such request. A failure by the Fund to deliver a MuniPreferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a MuniPreferred Basic Maintenance Report indicating the Discounted
Value for all assets of the Fund is less than the MuniPreferred Basic
Maintenance Amount, as of the relevant Valuation Date.
(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
B-22
<PAGE>
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 Stock 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.
8. [RESERVED]
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON PREFERRED STOCK 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 stock 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 stock 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 stock 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 stock 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 stock 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 STOCK UNDER THE
1940 ACT. The Board of Directors shall not declare any dividend (except a
dividend payable in shares of Common Stock), or declare any other distribution,
upon shares of Common Stock, or purchase shares of Common Stock, unless in every
such case the shares of Preferred Stock 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 stock of a closed-end investment
company as a condition of declaring dividends on its common 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
B-23
<PAGE>
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Stock or other
stock, 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 Stock or any other stock 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 shares of Common Stock or any other such junior stock
(except by conversion into or exchange for stock 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 stock
(except by conversion into or exchange for stock 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 Stock or other stock, 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 Stock or any other stock 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
shares of Common Stock or any other such junior stock (except by conversion into
or exchange for stock of the Fund ranking junior to shares of MuniPreferred as
to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
shares of MuniPreferred) and S&P Eligible Assets (if S&P is then rating the
shares of MuniPreferred) would each at least equal the MuniPreferred Basic
Maintenance Amount.
10. RATING AGENCY RESTRICTIONS.
For so long as any shares of MuniPreferred are outstanding and Moody's or
S&P, or both, are rating such shares, the Fund will not, unless it has received
written confirmation from Moody's or S&P, or both, as appropriate, that any such
action would not impair the ratings then assigned by such rating agency to such
shares, engage in any one or more of the following transactions:
(a) buy or sell futures or write put or call options;
(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 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
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;
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<PAGE>
(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 Directors, after consultation with the
Broker-Dealer or Broker-Dealers for such Special Rate Period of shares of such
series, determines that such Special Redemption Provisions are in the best
interest of the Fund.
(iii) If fewer than all of the outstanding shares of a series of MuniPreferred
are to be redeemed pursuant to subparagraph (i) of this paragraph (a), the
number of shares of such series to be redeemed shall be determined by the Board
of Directors, 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
B-25
<PAGE>
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
Directors 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 shares of other Preferred Stock 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
shares of other Preferred Stock the redemption or retirement of which would have
had such result, all shares of MuniPreferred and Preferred Stock then
outstanding shall be redeemed), and (ii) the maximum number of shares of
MuniPreferred, together with all shares of other Preferred Stock subject to
redemption or retirement, that can be redeemed out of funds expected to be
legally available therefor. 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 Stock (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 shares
of other Preferred Stock 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 shares
of other Preferred Stock 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 af 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 stock
books of the Fund on the record date established by the Board of Directors. 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 Directors 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.
B-26
<PAGE>
(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, 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 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 Directors
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 Minnesota law, but shall effect no redemption except in accordance with the
1940 Act and Minnesota law.
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(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 Articles 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 Stock 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
Stock or on any other class of stock 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 Stock 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 STOCK. Subject to the rights of the holders of shares of
any series or class or classes of stock ranking on a parity with the shares of
MuniPreferred with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, after payment shall have
been made in full to the Holders of the shares of MuniPreferred as provided in
paragraph (b) of this Section 12, but not prior thereto, any other series or
class or classes of stock 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 other corporation nor the merger or
consolidation of any other 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 Directors 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 Directors is
entitled to adopt pursuant to the terms of this Statement without shareholder
approval and (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.
