<PAGE> 1
NUVEEN LOGO
June 17, 1996
DEAR SHAREHOLDER:
We are pleased to invite you to the Annual Meetings of Shareholders of Nuveen
Insured Premium Income Municipal Fund, Inc. and Nuveen Insured Premium Income
Municipal Fund 2. The meetings are scheduled for Thursday, July 25, 1996, at
10:30 a.m., Chicago time, in the 6th floor auditorium of The Northern Trust
Company, 50 South LaSalle Street, Chicago, Illinois.
At the Annual Meetings, you will be asked to consider and approve a very
important proposal. Subject to shareholder approval, Nuveen Insured Premium
Income Municipal Fund 2, (the "Acquiring Fund") will acquire substantially all
of the assets and assume substantially all of the liabilities of Nuveen Insured
Premium Income Municipal Fund, Inc. (the "Acquired Fund") in exchange for newly
issued shares of the Acquiring Fund, which will be distributed to the
shareholders of the Acquired Fund.
The reorganization should lead to efficiencies of scale, providing benefits such
as:
- Reduced Management Fees
- Lower Administrative Expenses
- Improved Portfolio Management Flexibility
- Increased Trading Liquidity
You will also be asked to elect Board Members and ratify the selection of
independent auditors.
The attached Joint Proxy Statement--Prospectus has been prepared to give you
information about these proposals.
WHETHER OR NOT YOU PLAN TO JOIN US, PLEASE COMPLETE, DATE AND SIGN YOUR PROXY
CARD AND RETURN IT IN THE ENCLOSED ENVELOPE SO THAT YOUR VOTE WILL BE COUNTED.
We appreciate your continued support and confidence in Nuveen and our family of
investments.
Very truly yours,
Timothy R. Schwertfeger
Timothy R. Schwertfeger
President
<PAGE> 2
NOTICE OF ANNUAL MEETINGS 333 West Wacker Drive
OF SHAREHOLDERS Chicago, Illinois
JULY 25, 1996 60606
(312) 917-7700
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND, INC.
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND 2
June 17, 1996
TO THE SHAREHOLDERS:
Notice is hereby given that the Annual Meeting of Shareholders of each of Nuveen
Insured Premium Income Municipal Fund, Inc. (the "Acquired Fund") and Nuveen
Insured Premium Income Municipal Fund 2 (the "Acquiring Fund" and, together with
the Acquired Fund, the "Funds"), will be held in the 6th floor auditorium of The
Northern Trust Company, 50 South LaSalle Street, Chicago, Illinois, on Thursday,
July 25, 1996, at 10:30 a.m., Chicago time, for the following purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation (the
"Agreement") between the Acquiring Fund and the Acquired Fund, whereby the
Acquiring Fund would acquire substantially all of the assets of the Acquired
Fund in exchange for up to 18,000,000 common shares and 4,400 Municipal Auction
Rate Cumulative Preferred Shares, Series T and Series TH, of the Acquiring Fund
and the Acquiring Fund's assumption of substantially all of the liabilities of
the Acquired Fund, and, to approve, in the case of the Acquiring Fund common
shareholders, the issuance of such common shares of the Acquiring Fund pursuant
to the Agreement.
2. To elect six (6) board members, with four board members to be elected by
the holders of Preferred and Common Shares voting together and two board members
to be elected by holders of Preferred Shares only.
3. To ratify the selection of Ernst & Young LLP as independent auditors for
the fiscal year ending October 31, 1996.
4. To transact such other business as may properly come before the Annual
Meeting.
As more fully described in the accompanying Joint Proxy Statement--Prospectus,
shareholders of the Acquired Fund who do not vote to approve the Agreement and
who comply with certain other requirements of Minnesota law may, as an
alternative to receiving the consideration specified in the Agreement, dissent
from the transactions provided for therein and obtain the payment in cash of the
"fair value" of their shares, as defined under Minnesota law. The full text of
Minnesota Statutes, Sections 302A.471 and 302A.473, which set forth the
procedures to be followed by shareholders who choose to dissent under Minnesota
law, is included as Annex B to the Joint Proxy Statement--Prospectus and should
be read in its entirety.
Shareholders of record at the close of business on May 28, 1996 are entitled to
notice of and to vote at that Fund's Annual Meeting.
IN ORDER TO AVOID DELAY AND ADDITIONAL EXPENSE FOR YOUR FUND, AND TO ASSURE THAT
YOUR SHARES ARE REPRESENTED, IF YOU DO NOT EXPECT TO BE PRESENT IN PERSON AT THE
ANNUAL MEETING, YOU ARE REQUESTED TO FILL IN, SIGN AND MAIL THE ENCLOSED PROXY
AS PROMPTLY AS POSSIBLE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
James J. Wesolowski
Secretary
<PAGE> 3
JOINT PROXY STATEMENT
MEETINGS OF SHAREHOLDERS TO BE HELD JULY 25, 1996
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND, INC.
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND 2
PROSPECTUS
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND 2
This Joint Proxy Statement--Prospectus is being furnished to the shareholders of
Nuveen Insured Premium Income Municipal Fund, Inc. (the "Acquired Fund") and
Nuveen Insured Premium Income Municipal Fund 2 (the "Acquiring Fund" and,
together with the Acquired Fund, the "Funds") in connection with the
solicitation of proxies by the Acquiring Fund's Board of Trustees and the
Acquired Fund's Board of Directors for use at each Fund's Annual Meeting of
Shareholders to be held on Thursday, July 25, 1996, at 10:30 a.m., Chicago time,
and at any and all adjournments thereof. At the Acquiring Fund's Annual Meeting,
common shareholders of the Acquiring Fund will be asked to approve the issuance
of up to 18,000,000 common shares of the Acquiring Fund pursuant to an Agreement
and Plan of Reorganization and Liquidation dated as of May 1, 1996 by and
between the Acquiring Fund and the Acquired Fund (the "Agreement"), and common
and preferred shareholders of the Acquiring Fund will be asked to approve the
Agreement. At the Acquired Fund's Annual Meeting, common and preferred
shareholders of the Acquired Fund will be asked to approve the Agreement. The
Agreement provides for (a) the Acquiring Fund's acquisition of substantially all
of the assets of the Acquired Fund in exchange for newly issued common shares
and Municipal Auction Rate Cumulative Preferred Shares ("MuniPreferred(R)")
(collectively, "Acquiring Fund Shares") and the Acquiring Fund's assumption of
substantially all of the liabilities of the Acquired Fund and (b) the
liquidation of the Acquired Fund and the distribution of the Acquiring Fund
common shares and shares of Acquiring Fund MuniPreferred held by the Acquired
Fund to its common and preferred shareholders, respectively. The transactions
contemplated by the Agreement are referred to herein as the "Reorganization."
The number of Acquiring Fund common shares to be issued to the Acquired Fund
would be that number having an aggregate per share net asset value equal to the
aggregate value of the net assets of the Acquired Fund transferred to the
Acquiring Fund. Shares of Acquiring Fund MuniPreferred would be issued to the
Acquired Fund on the basis of one newly issued share of Acquiring Fund
MuniPreferred, Series T and Series TH, for each share of Acquired Fund
MuniPreferred Series T and Series TH, respectively, outstanding. The value of
the Acquired Fund's net assets shall be calculated net of the liquidation
preference (including accumulated and unpaid dividends) of all outstanding
shares of Acquired Fund MuniPreferred.
In addition, at the Annual Meetings, (a) common and preferred shareholders of
each Fund will be asked to consider and vote upon the election of four (4)
directors or trustees ("Board Members") and the ratification of the selection of
independent auditors for their respective Funds and (b) preferred shareholders
of each Fund will be asked to consider and vote upon the election of two (2)
Board Members. Shareholders of the Acquired Fund are being asked to vote on
these additional matters in case the Reorganization is not consummated and the
Acquired Fund remains a separate entity.
The Funds are both closed-end, diversified management investment companies, with
identical investment objectives and policies; primarily to provide current
interest income exempt from regular Federal income taxes and secondarily to
enhance portfolio value relative to the municipal bond market. The principal
executive office of each Fund is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and the telephone number of each Fund is (312) 917-7700. The
shares of each Fund are listed on the New York Stock Exchange ("NYSE"); reports,
proxy statements and other information concerning the Funds can be inspected at
the offices of the NYSE. See "Available Information."