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<PAGE>
(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 MuniPrerred 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
shares of Preferred Stock without designation as to series. Upon the redemption,
exchange or other acquisition by the Fund of all outstanding shares of a series
of MuniPreferred, all provisions of the Articles relating to such series
(including, without limitation, all provisions of this Statement relating to
such series) shall cease to be of further effect and shall cease to be part of
the Articles. Upon the occurrence of any such event, the Board of Directors
shall have the power, pursuant to Minnesota Statutes Section 302A.135,
Subdivision 5 or any successor provision and without shareholder action, to
cause restated articles of incorporation of the Fund or other appropriate
documents to be prepared and filed with the Secretary of State of the State of
Minnesota which reflect such removal from the Articles of all such provisions
relating to such series or, if appropriate, the cancellation of this Statement,
or both.
(e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable law,
the Board of Directors may interpret or adjust the provisions of this Statement
to resolve any inconsistency or ambiguity or to remedy any formal defect, and
may amend this Statement with respect to any series of MuniPreferred prior to
the issuance of shares of such series.
(f) HEADINGS NOT DETERMINATIVE. The headings contained in this Statement are
for convenience of reference only and shall not affect the meaning or
interpretation of this Statement.
(g) NOTICES. All notices or communications, unless otherwise specified in the
By-Laws of the Fund or this Statement, shall be sufficiently given if in writing
and delivered in person or mailed by first-class mail, postage prepaid.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of MuniPreferred:
(i) each Beneficial Owner of shares of such series may submit to its Broker-
Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series for the next succeeding
Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the Applicable
Rate for shares of such series for the next succeeding Rate Period of shares of
such series shall be less than the rate per annum specified by such Beneficial
Owner; and/or
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<PAGE>
(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
(C) the number of Outstanding shares of such series specified in such Bid if
the rate specified therein shall be higher than the Maximum Rate for shares of
such series, or such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iii) of paragraph
(b) of Section 4 of this Part II if the rate specified therein shall be higher
than the Maximum Rate for shares of such series and Sufficient Clearing Bids for
shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of a
series of MuniPreferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Sell
Order; or
(B) such number or a lesser number of Outstanding shares of such series as set
forth in clause (iii) of paragraph (b) of Section 4 of this Part II if
Sufficient Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of MuniPreferred shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Fund) with the provisions of Section 7 of this Part II or (2) such Broker-Dealer
has informed the Auction Agent pursuant to the terms of its Broker-Dealer
Agreement that, according to such Broker-Dealer's records, such Broker-Dealer
believes it is not the Existing Holder of such shares.
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<PAGE>
(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;
(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
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<PAGE>
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 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:
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<PAGE>
(i) the excess of the number of Outstanding shares of such series over the
number of outstanding shares of such series subject to Submitted Hold Orders
(such excess being hereinafter referred to as the "Available MuniPreferred"
of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to Submitted Bids
of Potential Holders specifying one or more rates equal to or lower than the
maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to Submitted Bids
of Existing Holders specifying one or more rates higher than the Maximum Rate
for shares of such series; and
(C) the number of Outstanding shares of such series subject to Submitted Sell
Orders
(in the event such excess or such equality exists (other than because the
number of shares of such series in subclauses (B) and (C) above is zero
because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the lowest
rate specified in such Submitted Bids (the "Winning Bid Rate" for shares of such
series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such lowest
rate and (II) all other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to continue to hold
the shares of such series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids of Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders 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.
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<PAGE>
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 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;
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<PAGE>
(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 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.
B-35
<PAGE>
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 Directors shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Agent. The Auction Agent's registry
of Existing Holders of shares of a series of MuniPreferred shall be conclusive
and binding on the Broker-Dealers. A Broker-Dealer may inquire of the Auction
Agent between 3:00 p.m. on the Business Day preceding an Auction for shares of a
series of MuniPreferred and 9:30 a.m. on the Auction Date for such Auction to
ascertain the number of shares of such series in respect of which the Auction
Agent has determined such Broker-Dealer to be an Existing Holder. If such
Broker-Dealer believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-Dealer's inquiry,
such Broker-Dealer may so inform the Auction Agent of that belief. Such Broker-
Dealer shall not, in its capacity as Existing Holder of shares of such series,
submit Orders in such Auction in respect of shares of such series covering in
the aggregate more than the number of shares of such series specified by the
Auction Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF SHARES OF MUNIPREFERRED. Unless otherwise permitted by the
Fund, a Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of shares of MuniPreferred only in whole shares and only pursuant to a
Bid or Sell Order placed with the Auction Agent in accordance with the
procedures described in this Part II or to a Broker-Dealer; provided, however,
that (a) a sale, transfer or other disposition of shares of MuniPreferred from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 7 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the Fund) to
whom such transfer is made shall advise the Auction Agent of such transfer.
8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period, (i) all
of the shares of a series of MuniPreferred outstanding from time to time shall
be represented by one global certificate registered in the name of the
Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of MuniPreferred shall be made on the books of the Fund to
any Person other than the Securities Depository or its nominee. The foregoing
restriction on registration of transfer shall be conspicuously noted on the face
or back of the certificates of MuniPreferred in such a manner as to comply with
the requirements of Minnesota Statute Section 302A.429, Subd. 2, and Section
8-204 of the Uniform Commercial Code as in effect in the State of Minnesota, or
any successor provisions.
B-36
<PAGE>
IN WITNESS WHEREOF, NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC., has
caused these presents to be signed in its name and on its behalf by its Vice
President on May __,1999.
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
BY:
Gifford R. Zimmerman
Vice President
B-37
<PAGE>
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
APPENDIX A
SECTION 1 DESIGNATION AS TO SERIES.
SERIES M2: A series of 10,000 shares of Preferred Stock, par value $.01
per share, liquidation preference $25,000 per share, is hereby designated
"Municipal Auction Rate Cumulative Preferred Stock, Series M2." 2,000 shares of
Series M2 MuniPreferred shall be issued on May __, 1999; have an Applicable Rate
for its Initial Rate Period equal to [ ]% per annum; have an initial Dividend
Payment Date of May __, 1999; and have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Articles applicable to Preferred Stock of the Fund, as set forth in
Part I and Part II of this Statement. The Series M2 MuniPreferred shall
constitute a separate series of Preferred Stock of the Fund, and each share of
Series M2 MuniPreferred shall be identical except as provided in Section 11 of
Part I of this Statement. Any references to "Series M MuniPreferred" in Part I
of this Statement shall include Series M2 MuniPreferred.
B-A-1
<PAGE>
SECTION 2. NUMBER OF AUTHORIZED SHARES PER SERIES.
The number of authorized shares constituting Series M2 MuniPreferred is
10,000.
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:
B-A-2
<PAGE>
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
- ---------------------------------------------------------------------------------------------------------------
EXPOSURE PERIOD Aaa* AA* A* Baa* OTHER**(V) MIG-1*** SP-1+***
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater
than seven weeks 154 164 173 205 235 137 149
9 weeks or less but greater
than eight weeks 158 169 179 209 242 138 150
</TABLE>
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-l or, if not rated by Moody's,
rated SP-l+ 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.
B-A-3
<PAGE>
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-l 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
B-A-4
<PAGE>
"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 100%
"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,
Ila3"/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
</TABLE>
B-A-5
<PAGE>
3 Business Days 130 135 150 190
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-
term Municipal obligations will be 115%, so long as such Municipal Obligations
are rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, or 125% if such Municipal obligations are not rated by
S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any
such Moody's-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
Moody's-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, rated MIG-1
or VMIG-1 by Moody's, 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 by Moody's, is
rated at least A by Moody's; (iv) is not part of a private placement of
Municipal Obligations; and (v) is part 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 rated by Moody's but 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. RATE PERIOD.
The Initial Rate Period for shares of Series M2 MuniPreferred shall be the
period from and including the Date of Original Issue thereof to but excluding
May , 1999
B-A-6
<PAGE>
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (yyy) CONTAINED UNDER THE
HEADING "DEFINITIONS" IN THIS STATEMENT.
May 31, 1999.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE MULTIPLE" IN
THIS STATEMENT.