This Joint Proxy Statement--Prospectus sets forth concisely the information that
shareholders of the Funds should know before voting on the proposals described
above. It should be read and retained for future reference. A Statement of
Additional Information dated June 17, 1996 containing additional information
about the Funds has been filed with the Securities and Exchange Commission (the
"Commission") and is hereby incorporated by reference in its entirety into this
Joint Proxy Statement--Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by mailing a written request to
either of the Funds, Attention: Administration, 333 West Wacker Drive, Chicago,
Illinois 60606, or by calling (800) 257-8787.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED ON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT --
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT--PROSPECTUS IS JUNE 17, 1996.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY......................................... 1
The Annual Meetings......................... 1
The Reorganization.......................... 1
Reasons for the Reorganization.............. 2
Dissenting Shareholders' Rights of
Appraisal................................. 2
Tax Consequences of the Reorganization...... 2
Comparison of the Acquiring Fund and the
Acquired Fund............................. 2
General................................ 2
Investment Objectives and Policies..... 2
Management of the Funds................ 3
Dividends and Distributions............ 3
Comparative Fee Table.................. 3
RISKS AND SPECIAL CONSIDERATIONS REGARDING THE
REORGANIZATION................................ 4
THE ANNUAL MEETINGS............................. 5
General..................................... 5
Voting; Proxies............................. 5
AVAILABLE INFORMATION........................... 6
PROPOSAL NO. 1--THE REORGANIZATION.............. 6
General..................................... 6
Terms of the Reorganization................. 7
Reasons for the Reorganization.............. 8
Votes Required.............................. 9
Vote of Common Shareholders as a
Separate Class....................... 9
Votes of Preferred Shareholders as a
Separate Class....................... 9
Combined Votes of Common and Preferred
Shareholders......................... 10
Rating Agency Considerations................ 10
Description of Common Shares Issued by the
Acquiring Fund............................ 10
General................................ 10
Distributions.......................... 10
Dividend Reinvestment Plan............. 11
Odd Lot Holdings....................... 12
Comparison of Rights of Holders of Common
Shares of the Acquiring Fund and the
Acquired Fund............................. 12
Description of MuniPreferred Issued by the
Acquiring Fund............................ 12
General................................ 12
Dividends and Dividend Periods......... 13
Designation of Special Rate Periods.... 16
Voting Rights.......................... 16
Redemption............................. 17
Liquidation............................ 17
Rating Agency Guidelines............... 17
The Auction................................. 18
General................................ 18
Auction Procedures..................... 19
Secondary Market Trading and Transfer
of Acquiring Fund MuniPreferred...... 20
Comparison of Rights of Holders of
MuniPreferred of the Acquiring Fund and
the Acquired Fund......................... 20
<CAPTION>
PAGE
----
<S> <C>
Comparison of the Investment Objectives and
Policies of the Acquiring Fund and the
Acquired Fund............................. 20
General................................ 20
Portfolio Investments.................. 21
Municipal Obligations.................. 22
Investment Restrictions................ 22
Certain Provisions in the Acquiring Fund's
Declaration of Trust...................... 23
Surrender and Exchange of Acquired Fund
Share Certificates........................ 23
Expenses Associated with the
Reorganization............................ 24
Dissenting Shareholders' Rights of
Appraisal................................. 24
General................................ 24
Procedure.............................. 24
Tax Consequences of the Reorganization...... 26
Exchange of Acquired Fund Shares Solely
for Acquiring Fund Shares.............. 26
Fractional Common Share Interests......... 26
Dissenting Shareholders................... 26
Capitalization.............................. 27
Comparative Performance Information......... 27
PROPOSAL NO. 2--ELECTION OF BOARD MEMBERS OF
EACH FUND..................................... 27
PROPOSAL NO. 3--SELECTION OF INDEPENDENT
AUDITORS FOR THE FUNDS........................ 31
MANAGEMENT OF THE FUNDS......................... 31
Board Members and Officers.................. 31
Investment Adviser.......................... 32
Portfolio Management........................ 32
ADDITIONAL INFORMATION ABOUT THE FUNDS.......... 33
Financial Highlights........................ 33
General Information and History............. 33
Repurchase of Common Shares; Conversion to
Open-End Fund............................. 34
Custodian, Transfer Agent, Dividend
Disbursing Agent and Redemption Agent..... 35
Tax Matters Associated with Investment in
the Funds................................. 36
LEGAL OPINIONS.................................. 36
EXPERTS......................................... 36
SHAREHOLDER PROPOSALS........................... 36
GENERAL......................................... 37
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION AND
LIQUIDATION................................... A-1
ANNEX B
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA
BUSINESS CORPORATION ACT RELATING TO THE
ACQUIRED FUND DISSENTING SHAREHOLDERS' RIGHTS
OF APPRAISAL.................................. B-1
ANNEX C
GLOSSARY OF TERMS............................... C-1
</TABLE>
<PAGE> 5
SUMMARY
The following is a summary of certain information contained in this Joint Proxy
Statement--Prospectus. This summary is qualified in its entirety by the more
detailed information contained herein and in the attached Annexes. Shareholders
should read the entire Joint Proxy Statement--Prospectus. Certain capitalized
terms used but not defined in this summary are defined elsewhere in the text of
this Joint Proxy Statement--Prospectus or in Annex C hereto.
THE ANNUAL MEETINGS
This Joint Proxy Statement--Prospectus is being furnished to the shareholders of
each of the Funds in connection with the solicitation by the Boards of the Funds
of proxies to be voted at the Annual Meetings. Holders of record of shares of
each Fund as of the close of business on May 28, 1996 will be entitled to notice
of and to vote at their Fund's Annual Meeting, as described elsewhere in this
Joint Proxy Statement--Prospectus. Holders of outstanding common shares of the
Acquiring Fund will be asked to approve the issuance of additional Acquiring
Fund common shares pursuant to the Agreement, and holders of outstanding common
and preferred shares of each Fund will be asked to approve the Agreement. Common
and preferred shareholders of each Fund also will be asked to consider and vote
upon the election of four (4) Board Members, and the ratification of the
selection of independent auditors for their respective Funds. In addition,
preferred shareholders of each Fund will be asked to consider and vote upon the
election of two (2) Board Members. Shareholders of the Acquired Fund are being
asked to vote on these additional matters in case the Reorganization is not
consummated and the Acquired Fund remains a separate entity. The details of each
proposal to be voted on by the shareholders of each Fund and the vote required
for approval of each proposal are set forth under the description of each
proposal in this Joint Proxy Statement-- Prospectus.
THE REORGANIZATION
The Agreement provides that, subject to the satisfaction of certain conditions,
including shareholder approval and confirmation of the ratings assigned by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's, a division of
the McGraw Hill Companies ("S&P") to the shares of Acquiring Fund MuniPreferred,
(a) the Acquiring Fund would acquire substantially all of the assets of the
Acquired Fund in exchange for newly issued common shares and newly issued shares
of MuniPreferred of the Acquiring Fund and the Acquiring Fund's assumption of
substantially all of the liabilities of the Acquired Fund, and (b) the Acquired
Fund would liquidate and distribute to its shareholders pro rata by class the
Acquiring Fund Shares received. The number of Acquiring Fund common shares to be
issued to the Acquired Fund would be that number having an aggregate per share
net asset value equal to the aggregate value of the assets of the Acquired Fund
transferred to, net of the Acquired Fund's liabilities assumed by, the Acquiring
Fund as of the time such assets and liabilities are transferred and assumed (the
"Effective Time"). The value of the Acquired Fund's net assets shall be
calculated net of the liquidation preference (including accumulated and unpaid
dividends) of all outstanding shares of Acquired Fund MuniPreferred. Shares of
Acquiring Fund MuniPreferred would be issued to the Acquired Fund on the basis
of one newly issued share of Acquiring Fund MuniPreferred, Series T or Series
TH, for each share of Acquired Fund MuniPreferred, Series T or Series TH,
respectively, outstanding as of the Effective Time.
The Initial Rate Period of the shares of Acquiring Fund MuniPreferred, Series T
and Series TH, will be a period consisting of the number of days following the
day on which the Effective Time occurs that would have remained in the rate
period of the shares of Acquired Fund MuniPreferred, Series T and Series TH, in
effect immediately prior to the Effective Time. The dividend rate for the shares
of Acquiring Fund MuniPreferred, Series T and Series TH, for the Initial Rate
Period thereof will be the dividend rate in effect immediately prior to the
Effective Time for the shares of Acquired Fund MuniPreferred, Series T and
Series TH, respectively. The initial Auction for the shares of Acquiring Fund
MuniPreferred, Series T and Series TH, will be held on the day on which the
auction next succeeding the Effective Time would have been held for the shares
of Acquired Fund MuniPreferred, Series T and Series TH, respectively. The shares
of Acquiring Fund MuniPreferred are subject to mandatory and optional redemption
under certain circumstances. See "Proposal No. 1--The
Reorganization--Description of MuniPreferred Issued by the Acquiring
Fund--Redemption."
As a result of the Reorganization, the assets of the Acquiring Fund and the
Acquired Fund would be combined and the shareholders of the Acquired Fund would
become shareholders of the Acquiring Fund. The investment objectives and
policies and Board Members and officers of the larger combined entity would be
virtually identical to, and the general portfolio characteristics of the larger
combined entity would be substantially similar to, those of each of the separate
Funds.
The Agreement may be terminated and the Reorganization abandoned, whether before
or after approval by the Funds' shareholders, at any time prior to the Effective
Time (a) by the written consent of the Boards of both Funds, (b) by either Fund
if any condition to that Fund's obligations under the Agreement has not been
satisfied or waived and it reasonably appears that such condition will not be
satisfied or (c) by either Fund if the Reorganization has not occurred by
January 31, 1997. If the proposals relating to the Agreement are approved, the
Effective Time is expected to be the close of business on September 9, 1996.
The Board of each Fund, including the Board Members of that Fund who are not
"interested persons," as that term is defined by the 1940 Act, has approved the
Reorganization based on its conclusion that the Reorganization is in the best
1
<PAGE> 6
interests of that Fund and that the interests of shareholders would not be
diluted as a result of the Reorganization. ACCORDINGLY, THE BOARD OF EACH FUND
RECOMMENDS THAT THE SHAREHOLDERS OF THAT FUND VOTE FOR THE APPROVAL OF THE
PROPOSAL RELATING TO THE AGREEMENT. See "Proposal No. 1--The Reorganization."
REASONS FOR THE REORGANIZATION
In approving the Reorganization, the respective Boards of the Funds, which
consist of the same individuals, identified certain benefits that are likely to
result from the Reorganization, including reduced management fees per share,
lower administrative expenses, greater efficiency and flexibility in portfolio
management and a more liquid trading market for common shares of the combined
Fund. The larger combined Fund that would result from the Reorganization would
have a significantly larger asset base than either individual Fund has
currently. Based on data presented by management of the Funds, the Boards
believe that administrative expenses of a larger combined Fund comprised of the
assets of both Funds would be less than the aggregate expenses of the individual
Funds, resulting in a lower expense ratio for the combined Fund and
corresponding higher earnings for its common shareholders. Based upon the fiscal
year ended October 31, 1995, the expense ratios for the Acquiring Fund and the
Acquired Fund were 0.83% and 0.82%, respectively. The pro-forma expense ratio
for the combined Fund for that period would have been 0.81%.
The Boards also considered the possible adverse effects and estimated costs of
combining the Funds and determined that the Reorganization is likely to provide
benefits to the shareholders of each Fund that outweigh such possible adverse
effects and the costs presented by the Reorganization. See "Proposal No. 1--The
Reorganization--Reasons for the Reorganization."
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Shareholders of the Acquiring Fund have no dissenters' rights of appraisal with
respect to the Reorganization. However, under Minnesota law, shareholders of the
Acquired Fund who do not vote to approve the Agreement may elect to have the
"fair value" of their shares (determined in accordance with Minnesota law)
judicially appraised and paid to them, provided that (a) the Acquired Fund
participates in the Reorganization and (b) such Acquired Fund shareholders
comply with the provisions of Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act, which are attached hereto as Annex B. Any deviation
from such requirements may result in the loss of dissenters' rights. See
"Proposal No. 1--The Reorganization--Dissenting Shareholders' Rights of
Appraisal" and Annex B.
TAX CONSEQUENCES OF THE REORGANIZATION
The Funds have received an opinion of Vedder, Price, Kaufman & Kammholz to the
effect that the proposed Reorganization will qualify as a tax-free
reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, neither Fund will recognize gain or loss for
Federal income tax purposes as a result of the Reorganization. In addition,
shareholders of the Acquired Fund who receive Acquiring Fund Shares pursuant to
the Reorganization will recognize no gain or loss, except with respect to the
cash received for a fractional Acquiring Fund common share interest, if any. See
"Proposal No. 1--The Reorganization--Tax Consequences of the Reorganization."
COMPARISON OF THE ACQUIRING FUND AND THE ACQUIRED FUND
GENERAL
The Acquiring Fund and the Acquired Fund are both closed-end, diversified
management investment companies. The Acquiring Fund common shares are listed and
trade on the NYSE under the symbol NPX and the Acquired Fund common shares are
listed and trade on the NYSE under the symbol NPE. The Acquiring Fund is
organized as a business trust under the laws of the Commonwealth of
Massachusetts. The Acquired Fund is organized as a corporation under the laws of
the State of Minnesota. The common shares of each Fund have equal voting rights
and equal rights with respect to the payment of dividends and distribution of
assets upon liquidation and have no preemptive, conversion or exchange rights or
rights to cumulative voting. All outstanding shares of Acquiring Fund
MuniPreferred and Acquired Fund MuniPreferred are rated "aaa" by Moody's and AAA
by S&P. The shares of Acquiring Fund MuniPreferred issued to the Acquired Fund
pursuant to the Reorganization will have rights and preferences, including
liquidation preferences, that are substantially similar to those of the
outstanding shares of Acquired Fund MuniPreferred. See "Proposal No. 1--The
Reorganization."
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Funds are identical. Each Fund's primary
investment objective is current income exempt from regular Federal income tax
and each Fund's secondary investment objective is the enhancement of portfolio
value relative to the municipal bond market through investments in tax-exempt
Municipal Obligations that, in the opinion of the Adviser, are underrated or
undervalued or that represent municipal markets that are undervalued. See
"Proposal No. 1--The Reorganization--Comparison of the Investment Objectives and
Policies of the Acquiring Fund and the Acquired Fund."
The investment policies of the Funds are virtually identical. Except to the
extent it invests in temporary investments, each Fund, as a fundamental policy,
invests all of its assets in tax-exempt Municipal Obligations which are either
covered by insurance guaranteeing the timely payment of principal and interest
thereon or backed by an escrow or trust account
2
<PAGE> 7
containing sufficient U.S. Government or U.S. Government agency securities to
ensure timely payment of principal and interest. As of April 30, 1996, the
dollar-weighted average portfolio maturities of the Funds were 19.65 years for
the Acquiring Fund and 19.23 years for the Acquired Fund and the durations were
9.17 years for the Acquiring Fund and 6.66 years for the Acquired Fund. The
portfolio characteristics of the Acquiring Fund, after the Reorganization, would
reflect the blended characteristics of the constituent Funds. Compared to the
Acquiring Fund, the combined portfolio would have a lower yield, shorter
maturity and higher credit quality. Compared to the Acquired Fund, the combined
portfolio would have a higher yield, longer maturity and lower credit quality.
See "Risks and Special Considerations Regarding the Reorganization" and
"Proposal No. 1--The Reorganization--Comparison of the Investment Objectives and
Policies of the Acquiring Fund and the Acquired Fund."
MANAGEMENT OF THE FUNDS
The Acquiring Fund and the Acquired Fund have the same Board Members and
officers. In addition, the Adviser acts as the investment adviser for, and
manages the investment and reinvestment of the assets of, each Fund. Pursuant to
an Investment Management Agreement between the Adviser and each Fund, each Fund
pays an annual management fee for the services and facilities furnished by the
Adviser on a monthly basis at the following annual rates: are .6500% of average
daily net assets for net assets of up to $125 million, .6375% for net assets in
excess of $125 million (but less than $250 million), .6250% for net assets in
excess of $250 million (but less than $500 million) and .6125% for net assets in
excess of $500 million (but less than $1 billion). See "Management of the
Funds."
DIVIDENDS AND DISTRIBUTIONS
The Funds have identical dividend policies with respect to the payment of
dividends on their common shares. Each Fund's present policy, which may be
changed by its Board, is to make regular monthly cash distributions to holders
of its common shares at a level rate that reflects the past and projected
performance of such Fund, which over time will result in the distribution of all
net investment income of such Fund. While the Adviser expects the level of
monthly distributions to remain relatively stable due to the similar composition
of each Fund's portfolio, the level of distributions over the life of each Fund
may be affected to the extent adjustments are made to such portfolio. Holders of
common shares of each Fund may elect to have all distributions automatically
reinvested in common shares of that Fund at the prevailing market price, plus
customary brokerage charges, pursuant to that Fund's Dividend Reinvestment Plan.
See "Proposal No. 1--The Reorganization--Description of Common Shares Issued by
the Acquiring Fund--Distributions" and "--Dividend Reinvestment Plan" and
"Additional Information About the Funds--Tax Matters Associated with Investment
in the Funds."
The dividend rates on shares of each Fund's MuniPreferred, including the shares
of Acquiring Fund MuniPreferred, Series T and Series TH, issued pursuant to the
Reorganization, are determined on the basis of auctions, which typically are
held weekly. See "Proposal No. 1--The Reorganization--Description of
MuniPreferred Issued by the Acquiring Fund" and "--The Auction" and the
Statement of Additional Information.
COMPARATIVE FEE TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ACQUIRING ACQUIRED
FUND FUND
PRO-FORMA
ACQUIRING
FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ANNUAL EXPENSES
(as a percentage of net assets)
Management Fees 0.64% 0.64% 0.63%
Other Expenses 0.19 0.18 0.18
Total Annual Expenses 0.83 0.82 0.81
- -------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE:
The following table illustrates the expenses on a $1,000 investment based upon
the fees and expenses shown above and assuming a 5% annual return.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquiring Fund $8 $26 $46 $103
Acquired Fund 8 26 46 101
Pro-Forma Acquiring Fund 8 26 45 100
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The purpose of the comparative fee table is to assist you in understanding the
various costs and expenses of investing in shares of the Funds. The information
in the table is based upon annualized expenses for the fiscal year ended October
31, 1995. The figures in the Example are not necessarily indicative of past or
future expenses, and actual expenses may be greater or less than those shown.
The Funds' actual rate of return may be greater or less than the hypothetical 5%
annual return shown in the Example.
3
<PAGE> 8
RISKS AND SPECIAL CONSIDERATIONS REGARDING THE REORGANIZATION
The Boards of each of the Acquiring Fund and the Acquired Fund have identified
certain benefits to the respective shareholders of each Fund as a result of the
Reorganization. The portfolio characteristics of the Acquiring Fund, after the
Reorganization, would reflect the blended characteristics of the constituent
Funds. Compared to the Acquiring Fund, the combined portfolio would have a lower
yield, shorter maturity and higher credit quality. Compared to the Acquired
Fund, the combined portfolio would have a higher yield, longer maturity and
lower credit quality. The following risks and special considerations should be
considered by shareholders of each Fund in their evaluation of the
Reorganization:
1. Each of the Fund's portfolios of Municipal Obligations has different
maturity and yield characteristics, due in part to the different market
conditions existing at the time each Fund was organized. As of April 30,
1996 the yield for the Acquiring Fund's portfolio was 5.80% and for the
Acquired Fund's portfolio was 5.56%. The yield provided for each Fund
represents the average yield of the bonds in the portfolio derived by
weighing each bond's "yield to worst" by the market value of the bond. The
"yield to worst" of a bond is the lower of the yield to maturity and the
yield to call of that bond. Additionally, as of April 30, 1996 the
dollar-weighted average portfolio maturity of the Acquiring Fund was 19.65
years and of the Acquired Fund was 19.23 years and the duration was 9.17
years for the Acquiring Fund and 6.66 years for the Acquired Fund. Both
dollar-weighted average maturity and duration reflect the sensitivity of a
Fund to interest rate fluctuations, whereby a Fund with a longer maturity
and duration reacts more strongly to interest rate changes than a Fund with
a shorter maturity and duration. The average dollar-weighted maturity of a
Fund is the dollar-weighted average of the stated maturities of all debt
instruments held by the Fund. Duration is the weighted present value of
principal and interest payments expressed in years and may more accurately
measure a Fund's sensitivity to incremental changes in interest rates than
average maturity. For example, a Fund with a duration of 5.0 years should
have half the interest rate sensitivity of a Fund with a duration of 10.0
years, because the Fund with the shorter duration will receive payments
(and can reinvest at prevailing interest rates) twice as quickly. Assuming
the Reorganization had occurred on April 30, 1996, the portfolio yield,
dollar-weighted average portfolio maturity and duration of the combined
Funds would have been 5.70%, 19.37 years and 8.16 years, respectively.
2. Although the investment portfolio of each Fund must satisfy the same
standards of credit quality and diversification, the securities owned by
each Fund are different, resulting in certain differences in the
composition of each Fund's portfolio. Of the Municipal Obligations owned by
the Acquiring Fund as of April 30, 1996 (excluding temporary investments),
90% are rated in the highest grade by Moody's or S&P, 91% in the highest
two grades, 100% in the highest three grades, and 0% are unrated. Of the
Municipal Obligations owned by the Acquired Fund, as of April 30, 1996
(excluding temporary investments), 98% are in the highest grade, 98% in the
highest two grades, 100% in the highest three grades, and 0% are unrated.
See Annex A to the Statement of Additional Information for a general
description of Moody's and S&P's ratings of Municipal Obligations.
3. There are differences in concentration among the categories of
industries and tax-exempt issuers of the Municipal Obligations held in the
portfolios of the Funds. For the Acquiring Fund, as of April 30, 1996, the
highest concentration of Municipal Obligations was in the general
obligation, housing, pollution control, and transportation categories
accounting for 26.0%, 15.4%, 13.0% and 10.1% of such Fund's portfolio,
respectively. For the Acquired Fund, as of April 30, 1996, the highest
concentration was in the pollution control, general obligation,
transportation and housing categories accounting for 17.3%, 14.9%, 14.2%
and 11.6% of such Fund's portfolio, respectively.
4. During the periods since the inception of the Funds, common shares of
both Funds have generally traded at discounts to net asset value, with deep
discounts being reflected at times. Since the termination of common share
price stabilization following each Fund's initial public offering, common
share prices for the Acquiring Fund have fluctuated between a maximum
premium of 0.74% and a maximum discount of 15.3%; and common share prices
for the Acquired Fund have fluctuated between a maximum premium of 5.40%
and a maximum discount of 14.75% as determined by the closing price at the
end of each week. As of April 30, 1996, the Acquiring Fund common shares
were trading at a discount to net asset value of 11.35%, and the Acquired
Fund common shares were trading at a discount to net asset value of 8.32%.
It is not possible to state whether the Acquiring Fund common shares will
trade at a premium or discount to net asset value following the
Reorganization, or what the extent of any such premium or discount might
be.
5. With respect to the outstanding shares of MuniPreferred of each Fund, as
of April 30, 1996, the 1940 Act MuniPreferred Asset Coverage was 265% for
the Acquiring Fund and 295% for the Acquired Fund. If the Reorganization
had occurred as of that date, the 1940 Act MuniPreferred Asset Coverage of
the combined Fund would have been 277%, which exceeds the minimum asset
coverage required by the 1940 Act and rating agency guidelines. See
"Proposal No. 1--The Reorganization--Description of MuniPreferred Issued by
the Acquiring Fund--Rating Agency Guidelines."