<TABLE>
<CAPTION>
PARTY: SERIES OF MUNIPREFERRED:
- ---------------------------------------------------------------------------
<S> <C>
Salomon Smith Barney Inc. Series M2
</TABLE>
SECTION 8. ADDITIONAL DEFINITIONS.
Not applicable.
SECTION 9. DIVIDEND PAYMENT DATES.
Series M2 MuniPreferred on Tuesday, May __, 1999, and on each
Tuesday thereafter.
B-A-7
<PAGE>
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c)(i) OF SECTION 5 OF
PART I OF THIS STATEMENT.
$350,000,000.
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
reqular 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 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.
B-A-8
<PAGE>
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY , 1999
<PAGE>
PART C -- OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
Included in Part A of the Registration Statement
Financial Highlights for each of the ten years ended October 31, 1998
PART I
Portfolio of Investments, October 31, 1998 (audited)
Statement of Net Assets, October 31, 1998 (audited)
Statement of Operations for the year ended October 31, 1998 (audited)
Statement of Changes in Net Assets for the two years ended October 31,
1998 (audited)
(2) EXHIBITS
The exhibits to this Registration Statement are listed in the Exhibit Index
located elsewhere herein.
ITEM 25: MARKETING ARRANGEMENTS
See Sections 2(a) and 3(i) of the Purchase Agreement filed as an Exhibit
herein.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission fees $ 13,900
Printing and engraving expenses 60,000
Legal fees 55,000
Accounting expenses 5,000
Rating Agency fees 15,000
Blue Sky filing fees and expenses 10,000
Miscellaneous expenses 5,000
--------
Total* $163,900
========
</TABLE>
C-I
<PAGE>
[*Estimated]
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
<S> <C>
Common Stock, $.01 par value............................ 41,729
------
Preferred Stock, $.01 par value......................... 25
------
</TABLE>
ITEM 29: INDEMNIFICATION
Article EIGHTH of the Registrant's Articles of Incorporation provides as
follows:
EIGHTH: To the maximum extent permitted by the Minnesota Business
Corporation Act, as from time to time amended, the Corporation shall indemnify
its currently acting and its former directors, officers, employees and agents,
and those persons who, at the request of the Corporation, serve or have served
another corporation, partnership, joint venture, trust or other enterprise in
one or more such capacities. The indemnification provided for herein shall not
be deemed exclusive of any other rights to which those seeking indemnification
may otherwise be entitled.
Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit or proceeding (including costs connected with the
preparation of a settlement) may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding, if authorized by the Board
of Directors in the specific case, upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay that amount of the
advance which exceeds the amount which it is ultimately determined that he is
entitled to receive from the Corporation by reason of indemnification as
authorized herein; provided, however, that prior to making any such advance at
least one of the following conditions shall have been met: (1) the indemnitee
shall provide a security for his undertaking, (2) the Corporation shall be
insured against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of the disinterested, non-party directors of the
Corporation, or an independent legal counsel in a written opinion, shall
determine, based on a review of readily available facts, that there is reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
C-II
<PAGE>
Nothing in these Articles of Incorporation or in the By-Laws shall be
deemed to protect or provide indemnification to any director or officer of the
Corporation against any liability to the Corporation or to its security holders
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 ("disabling conduct"), and the Corporation shall not
indemnify any of its officers or directors against any liability to the
Corporation or to its security holders unless a determination shall have been
made in the manner provided hereafter that such liability has not arisen from
such officer's or director's disabling conduct. A determination that an officer
or director is entitled to indemnification shall have been properly made if it
is based upon (1) a final decision on the merits by a court or other body before
whom the proceeding was brought that the indemnitee was not liable by reason of
disabling conduct or, (2) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of disabling conduct, by (a) the vote of a majority of a quorum
of directors who are neither "interested persons" of the Corporation as defined
in the Investment Company Act of 1940 nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion.
The directors and officers of the Registrant are covered by Investment
Trust Errors and Omission policies in the aggregate amount of $40,000,000 (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 the
Registrant or where he or she had reasonable cause to believe this conduct was
unlawful).
Section 7 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 directors,
certain of their officers and 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 Trust II, Nuveen Flagship Multistate Trust III,
Nuveen Flagship Multistate Trust IV, Nuveen Flagship Municipal Trust, Nuveen
Taxable Funds Inc., Nuveen California Tax-Free Fund, Inc., Nuveen Tax-Free Money
Market Fund, Inc., Nuveen Tax-Exempt Money Market Fund, Inc., and Nuveen Tax-
Free Reserves, Inc. It also serves as investment adviser to the following
closed-end management type investment companies: 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.,
C-III
<PAGE>
Nuveen Performance Plus Municipal Fund, Inc., Nuveen California Performance Plus
Municipal Fund, Inc., Nuveen New York Performance Plus Municipal Fund, Inc.,
Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund,
Inc., Nuveen California Municipal Market Opportunity Fund, Inc., Nuveen
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 Premium Income Municipal Fund 2, Inc., Nuveen Insured California Premium
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, 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
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, and Nuveen Insured Premium Income Municipal Fund 2.
Nuveen Advisory Corp. has no other clients or business at the present time. The
principal business address for all of these investment companies is 333 West
Wacker Drive, Chicago, Illinois 60606.
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains Articles of Incorporation, By-Laws, minutes of directors 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,
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. It also maintains all the required records
in its capacity as transfer, dividend paying, and shareholder service agent for
shares of the Registrant's Common Stock. Bankers Trust Company, 4 Albany Street,
New
C-IV
<PAGE>
York, New York 10006, maintains all required records in its capacity as transfer
agent, registrar, dividend disbursing agent and redemption agent for the
Registrant's MuniPreferred shares.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of its shares until it amends
its prospectus if (1) subsequent to the effective date of its Registration
Statement, the net asset value declines more than 10 percent from its net asset
value as of the effective date of the Registration Statement, or (2) the net
asset value increases to an amount greater than its net proceeds as stated in
the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) Registrant 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 a part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 497(h) under the Securities Act of
1933 shall be deemed to be a 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 the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) 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.
(7) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding (is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-V
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, and State of Illinois, on the
17th day of May, 1999.
NUVEEN PREMIUM INCOME MUNICIPAL FUND, INC.
/s/ GIFFORD R. ZIMMERMAN
--------------------------------------
Gifford R. Zimmerman, Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the 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 Vice President and May 17, 1999
- ---------------------------------- Controller (Principal
Stephen D. Foy Financial and Accounting
Officer)
Timothy R. Schwertfeger* Executive Officer
Robert P. Bremner* Director
Lawrence H. Brown* Director
Anne E. Impellizzeri* Director
Peter R. Sawers* Director
William J. Schneider* Director
Judith M. Stockdale* Director
</TABLE>
By
/s/ GIFFORD R. ZIMMERMAN
-----------------------
Gifford R. Zimmerman
Attorney-in-Fact
May 17, 1999
* An original power of attorney authorizing, among others, Timothy R.
Schwertfeger, Gifford R. Zimmerman, Larry W. Martin, and each of them, to
execute this Registration Statement, and Amendments thereto, for each of the
officers and directors of Registrant on whose behalf this Registration Statement
is filed, have been executed and are filed herewith.
C-VI
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------- ------------
a. Articles of Incorporation of Registrant, as amended, including the
Statement Establishing and Fixing the Rights and Preferences of
Registrant's Municipal Auction Rate Cumulative Preferred Stock
(Incorporated by reference to Exhibit a of the Registration Statement on
Form N-2 (Registration Nos. 333-78323 and 811-05570), which was filed May
12, 1999)........................................................
b. By-Laws of Registrant (Incorporated by reference to Exhibit b of the
Registration Statement on Form N-2 (Registration Nos. 333-78323 and 811-
05570), which was filed May 12, 1999 .............................
c. Not applicable ...................................................