Based upon the foregoing, as well as the anticipated benefits of the
Reorganization described below, the Board of each Fund determined that the
Reorganization presents no significant risks to such Fund and is likely to
provide benefits to the
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<PAGE> 9
shareholders of such Fund that outweigh the costs and any risks presented by the
Reorganization. See "Proposal No. 1--The Reorganization--Reasons for the
Reorganization."
THE ANNUAL MEETINGS
GENERAL
This Joint Proxy Statement--Prospectus is furnished in connection with the
solicitation by the Boards of the Funds of proxies to be voted at the Funds'
Annual Meetings to be held in the 6th floor auditorium of The Northern Trust
Company, 50 South LaSalle Street, Chicago, Illinois, on Thursday, July 25, 1996
at 10:30 a.m., Chicago time, and at any and all adjournments of such Annual
Meetings. The cost of preparing, printing and mailing the enclosed proxy,
accompanying notice and Joint Proxy Statement--Prospectus, and all other costs
in connection with the solicitation of proxies, to the extent they are not
incremental costs related to the Reorganization, will be paid by the Funds pro
rata based on the number of each Fund's shareholder accounts. Incremental costs
related to the Reorganization will be paid by the Funds based upon estimated
savings to each Fund as a result of expected reduced management fees and
operating expenses resulting from the Reorganization. Additional solicitation
may be made by letter, telephone or telegraph by officers of the Funds, by
officers or employees of the Adviser or Nuveen, or by dealers and their
representatives. The Funds have engaged Tritech Services to assist in the
solicitation of proxies at a total estimated cost of $12,000.
The Board of each Fund has fixed the close of business on May 28, 1996 as the
record date (the "Record Date") for determining holders of such Fund's common
shares and shares of MuniPreferred entitled to notice of and to vote at that
Fund's Annual Meeting. Each shareholder will be entitled to one vote for each
common share or share of MuniPreferred held. At the close of business on the
Record Date, (a) the Acquiring Fund had outstanding 20,642,068 common shares and
shares of MuniPreferred as follows: Series M--2,080 shares; Series W--2,080
shares; and Series F--2,196 shares, and (b) the Acquired Fund had outstanding
15,128,458 common shares and shares of MuniPreferred as follows: Series T--2,200
shares and Series TH--2,200 shares. This Joint Proxy Statement--Prospectus is
first being mailed to shareholders of the Funds on or about June 17, 1996. EACH
FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS OCTOBER 31, 1995 ANNUAL REPORT
AND APRIL 30, 1996 SEMI-ANNUAL REPORT (WHICH WILL BE AVAILABLE ON OR BEFORE JUNE
30, 1996) UPON REQUEST. SUCH WRITTEN OR ORAL REQUEST SHOULD BE DIRECTED TO SUCH
FUND AT 333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606 OR BY CALLING
1-800-257-8787.
VOTING; PROXIES
Common shares and shares of MuniPreferred of the Acquiring Fund entitled to vote
at the Acquiring Fund's Annual Meeting that are represented by properly executed
proxies will, unless such proxies have been revoked, be voted in accordance with
the shareholder's instructions indicated on such proxies. If no contrary
instructions are indicated, all such shares will be voted FOR approval of the
Agreement (and, in the case of Acquiring Fund common shares, for approval of the
issuance of the Acquiring Fund common shares pursuant to the Agreement), FOR the
election of the four Board Member nominees and FOR ratification of the Acquiring
Fund's selection of independent auditors. In addition, such shares of Acquiring
Fund MuniPreferred will be voted FOR the election of the two Board Member
nominees to be elected solely by the holders of shares of Acquiring Fund
MuniPreferred.
Common shares and shares of MuniPreferred of the Acquired Fund entitled to vote
at the Acquired Fund's Annual Meeting that are represented by properly executed
proxies will, unless such proxies have been revoked, be voted in accordance with
the shareholder's instructions indicated on such proxies. If no contrary
instructions are indicated, all such shares will be voted FOR approval of the
Agreement, FOR the election of the four Board Member nominees and FOR
ratification of the Acquired Fund's selection of independent auditors. In
addition, such shares of Acquired Fund MuniPreferred will be voted FOR the
election of the two Board Member nominees to be elected solely by the holders of
shares of Acquired Fund MuniPreferred.
A quorum of shareholders is required to take action at each Annual Meeting. A
majority of the shares entitled to vote at each Annual Meeting, represented in
person or by proxy, will constitute a quorum of shareholders at that Annual
Meeting, except that for the election of the two nominees to be elected by
holders of MuniPreferred, 33 1/3% of the MuniPreferred shares entitled to vote
and represented in person or by proxy will constitute a quorum. Votes cast by
proxy or in person at each Annual Meeting will be tabulated by the inspectors of
election appointed for that Annual Meeting. The inspectors of election will
determine whether or not a quorum is present at that Annual Meeting. The
inspectors of election will treat abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees, typically in "street name," as to which (i)
instructions have not been received from the beneficial owners or persons
entitled to vote and (ii) the broker or nominee does not have discretionary
voting power on a particular matter) as present for purposes of determining a
quorum.
For purposes of determining the approval of the matters submitted to
shareholders for a vote, in the case of the Acquiring Fund, (i) abstentions and
broker non-votes will have the same effect as a vote against the Agreement
(except that for the common shareholders voting as a separate class on the
issuance of up to 18,000,000 additional common shares, abstentions and broker
non-votes will not be treated as voting upon the proposal), (ii) abstentions and
broker non-votes will have no effect on the election of Board Members (the
persons receiving the largest number of votes will be elected), and
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<PAGE> 10
(iii) abstentions and broker non-votes will have the same effect as a vote
against the ratification of the selection of independent auditors. In the case
of the Acquired Fund, (i) abstentions and broker non-votes will have the same
effect as a vote against the Agreement, (ii) abstentions and broker non-votes
will have the same effect as a vote against the election of Board Members, and
(iii) abstentions and broker non-votes will have the same effect as a vote
against ratification of the selection of independent auditors.
Shares of a series of MuniPreferred of a Fund held in "street name" for which
voting instructions have not been received as of one business day before the
meeting, or, if adjourned, one business day before the day to which the meeting
is adjourned, and that would otherwise be treated as "broker non-votes" may,
pursuant to Rule 452 of the NYSE, be voted by the broker on each item in the
same proportion as the votes cast by all MuniPreferred shareholders of that
series of that Fund who have voted on the item.
The details of each proposal to be voted on by the shareholders of each Fund and
the vote required for approval of each proposal are set forth under the
description of each proposal below. Shareholders of either Fund who execute
proxies may revoke them at any time before they are voted by filing with their
Fund a written notice of revocation, by delivering a duly executed proxy bearing
a later date or by attending the meeting and voting in person.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act"), and in accordance therewith is
required to file reports, proxy statements and other information with the
Commission. Any such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Northeast Regional Office, Suite 1300, Seven World Trade
Center, New York, New York 10048 and Midwest Regional Office, Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies
of such materials can be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The shares of the Acquiring
Fund and the Acquired Fund are listed on the NYSE, and such reports, proxy
statements and other information concerning the Funds can also be inspected at
the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Acquiring Fund has filed with the Commission a registration statement on
Form N-14 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the Acquiring Fund shares to be issued pursuant
to the Reorganization. This Joint Proxy Statement--Prospectus and the related
Statement of Additional Information does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Acquiring Fund shares to be issued pursuant to
the Reorganization, reference is hereby made to the Registration Statement.
Statements contained in the Joint Proxy Statement--Prospectus and the related
Statement of Additional Information as to the content of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document included as an
Annex hereto or filed as an exhibit to the Registration Statement.
The information in this Joint Proxy Statement--Prospectus concerning the
Acquiring Fund has been furnished by the Acquiring Fund, and the information
concerning the Acquired Fund has been furnished by the Acquired Fund. This Joint
Proxy Statement--Prospectus constitutes a prospectus of the Acquiring Fund with
respect to the Acquiring Fund Shares issued pursuant to the Reorganization.
PROPOSAL NO. 1--THE REORGANIZATION
The terms and conditions of the Reorganization are set forth in the Agreement
and Plan of Reorganization and Liquidation. Significant provisions of the
Agreement are summarized below; however, this summary is qualified in its
entirety by reference to the Agreement, a copy of which is attached as Annex A
to this Joint Proxy Statement--Prospectus.
GENERAL
The Agreement sets forth the terms of the Reorganization, under which (a) the
Acquiring Fund would acquire substantially all of the assets of the Acquired
Fund in exchange for newly issued common shares and newly issued shares of
MuniPreferred, Series T and Series TH, of the Acquiring Fund and the Acquiring
Fund's assumption of substantially all of the liabilities of the Acquired Fund;
and (b) the Acquired Fund would liquidate and distribute to its shareholders pro
rata by class the Acquiring Fund Shares received. As a result of the
Reorganization, the assets of the Acquiring Fund and the Acquired Fund would be
combined and the shareholders of the Acquired Fund would become shareholders of
the Acquiring Fund. The investment objectives and policies and board members and
officers of the Acquiring Fund are virtually identical to those of the Acquired
Fund, and the general portfolio characteristics of the Acquiring Fund, after the
Reorganization, would be substantially similar to, those of each of the separate
Funds. If the proposals relating to the Agreement are approved, the Effective
Time is expected to be the close of business on September 9, 1996. Following the
Reorganization, the Acquired
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<PAGE> 11
Fund would terminate its registration as an investment company under the 1940
Act by filing a Form N-8F with the Commission.
TERMS OF THE REORGANIZATION
If the Reorganization is approved and the other conditions are satisfied or
waived, at the Effective Time the Acquiring Fund will acquire substantially all
of the assets of the Acquired Fund, including cash (other than cash used to pay
certain Reorganization expenses of the Acquired Fund, to pay shareholders
exercising dissenters' rights, if any, and to make a final distribution of net
tax-exempt income, net ordinary taxable income and net capital gains to the
shareholders of the Acquired Fund accrued as of the Effective Time), cash
equivalents, Municipal Obligations and other securities, receivables and other
property owned by the Acquired Fund. In exchange, the Acquiring Fund would
assume from the Acquired Fund all debts, liabilities, obligations and duties of
the Acquired Fund (other than certain expenses incurred by the Acquired Fund in
connection with the Reorganization, the payment of amounts to shareholders
exercising dissenters' rights, if any, and the Acquired Fund's obligation to
distribute any net tax-exempt income, net ordinary taxable income and net
capital gains accrued as of the Effective Time), and the Acquiring Fund would
issue to the Acquired Fund common shares and shares of MuniPreferred, Series T
and Series TH, of the Acquiring Fund. The number of Acquiring Fund common shares
to be issued to the Acquired Fund would be that number having an aggregate per
share net asset value equal to the aggregate value of the Acquired Fund's assets
transferred to, net of the Acquired Fund's liabilities assumed by, the Acquiring
Fund as of the Effective Time. The value of the Acquired Fund's net assets shall
be calculated net of the liquidation preference (including accumulated and
unpaid dividends) of all outstanding shares of Acquired Fund MuniPreferred.