d.1 Basic Terms of Auction Agency Agreement, including form of request and
acceptance letter related thereto (Incorporated by reference to Exhibit d.1
of the Registration Statement on Form N-2 (Registration Nos. 333-78323 and
811-05570), which was filed May 12, 1999) ........................
d.2 Basic Terms of Broker-Dealer Agreement, including form of request and
acceptance letter related thereto (Incorporated by reference to Exhibit d.2
of the Registration Statement on Form N-2 (Registration Nos. 333-78323 and
811-05570), which was filed May 12, 1999) .........................
d.3 Form of Letter of Representation to The Depository Trust Company relating
to the Series of MuniPreferred (Incorporated by reference to Exhibit d.3 of
the Registration Statement on Form N-2 (Registration Nos. 333-78323 and
811-05570), which was filed May 12, 1999) ........................
e. Dividend Reinvestment Plan (Incorporated by reference to Exhibit e of the
Registration Statement on Form N-2 (Registration Nos. 333-78323 and 811-
05570), which was filed May 12, 1999) ............................
f. Not applicable....................................................
g.1 Investment Management Agreement (Incorporated by reference to Exhibit g.1
of the Registration Statement on Form N-2 (Registration Nos. 333-78323 and
811-05570), which was filed May 12, 1999).........................
g.2 Renewal of Investment Management Agreement (Incorporated by reference to
Exhibit g.2 of the Registration Statement on Form N-2 (Registration Nos.
333-78323 and 811-05570), which was filed May 12, 1999)...............
h. Form of Underwriting Agreement (Incorporated by reference to Exhibit h of
the Registration Statement on Form N-2 (Registration Nos. 333-78323 and
811-05570), which was filed May 12, 1999).........................
i. Deferred Compensation Plan for Non-Employee Directors (Incorporated by
reference to Exhibit i of the Registration Statement on Form N-2
(Registration Nos. 333-78323 and 811-05570), which was filed May 12,
1999).............................................................
j.1 Exchange-Traded Fund Custody Agreement (Incorporated by reference to
Exhibit j.1 of the Registration Statement on Form N-2 (Registration Nos.
333-78323 and 811-05570), which was filed May 12, 1999)...........
j.2 Fund Accounting Agreement (Incorporated by reference to Exhibit j.2 of the
Registration Statement on Form N-2 (Registration Nos. 333-78323 and 811-
05570), which was filed May 12, 1999).............................
j.3 Letter of Succession to Agreements (Incorporated by reference to Exhibit
j.3 of the Registration Statement on Form N-2 (Registration Nos. 333-78323
and 811-05570), which was filed May 12, 1999).....................
k. Not applicable....................................................
l. Opinion and consent of Morgan, Lewis & Bockius LLP (Incorporated by
reference to Exhibit l of the Registration Statement on Form N-2
(Registration Nos. 333-78323 and 811-05570), which was filed May 12,
1999).............................................................
m. Not applicable....................................................
n. Consent of Ernst & Young..........................................
o. Not applicable....................................................
p. Not applicable....................................................
q. Not applicable....................................................
r. Financial Data Schedule (Incorporated by reference to Exhibit r of the
Registration Statement on Form N-2 (Registration Nos. 333-78323 and 811-
05570), which was filed May 12, 1999)............................
s. Powers of Attorney (Incorporated by reference to Exhibit s of the
Registration Statement on Form N-2 (Registration Nos. 333-78323 and 811-
05570), which was filed May 12, 1999).............................
C-VII
<PAGE>
EXHIBIT 99.2n
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Experts" and to the use of our report dated December 11, 1998
in the Registration Statement (Form N-2) and related Prospectus and Statement of
Additional Information of Nuveen Premium Income Municipal Fund, Inc. filed with
the Securities and Exchange Commission in this Pre-Effective Amendment No. 1 to
the Registration Statement under the Securities Act of 1933 (Registration No.
333-78323) and in this Amendment No. 19 to the Registration Statement under the
Investment Company Act of 1940 (Registration No. 811-05570).
ERNST & YOUNG LLP
Chicago, Illinois
May 14, 1999