Shares of Acquiring Fund MuniPreferred would be issued to the Acquired Fund on
the basis of one newly issued share of Acquiring Fund MuniPreferred, Series T
and Series TH, for each share of Acquired Fund MuniPreferred, Series T and
Series TH, respectively, outstanding as of the Effective Time.
The value of the Acquired Fund's assets to be acquired and liabilities to be
assumed by the Acquiring Fund, and the net asset value per common share to be
issued by the Acquiring Fund, will be determined by The Chase Manhattan Bank,
N.A. ("Chase"), the custodian for each Fund, as of the Effective Time. Net asset
value per Acquiring Fund common share shall be computed by dividing the value of
the Acquiring Fund's total assets, less liabilities and less the aggregate
liquidation preference of all outstanding shares of Acquiring Fund MuniPreferred
and any accumulated and unpaid dividends thereon, by the number of Acquiring
Fund common shares outstanding. In determining net asset value per Acquiring
Fund common share and the value of the Acquired Fund's assets, Chase utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the Boards of the respective Funds. 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 constitute a majority of the
securities held by the Funds) 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. The procedures of the pricing service
and its valuations are reviewed periodically by the officers of each Fund under
the general supervision of that Fund's Board. The number of Acquiring Fund
common shares to be issued to the Acquired Fund pursuant to the Reorganization
will be calculated based upon the determinations of Chase.
In the event the Reorganization is consummated, as soon as practicable after the
Effective Time, the Acquired Fund will liquidate and distribute pro rata to its
common shareholders of record the Acquiring Fund common shares it receives, and
pro rata by class to its preferred shareholders of record the shares of
Acquiring Fund MuniPreferred it receives. Such liquidation and distribution will
be accomplished by opening accounts on the books of the Acquiring Fund in the
names of the shareholders of the Acquired Fund and transferring to those
shareholder accounts the Acquiring Fund Shares previously credited on those
books to the account of the Acquired Fund. Each common shareholder account will
receive the respective pro rata number of Acquiring Fund common shares (rounded
down, in the case of fractional Acquiring Fund common shares, to the next
largest number of whole Acquiring Fund common shares) due such Acquired Fund
common shareholder, and each preferred shareholder account will receive one
newly issued share of Acquiring Fund MuniPreferred, Series T or Series TH, for
each share of Acquired Fund MuniPreferred, Series T or Series TH, respectively,
held by such preferred shareholder.
No fractional Acquiring Fund common shares will be issued. In lieu thereof, the
Acquired Fund's transfer agent, Chase, will aggregate all fractional Acquiring
Fund common shares and sell the resulting whole Acquiring Fund common shares on
the NYSE for the account of all shareholders of fractional interests, and each
such shareholder will be entitled to his or her pro rata share of the proceeds
of such sale upon surrender of his or her Acquired Fund common share
certificates.
Dividends will accumulate on shares of Acquired Fund MuniPreferred, Series T and
Series TH, up to and including the day on which the Effective Time occurs and
will be paid, together with the dividends then payable in respect of the shares
of Acquiring Fund MuniPreferred, Series T and Series TH, respectively, to the
holders thereof on the Dividend Payment Date in respect of the Initial Rate
Period of such shares. The Initial Rate Period of the shares of Acquiring Fund
MuniPreferred, Series T and Series TH, will be a period consisting of the number
of days following the day on which the Effective Time occurs that would have
remained in the rate period of the shares of Acquired Fund MuniPreferred, Series
T and Series TH, respectively, in effect immediately prior to the Effective
Time. The dividend rate for the shares of Acquiring Fund
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<PAGE> 12
MuniPreferred, Series T and Series TH, for such Initial Rate Period thereof will
be the dividend rate in effect immediately prior to the Effective Time for the
shares of Acquired Fund MuniPreferred, Series T and Series TH, respectively. The
initial Auction for the shares of Acquiring Fund MuniPreferred, Series T and
Series TH, issued pursuant to the Reorganization will be held on the day on
which the auction next succeeding the Effective Time would have been held for
the shares of Acquired Fund MuniPreferred, Series T and Series TH, respectively,
but for the Reorganization.
Following the Reorganization, every common shareholder of the Acquired Fund
would own common shares of the Acquiring Fund that, except for cash payments
received in lieu of fractional Acquiring Fund common shares, will have an
aggregate per share net asset value immediately after the Effective Time equal
to the aggregate per share net asset value of that shareholder's Acquired Fund
common shares immediately prior to the Effective Time. See "Description of
Common Shares Issued by the Acquiring Fund" for a description of the rights of
such shareholders. Since the Acquiring Fund common shares issued to the common
shareholders of the Acquired Fund would be issued at net asset value in exchange
for net assets of the Acquired Fund having a value equal to the aggregate per
share net asset value of those Acquiring Fund common shares so issued, the net
asset value of the Acquiring Fund common shares should remain virtually
unchanged by the Reorganization. Thus, the Reorganization should result in no
dilution of net asset value of any common shareholder's holdings. See "Pro Forma
Financial Information" in the Statement of Additional Information. However, as a
result of the Reorganization, common shareholders of both Funds would hold
reduced percentages of ownership in the larger combined entity than they held in
the Acquiring Fund or the Acquired Fund, as the case may be.
Following the Reorganization, every preferred shareholder of the Acquired Fund
would own the same number of shares of Acquiring Fund MuniPreferred, Series T or
Series TH, as he or she held of Acquired Fund MuniPreferred, Series T or Series
TH, respectively, and the shares of Acquiring Fund MuniPreferred, Series T or
Series TH, would have rights and preferences substantially similar to those of
the shares of Acquired Fund MuniPreferred, Series T or Series TH, respectively.
Holders of shares of Acquiring Fund MuniPreferred, Series T or Series TH, would
be entitled to receive, on the date that, but for the Reorganization, would have
been the next dividend payment date in respect of the shares of Acquired Fund
MuniPreferred, Series T or Series TH, respectively, dividends accumulated in
respect of the shares of Acquired Fund MuniPreferred, Series T or Series TH,
respectively, (up to and including the day on which the Effective Time occurs),
and in respect of such shares of Acquiring Fund MuniPreferred, Series T or
Series TH (for an Initial Rate Period beginning the day after the day on which
the Effective Time occurs), which together equal the amount of dividends that
would have been paid on such date with respect to the shares of Acquired Fund
MuniPreferred, Series T or Series TH, respectively, but for the Reorganization.
See "Description of MuniPreferred Issued by the Acquiring Fund" and "Comparison
of Rights of Holders of MuniPreferred of the Acquiring Fund and the Acquired
Fund."
See "Surrender and Exchange of Acquired Fund Share Certificates" for a
description of the procedures to be followed by Acquired Fund shareholders to
obtain certificates representing their Acquiring Fund Shares (and cash in lieu
of fractional Acquiring Fund common shares, if any).
Under the terms of the Agreement, the Reorganization is conditioned upon (a)
approval by the shareholders of the Acquiring Fund and the Acquired Fund, as
described under "Votes Required" below, (b) the Funds' receipt of written advice
from Moody's and S&P (i) confirming that consummation of the Reorganization will
not impair the "aaa" and AAA ratings assigned to the outstanding shares of
Acquiring Fund MuniPreferred, Series M, Series W, or Series F and (ii) assigning
"aaa" or AAA ratings to the shares of Acquiring Fund MuniPreferred, Series T and
Series TH, issued pursuant to the Reorganization, (c) the Funds' receipt of an
opinion to the effect that the Reorganization will qualify as a tax-free
reorganization under the Code (which opinion has already been received), (d) the
absence of legal proceedings challenging the Reorganization and (e) the Funds'
receipt of certain routine certificates and legal opinions. See "Rating Agency
Considerations" and "Tax Consequences of the Reorganization."
The Agreement may be terminated and the Reorganization abandoned, whether before
or after approval by the Funds' shareholders, at any time prior to the Effective
Time (a) by the written consent of the Boards of both Funds, (b) by either Fund
if any condition to that Fund's obligations under the Agreement has not been
satisfied or waived and it reasonably appears that such condition will not be
satisfied or (c) by either Fund if the Reorganization has not occurred by
January 31, 1997.
REASONS FOR THE REORGANIZATION
The respective Boards of the Acquiring Fund and the Acquired Fund, which consist
of the same individuals, have concluded that the Reorganization is in the best
interests of their respective Funds and unanimously recommend that the
shareholders of their respective Funds vote FOR approval of the proposals
relating to the Agreement.
In approving the Reorganization, the Boards identified certain benefits that are
likely to result from combining the Funds, including reduced per share
management fees, lower administrative expenses, greater efficiency and
flexibility in portfolio management and a more liquid trading market for common
shares of the combined Fund. The Boards also considered the possible adverse
effects and estimated costs of combining the Funds. See "Risks and Special
Considerations Regarding the Reorganization."
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<PAGE> 13
Common shareholders of both Funds should benefit from a lower investment
management rate as a result of the Reorganization. As of April 30, 1996, the
Acquiring Fund had net assets of approximately $421 million and the Acquired
Fund had net assets of approximately $324 million. Management projections
estimate that the Acquiring Fund will have net assets in excess of $745 million
upon completion of the Reorganization. Under the Acquiring Fund's Investment
Management Agreement, the management fees payable by the Acquiring Fund are
.6500% of average daily net assets for net assets of up to $125 million, .6375%
for net assets in excess of $125 million (but less than $250 million), .6250%
for net assets in excess of $250 million (but less than $500 million) and .6125%
for net assets in excess of $500 million (but less than $1 billion). If the
Reorganization is completed, approximately $245 million of net assets of the
Acquiring Fund will be subject to management fees at a lower rate.
Based upon data presented by management of the Funds, the Boards believe that
administrative expenses of a larger combined Fund comprised of the assets of
both Funds will be less than the aggregate expenses of the individual Funds,
resulting in a lower expense ratio for the combined Fund and corresponding
higher earnings for its common shareholders. For the fiscal year ended October
31, 1995, the expense ratios for the Acquiring Fund and the Acquired Fund were
0.83% and 0.82%, respectively. The pro-forma expense ratio for the combined Fund
for that period would have been 0.81%.
The larger asset base resulting from combining the Funds should also provide
benefits in portfolio management. The Acquiring Fund after the Reorganization
should be able to purchase larger amounts of Municipal Obligations at more
favorable prices than either of the Funds individually and, with this greater
purchasing power, be in a better position to request improvements in the terms
of Municipal Obligations (e.g., added indenture provisions covering call
protection, sinking funds or audits for the benefit of large holders) prior to
purchase.
The Reorganization would result in the Acquiring Fund's having a significantly
larger number of common shares outstanding, and a significantly larger number of
common shareholders, than either individual Fund. Data prepared by management of
the Funds indicates that market prices of common shares of smaller funds are
likely to experience greater spreads between the bid and the offer than market
prices of common shares of larger funds, and that increasing the size of the
Acquiring Fund by combining it with the Acquired Fund should result in a higher
average daily trading volume, a narrower average spread between the bid and the
offer and reduced price volatility for its common shares. There can be no
assurance that the Reorganization will produce these anticipated benefits.
However, the Boards believe that these results, if obtained, would benefit
holders of common shares by affording them a more liquid trading market for
their shares and the opportunity for more favorable price execution in trading
the common shares.
In approving the Reorganization, the respective Boards determined that the
Reorganization should result in no dilution of the interests of the respective
Funds' existing shareholders. See "Pro Forma Financial Information" in the
Statement of Additional Information. Although the Reorganization is expected to
result in a reduction in net asset value per Acquiring Fund common share (and
per Acquired Fund common share equivalent) of approximately $0.01 as a result of
the estimated costs of the Reorganization, management of the Funds has advised
the Boards that it expects that such costs will be recovered within
approximately 22 months after the Effective Time. See "Expenses Associated with
the Reorganization."
In approving the Reorganization, the Boards considered a report of the Funds'
management indicating that the Reorganization should not have a materially
adverse overall effect on the financial status and ongoing performance of either
Fund, and considered such measures as gross portfolio yield, net portfolio
earnings rate as a percentage of net asset value, monthly net earnings, monthly
dividends, dividend rates as a percentage of the initial offering and market
price, management fees, expense ratios and undistributed net investment income
balances. The Boards also examined the relative credit strength, maturity
characteristics, preferred share asset coverages, mix of type and purpose, and
yield of the Funds' portfolios of Municipal Obligations and the costs involved
in the Reorganization. The Boards noted the many similarities between the Funds,
including their identical investment objectives, virtually identical investment
policies, common management and substantially similar portfolios of Municipal
Obligations. Based on these factors, the Boards determined that the
Reorganization is likely to provide benefits to the shareholders of each Fund,
as discussed above, that outweigh the possible adverse effects and the costs
(including relatively minor legal, accounting and administrative costs, some of
which have already been incurred in evaluating and analyzing the Reorganization)
presented by the Reorganization.
VOTES REQUIRED
VOTE OF COMMON SHAREHOLDERS AS A SEPARATE CLASS
Common shareholders of the Acquiring Fund are being asked to approve the
issuance of up to 18,000,000 additional common shares of the Acquiring Fund
pursuant to the Agreement. Adoption of this proposal requires the affirmative
vote of the holders of at least a majority of the Acquiring Fund common shares
voting on the proposal, provided that the total vote cast on the proposal
represents over 50% of all Acquiring Fund common shares entitled to vote on the
proposal.
VOTES OF PREFERRED SHAREHOLDERS AS A SEPARATE CLASS
Preferred shareholders of each Fund are being asked to approve the Agreement as
a "plan of reorganization" under the 1940 Act. Section 18(a)(2)(D) of the 1940
Act provides that the terms of preferred shares issued by a registered
closed-end investment company must contain provisions requiring approval by the
vote of a majority of such shares, voting as a class, of
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<PAGE> 14
any plan of reorganization adversely affecting such shares. The 1940 Act makes
no distinction between a plan of reorganization that has an adverse effect as
opposed to a materially adverse effect. While the respective Boards do not
believe that the holders of shares of MuniPreferred of either Fund would be
materially adversely affected by the Reorganization, it is possible that there
may be insignificant adverse effects (such as where the asset coverage with
respect to the shares of Acquiring Fund MuniPreferred issued pursuant to the
Reorganization is slightly more or less than the asset coverage with respect to
the shares of Acquired Fund MuniPreferred for which they are exchanged). Each
Fund is seeking approval of the Agreement by the holders of shares of each
series of that Fund's MuniPreferred, each such series voting separately as a
class. Such approval requires the affirmative vote of the holders of at least a
majority of the outstanding shares of that Fund's MuniPreferred entitled to vote
on the proposal, each such series voting separately as a class.
Preferred shareholders of the Acquired Fund are also being asked to approve the
Agreement pursuant to Minnesota law. Such approval requires the affirmative vote
of the holders of at least a majority of the outstanding shares of the Acquired
Fund MuniPreferred entitled to vote on the proposal, each such series voting
separately as a class.
COMBINED VOTES OF COMMON AND PREFERRED SHAREHOLDERS
Consummation of the Reorganization is also subject to approval of the Agreement
by the common and preferred shareholders of each Fund. Adoption of this proposal
requires the affirmative vote of the holders of at least a majority of the
outstanding common shares and shares of MuniPreferred of that Fund entitled to
vote on the proposal, voting together as a single class.
RATING AGENCY CONSIDERATIONS
It is a condition to the Funds' obligations to consummate the Reorganization
that the Acquiring Fund obtain written confirmation from both Moody's and S&P
that (a) the issuance of shares of Acquiring Fund MuniPreferred, Series T and
Series TH, pursuant to the Reorganization will not impair the "aaa" and AAA
ratings, respectively, assigned by such rating agencies to the outstanding
shares of Acquiring Fund MuniPreferred, Series M, Series W and Series F, and (b)
the shares of Acquiring Fund MuniPreferred, Series T and Series TH, issued
pursuant to the Reorganization will be rated "aaa" by Moody's or AAA by S&P. The
Acquiring Fund will not issue additional shares of MuniPreferred, and the
Reorganization will not be consummated, unless the Acquiring Fund has obtained
such confirmation from Moody's and S&P. The Acquiring Fund expects to obtain the
necessary confirmation.
DESCRIPTION OF COMMON SHARES ISSUED BY THE ACQUIRING FUND
GENERAL
The Declaration of Trust (the "Declaration") of the Acquiring Fund authorizes
the issuance of an unlimited number of common shares in a single class, par
value $.01 per share. As of May 28, 1996, there were issued and outstanding
20,642,068 common shares of the Acquiring Fund. If the Reorganization is
approved, at the Effective Time the Acquiring Fund will issue additional common
shares. The number of such additional Acquiring Fund common shares will be based
on the relative aggregate per share net asset values of the Acquiring Fund and
the Acquired Fund, in each case as of the Effective Time. Based on the relative
per share net asset values as of May 28, 1996 the Acquiring Fund would have
issued approximately 16,843,530 additional common shares if the Reorganization
had occurred as of that date.
The terms of the Acquiring Fund common shares to be issued pursuant to the
Reorganization will be identical to the terms of the Acquiring Fund common
shares that are then outstanding. All of the Acquiring Fund common shares have
equal rights with respect to the payment of dividends and the distribution of
assets upon liquidation. The Acquiring Fund common shares are, when issued,
fully paid and, subject to the matters set forth under "Certain Provisions in
the Acquiring Fund's Declaration of Trust" below, non-assessable and have no
preemptive, conversion or exchange rights or right to cumulative voting. The
Acquiring Fund will not be permitted to declare, pay or set apart for payment
any cash dividend or distribution on the Acquiring Fund common shares, unless
(a) cumulative dividends on all outstanding shares of Acquiring Fund
MuniPreferred have been paid in full and (b) the Acquiring Fund meets the asset
coverage test described in the Statement of Additional Information under
"Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--Restrictions on Dividends and Other Payments." This latter
limitation on the Acquiring Fund's ability to make distributions on common
shares could under certain circumstances impair the ability of the Acquiring
Fund to maintain its qualification for taxation as a regulated investment
company under the Code. See "Tax Matters Associated with Investment in the
Funds" under "Additional Information About the Funds" below and in the Statement
of Additional Information.
DISTRIBUTIONS
It is each Fund's present policy, which may be changed by its Board, to make
regular monthly cash distributions to the holders of its common shares of net
investment income at a level rate that reflects past and projected performance
of the Fund, which over time will result in the distribution of all net
investment income of the Fund (net investment income remaining after the payment
of dividends on shares of MuniPreferred, when such shares are outstanding), and
to distribute at least annually net capital gains, if any, to the extent such
net capital gains are not necessary to satisfy the dividend,
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<PAGE> 15
redemption or liquidation preferences of shares of MuniPreferred. Each Fund's
distribution level is determined by the Board of the Fund after giving
consideration to a number of factors, including the Fund's undistributed net
investment income and historical and projected investment income, expenses and
dividend payments on shares of MuniPreferred. Net income for each Fund consists
of all interest income accrued on portfolio assets less all expenses of the
Fund. Expenses of each Fund are accrued each day.
To permit each Fund to maintain a more stable monthly distribution, the Fund may
from time to time distribute less than the entire amount of net investment
income earned in a particular period. Such undistributed net investment income
would be available to supplement future distributions, including distributions
which might otherwise have been reduced by a decrease in such Fund's monthly net
income due to fluctuations in investment income or expenses, or due to an
increase in the dividend rate on the outstanding shares of MuniPreferred. As a
result, the distributions paid by each Fund for any particular monthly period
may be more or less than the amount of net investment income actually earned by
the Fund during such period. Undistributed net investment income is added to
each Fund's net asset value, and, correspondingly, distributions from
undistributed net investment income are deducted from the Fund's net asset
value.
For tax purposes, each Fund is currently required to allocate net capital gains
and other taxable income, if any, between common shares and shares of
MuniPreferred of the Fund in proportion to total distributions paid to each
class for the year in which such net capital gains or other taxable income is
realized. See "Tax Matters Associated with Investment in the Funds" under
"Additional Information About the Funds" below and in the Statement of
Additional Information.
Fund management does not expect the level of monthly distributions to the common
shareholders of the Acquiring Fund and the Acquired Fund to be affected by the
Reorganization. There can be no assurance, however, that a stable level of
distributions may be maintained over the life of a Fund.
DIVIDEND REINVESTMENT PLAN
Under each Fund's Dividend Reinvestment Plan (the "Plan"), each common
shareholder of the Fund may elect to have all dividends or capital gains
distributions, or both, automatically reinvested by Chase, as agent for the
common shareholders of the Fund (the "Plan Agent"), in additional common shares.
A Fund common shareholder may make this election by completing a Dividend
Reinvestment Plan Application Form. Common shareholders of the Acquired Fund who
participate in the Acquired Fund's Dividend Reinvestment Plan will automatically
be enrolled in the Plan upon consummation of the Reorganization and any unpaid
dividends at the time of the Reorganization will be reinvested in shares of the
Acquiring Fund as if subject to the Plan. Other common shareholders of the
Acquired Fund will be given the opportunity to enroll in the Plan following the
Effective Time. An Acquired Fund common shareholder who does not elect to
participate in the Plan will receive all dividends and capital gains
distributions in cash paid by check mailed directly to the record shareholder by
Chase, as dividend paying agent.
Under the Plan, the number of shares equivalent to the cash distribution is
determined as follows:
(a) If the Fund common shares are trading at net asset value or at a
premium above net asset value at the time of valuation, the Fund will issue
new common shares at the then current market price; or
(b) If the Fund common shares are trading at a discount from net asset
value at the time of valuation, the Plan Agent will receive the dividend or
distribution in cash and apply it to the purchase of Fund common shares in
the open market, on the NYSE or elsewhere, for the participants' accounts.
As a result of increases in the market price prior to the time the Plan
Agent has completed its purchases, the average purchase price per share
paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the acquisition of fewer Fund common shares than if
the dividend or distribution had been paid in common shares issued by the
Fund. The Plan Agent will use all dividends and distributions received in
cash to purchase Fund common shares in the open market within 30 days of
the dividend payment date. Interest will not be paid on any uninvested cash
payments.
Participants in the Plan may withdraw from the Plan upon written or telephone
notice to the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan, certificates for whole Fund common shares credited to
his or her account under the Plan will be issued and a cash payment will be made
for any fraction of a Fund common share credited to such account; or, if a
participant so desires, the Plan Agent will sell his or her Fund common shares
in the Plan and send the proceeds to the participant, less brokerage commissions
and a $2.50 service fee.
The Plan Agent maintains all Fund common shareholder accounts in the Plan and
furnishes written confirmation of all transactions in the accounts, including
information needed by such common shareholders for tax records. The Fund common
shares in the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the participant, and each such common
shareholder's proxy includes those Fund common shares received pursuant to the
Plan.
In the case of Fund common shareholders such as banks, brokers or nominees that
hold Fund common shares for others who are the beneficial owners, the Plan Agent
administers the Plan on the basis of the number of Fund common shares certified
from time to time by the record shareholders as representing the total amount
registered in the record common shareholder's name and held for the account of
beneficial owners who participate in the Plan.
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<PAGE> 16
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant pays a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions does not relieve
participants of any income taxes that may be payable on dividends or
distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
each Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
Additional information about the Plan may be obtained from Chase, 770 Broadway,
New York, New York 10003.
ODD LOT HOLDINGS
In connection with the Reorganization, a common shareholder of the Acquired Fund
might receive a number of Acquiring Fund common shares in the Reorganization
which consists of or includes an "odd lot" (i.e., less than 100 shares). Such
odd lot holders may participate in the Acquiring Fund's Dividend Reinvestment
Plan for the limited purpose of purchasing a sufficient number of Acquiring Fund
common shares to bring their odd lot shares up to a 100-share "round lot." Each
such odd lot holder would send in the certificates representing his or her odd
lot shares and direct the Plan Agent to reinvest dividends only until a
sufficient number of Acquiring Fund common shares have been acquired to form a
round lot. When this is accomplished, (a) certificates representing the round
lot of Acquiring Fund common shares would be issued to the holder, (b) any
excess Acquiring Fund common shares or fractional Acquiring Fund common shares
would be sold and a check for the sale issued to the holder, and (c) dividend
reinvestment on behalf of such holder would be discontinued.
COMPARISON OF RIGHTS OF HOLDERS OF COMMON SHARES OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
Notwithstanding that the Acquiring Fund is organized as a business trust under
the laws of the Commonwealth of Massachusetts and the Acquired Fund is organized
as a corporation under the laws of the State of Minnesota, the common shares of
each Fund have equal voting rights and equal rights with respect to the payment
of dividends and distribution of assets upon liquidation and have no preemptive,
conversion or exchange rights or rights to cumulative voting. The provisions of
the Declaration of the Acquiring Fund are substantially similar to the
provisions of the Articles of the Acquired Fund, and both contain, among other
things, identical super-majority voting provisions, as described under "Certain
Provisions in the Acquiring Fund's Declaration of Trust" below. Under
Massachusetts law, however, shareholders of the Acquiring Fund do not have
dissenters' rights of appraisal. The full text of each Fund's Declaration or
Articles, as the case may be, is on file with the Commission and may be obtained
as described under "Available Information." The terms of the Acquiring Fund's
Dividend Reinvestment Plan are identical to the terms of the Acquired Fund's
Dividend Reinvestment Plan.
DESCRIPTION OF MUNIPREFERRED ISSUED BY THE ACQUIRING FUND
The following is a brief description of the terms of the shares of the Acquiring
Fund MuniPreferred, including the shares of Acquiring Fund MuniPreferred, Series
T and Series TH, to be issued pursuant to the Reorganization. This description
assumes that the Reorganization will be consummated and that the Acquiring Fund
will issue shares of its MuniPreferred pursuant to the Reorganization. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the more detailed description of the shares of
Acquiring Fund MuniPreferred in the Statement of Additional Information and in
the form of Statement Establishing and Fixing the Rights and Preferences of
Municipal Auction Rate Cumulative Preferred Shares of the Acquiring Fund (the
"Acquiring Fund Statement") filed as an exhibit to the Registration Statement.
Capitalized terms used but not defined herein have the meanings given them above
or in Annex C to this Joint Proxy Statement--Prospectus.
GENERAL
The Acquiring Fund's Declaration authorizes the issuance of an unlimited number
of preferred shares, par value $.01 per share, which may be issued from time to
time in such series and with such designations, preferences and other rights,
qualifications, limitations and restrictions as are determined in a resolution
of the Acquiring Fund's Board. The Acquiring Fund currently has outstanding
shares of MuniPreferred as follows: Series M--2,080; Series W--2,080; and Series
F--2,196. If the Reorganization is approved, at the Effective Time, the
Acquiring Fund will issue to the Acquired Fund 2,200 shares of MuniPreferred,
Series T and 2,200 shares of MuniPreferred, Series TH, which the Acquired Fund
will then distribute to the holders of shares of Acquired Fund MuniPreferred,
Series T and Series TH, respectively. All shares of Acquiring Fund MuniPreferred
issued pursuant to the Reorganization will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared).
The shares of Acquiring Fund MuniPreferred, Series T and Series TH, issued
pursuant to the Reorganization will rank on a parity with shares of any other
series of Acquiring Fund MuniPreferred, and with any other series of preferred
shares of the Acquiring Fund as to the payment of dividends and the distribution
of assets upon liquidation. All shares of Acquiring Fund MuniPreferred carry one
vote per share on all matters on which such shares are entitled to be voted.
Shares of Acquiring
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<PAGE> 17
Fund MuniPreferred are, when issued, fully paid and, subject to the matters set
forth under "Certain Provisions in the Acquiring Fund's Declaration of Trust"
below, non-assessable and have no preemptive, conversion or exchange rights or
rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. The Initial Rate Period of the shares of Acquiring Fund MuniPreferred,
Series T and Series TH, issued pursuant to the Reorganization will be a period
consisting of the number of days following the day on which the Effective Time
occurs that would have remained in the rate period of the shares of Acquired
Fund MuniPreferred, Series T or Series TH, in effect immediately prior to the
Effective Time. Any Subsequent Rate Period of shares of Acquiring Fund
MuniPreferred, Series T and Series TH, as well as any Subsequent Rate Period of
shares of outstanding Acquiring Fund MuniPreferred, Series M, Series W and
Series F will be a Minimum Rate Period (7 Rate Period Days), unless the
Acquiring Fund, subject to certain conditions, designates such Subsequent Rate
Period as a Special Rate Period. See "Designation of Special Rate Periods"
below.
Dividends on shares of each series of Acquiring Fund MuniPreferred shall be
payable, when, as and if declared by the Acquiring Fund's Board out of funds
legally available therefor in accordance with the Acquiring Fund's Declaration,
including the Acquiring Fund's Statement and applicable law, on shares of (a)
Acquiring Fund MuniPreferred, Series M, on each Tuesday; (b) Acquiring Fund
MuniPreferred Series T, on the first Wednesday following the end of the Initial
Rate Period thereof, and thereafter on each Wednesday; (c) Acquiring Fund
MuniPreferred, Series W, on each Thursday; (d) Acquiring Fund MuniPreferred,
Series TH, on the first Friday following the end of the Initial Rate Period
thereof, and thereafter on each Friday; and (e) Acquiring Fund MuniPreferred,
Series F, on each Monday; provided, however, that (i) if the Monday or the
Tuesday on which dividends would otherwise be payable as set forth above is not
a Business Day, then such Dividends shall be payable on such shares on the first
Business Day that falls after such Monday or Tuesday, as the case may be; (ii)
if the Wednesday, Thursday or Friday on which dividends would otherwise be
payable as set forth above is not a Business Day, then such dividends shall be
payable on such shares on the first Business Day that falls prior to such
Wednesday, Thursday or Friday, as the case may be; and (iii) the Acquiring Fund
may specify different Dividend Payment Dates in respect of any Special Rate
Period of more than 28 Rate Period Days.
The amount of dividends per share payable on shares of each series of Acquiring
Fund MuniPreferred on any date on which dividends shall be payable on shares of
such series shall be computed by multiplying the Applicable Rate for shares of
such series in effect for such Dividend Period or Dividend Periods or part
thereof for which dividends have not been paid by a fraction, the numerator of
which shall be the number of days in such Dividend Period or Dividend Periods or
part thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which currently provide
for it to distribute dividends in next-day funds to Agent Members, who in turn
are expected to distribute such dividend payments to the persons for whom they
are acting as agents. Each of the current Broker-Dealers, however, has indicated
to the Acquiring Fund that such Broker-Dealer or the Agent Member designated by
such Broker-Dealer will make such dividend payments available in same-day funds
on each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on the shares of Acquiring Fund MuniPreferred, Series T and Series TH,
issued pursuant to the Reorganization shall accumulate from the day following
the day on which the Effective Time occurs. The dividend rate for such shares
for the Initial Rate Period thereof will be the dividend rate in effect
immediately prior to the Effective Time for the shares of Acquired Fund
MuniPreferred, Series T and Series TH, respectively. For each Subsequent Rate
Period of shares of Acquiring Fund MuniPreferred, Series M, Series T, Series W,
Series TH or Series F, the dividend rate will be the Applicable Rate for shares
of such series that the Auction Agent advises the Acquiring Fund results from an
Auction, except as provided below. The Applicable Rate that results from an
Auction for shares of any series of Acquiring Fund MuniPreferred will not be
greater than the Maximum Rate, which is:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (ii) the Rate Multiple on such Auction
Date, unless shares of such series have or had a Special Rate Period (other
than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction
at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate
Period, in which case the higher of:
(A) the dividend rate on shares of such series for the then-ending Rate
Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was more than 364
Rate Period
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<PAGE> 18
Days, and (II) the Reference Rate on such Auction Date for a Rate Period
equal in length to such Special Rate Period of shares of such series, if
such Special Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was more
than 364 Rate Period Days and (y) the Rate Multiple on such Auction
Date; or
(b) in the case of any Auction Date which is the Auction Date immediately
prior to the first day of any proposed Special Rate Period, the product of
(i) the highest of (x) the Reference Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate
on such Auction Date for Minimum Rate Periods and (ii) the Rate Multiple on
such Auction Date.
If an Auction for any Subsequent Rate Period of shares of any series of
Acquiring Fund MuniPreferred is not held for any reason other than as described
below, the dividend rate on shares of such series for such Subsequent Rate
Period will be the Maximum Rate for shares of such series on the Auction Date
for such Subsequent Rate Period.
If the Acquiring Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of any
series of Acquiring Fund MuniPreferred during any Rate Period thereof (other
than any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which such a failure occurred that has not been cured), and, prior to
12:00 Noon on the third Business Day next succeeding the date such failure
occurred, such failure shall have been cured and the Acquiring Fund shall have
paid a late charge, as described more fully under "Description of MuniPreferred
Issued by the Acquiring Fund--Dividends--Determination of Dividend Rate" in the
Statement of Additional Information, no Auction will be held in respect of
shares of such series for the first Subsequent Rate Period thereof thereafter
and the dividend rate for shares of such series for such Subsequent Rate Period
will be the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period.
If the Acquiring Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of any
series of Acquiring Fund MuniPreferred during any Rate Period thereof (other
than any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which such a failure occurred that has not been cured), and, prior to
12:00 Noon on the third Business Day next succeeding the date on which such
failure occurred, such failure shall not have been cured or the Acquiring Fund
shall not have paid a late charge, as described more fully under "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends--Determination of Dividend
Rate" in the Statement of Additional Information, no Auction will be held in
respect of shares of such series for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and including the Rate
Period during which such failure is so cured and such late charge so paid), 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 on the Auction Date for
shares of such series for each such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes of determining such
Maximum Rate, being deemed to be "Below 'ba3'/BB-").
If the Acquiring Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of any
series of Acquiring Fund MuniPreferred during a Special Rate Period thereof of
more than 364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured, and such failure shall not have been
cured or the Acquiring Fund shall not have paid a late charge, as described more
fully under "Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--Determination of Dividend Rate" in the Statement of Additional
Information, no Auction will be held in respect of shares of such series for
such Subsequent Rate Period thereof (or for any Rate Period thereof thereafter
to and including the Rate Period during which such failure is so cured and such
late charge so paid), and the dividend rate for shares of such series for each
such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
for shares of such series on the Auction Date for each such Subsequent Rate
Period (but with the prevailing rating for shares of such series, for purposes
of determining such Maximum Rate, being deemed to be "Below 'ba3'/BB-").
A failure to pay dividends on or the redemption price of shares of any series of
Acquiring Fund MuniPreferred shall have been cured with respect to any Rate
Period thereof if, within the respective time periods described under
"Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--Determination of Dividend Rate" in the Statement of Additional
Information, the Acquiring Fund shall have paid to the Auction Agent (a) all
accumulated and unpaid dividends on the shares of such series and (b) without
duplication, the redemption price for shares, if any, of such series for which
notice of redemption has been mailed by the Acquiring Fund; provided, however,
that the foregoing clause (b) shall not apply to the Acquiring Fund's failure to
pay the redemption price in respect of shares of Acquiring Fund MuniPreferred
when the related notice of redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such
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<PAGE> 19
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such notice of redemption.
GROSS-UP PAYMENTS. Holders of shares of Acquiring Fund MuniPreferred are
entitled to receive, when, as and if declared by the Acquiring Fund's Board, out
of funds legally available therefor in accordance with the Acquiring Fund's
Declaration, including the Acquiring Fund Statement and applicable law,
dividends in an amount equal to the aggregate Gross-up Payments in accordance
with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28 Rate
Period Days or fewer, the Acquiring Fund allocates any net capital gains or
other income taxable for Federal income tax purposes to a dividend paid on
shares of Acquiring Fund MuniPreferred without having given advance notice
thereof to the Auction Agent as described under "The Auction--Auction
Procedures" (a "Taxable Allocation") below 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 Acquiring Fund MuniPreferred or the
liquidation of the Acquiring Fund, the Acquiring Fund will, prior to the end of
the calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the Acquiring Fund's dividend disbursing agent to send
such notice with a Gross-up Payment to each holder of shares (initially Cede &
Co., as nominee of the Securities Depository) that was entitled to such dividend
payment during such calendar year at such holder's address as the same appears
or last appeared on the record books of the Acquiring Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period Days, the
Acquiring Fund makes a Taxable Allocation to a dividend paid on shares of
Acquiring Fund MuniPreferred, the Acquiring 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 Acquiring Fund's dividend disbursing agent to send
such notice with a Gross-up Payment to each holder of shares that was entitled
to such dividend payment during such calendar year at such holder's address as
the same appears or last appeared on the record books of the Acquiring Fund.
The Acquiring 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
Acquiring Fund.
A "Gross-up Payment" means payment to a holder of shares of Acquiring Fund
MuniPreferred of an amount which, when taken together with the aggregate amount
of Taxable Allocations made to such holder to which such Gross-up Payment
relates, would cause such holder's dividends in dollars (after Federal income
tax consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations had been excludable from the gross income of such holder. Such
Gross-up Payment shall be calculated: (a) without consideration being given to
the time value of money; (b) assuming that no holder of shares of Acquiring Fund
MuniPreferred is subject to the Federal alternative minimum tax with respect to
dividends received from the Acquiring Fund; and (c) assuming that each Taxable
Allocation and each Gross-up Payment (except to the extent such Gross-up Payment
is designated as an exempt-interest dividend under Section 852(b)(5) of the Code
or successor provisions) would be taxable in the hands of each holder of shares
of Acquiring Fund MuniPreferred at the maximum marginal regular Federal income
tax rate, if any, applicable to ordinary income (taking into account the Federal
income tax deductibility of state taxes paid or incurred) or net capital gains,
as applicable, or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income or net capital gains, as applicable, whichever is
greater, in effect during the calendar year in question.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. Except as otherwise described
herein, for so long as any shares of Acquiring Fund MuniPreferred are
outstanding, the Acquiring Fund may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in, or in options, warrants or rights to subscribe for or purchase, its common
shares) in respect of its common shares or call for redemption, redeem, purchase
or otherwise acquire for consideration any of its common shares (except by
conversion into or exchange for shares of the Acquiring Fund ranking junior to
the shares of Acquiring Fund MuniPreferred as to the payment of dividends and
the distribution of assets upon liquidation), unless (a) full cumulative
dividends on shares of each series of Acquiring Fund MuniPreferred through its
most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent; (b) the Acquiring Fund shall have redeemed the full number of shares of
Acquiring Fund MuniPreferred required to be redeemed by any provision for
mandatory redemption pertaining thereto; and (c) immediately after such
transaction the Discounted Value of the Acquiring Fund's portfolio would at
least equal the MuniPreferred Basic Maintenance Amount in accordance with
guidelines of the rating agency or agencies then rating the shares of Acquiring
Fund 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 Acquiring Fund
shares ranking, as to the payment of dividends, on a parity with shares of
Acquiring Fund MuniPreferred for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the shares of each
series of Acquiring Fund MuniPreferred through its most recent Dividend Payment
Date. When dividends are not paid in full upon the shares of each series of
Acquiring Fund MuniPreferred through its most recent Dividend Payment Date or
upon the shares of any other class or series of shares ranking on a parity as to
the payment of dividends with shares
15
<PAGE> 20
of Acquiring Fund MuniPreferred through their most recent respective dividend
payment dates, all dividends declared upon shares of Acquiring Fund
MuniPreferred and any such other class or series of shares ranking on a parity
as to the payment of dividends with shares of Acquiring Fund MuniPreferred shall
be declared pro rata so that the amount of dividends declared per share on
shares of Acquiring Fund MuniPreferred and such other class or series of shares
shall in all cases bear to each other the same ratio that accumulated dividends
per share on the shares of Acquiring Fund MuniPreferred and such other class or
series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Acquiring Fund, at its option, may designate any succeeding Subsequent Rate
Period of shares of either series of Acquiring Fund MuniPreferred as a Special
Rate Period consisting of a specified number of Rate Period Days evenly
divisible by seven and not more than 1,820 (approximately 5 years), subject to
certain adjustments. A designation of a Special Rate Period shall be effective
only if, among other things, (a) the Acquiring Fund shall have given certain
notices to the Auction Agent, (b) an Auction for shares of such series shall
have been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction and (c) if the Acquiring Fund shall
have mailed a notice of redemption with respect to any shares of such series,
the redemption price with respect to such shares shall have been deposited with
the Auction Agent.
VOTING RIGHTS
In addition to voting rights described under "Certain Provisions in the
Acquiring Fund's Declaration of Trust" and "Additional Information About the
Funds--Investment Objectives and Policies" below and in the Statement of
Additional Information under "Investment Objectives and Policies--Investment
Restrictions," holders of Acquiring Fund preferred shares, including shares of
Acquiring Fund MuniPreferred, voting as a separate class, are entitled to elect
(a) two trustees of the Acquiring Fund at all times and (b) a majority of the
trustees if at any time dividends on Acquiring Fund preferred shares shall be
unpaid in an amount equal to two years dividends thereon, and to continue to be
so represented until all dividends in arrears shall have been paid or otherwise
provided for. In all other cases, trustees shall be elected by holders of
Acquiring Fund common shares and preferred shares (including shares of Acquiring
Fund MuniPreferred), voting together as a single class. Except as otherwise
specified under "Certain Provisions in the Acquiring Fund's Declaration of
Trust" below, the Acquiring Fund may not, among other things, without the
approval of the holders of a "majority of the outstanding" shares of Acquiring
Fund MuniPreferred, voting as a separate class, approve any plan of
reorganization adversely affecting shares of Acquiring Fund MuniPreferred.
The Acquiring Fund may not, without the affirmative vote of the holders of at
least a majority of the shares of Acquiring Fund MuniPreferred outstanding at
the time (voting separately as one class): (a) authorize, create or issue any
class or series of shares ranking prior to or on a parity with the Acquiring
Fund MuniPreferred with respect to the payment of dividends or the distribution
of assets upon liquidation or increase the authorized amount of any series of
Acquiring Fund MuniPreferred or (b) amend, alter or repeal the provisions of the
Acquiring Fund's Declaration, including the Acquiring Fund Statement, whether by
merger, consolidation or otherwise, so as to affect any preference, right or
power of shares of Acquiring Fund MuniPreferred or the holders thereof. The
Acquiring Fund may not, without the affirmative vote of the holders of at least
66 2/3% of the shares of Acquiring Fund MuniPreferred outstanding at the time
(voting separately as one class) file a voluntary application for relief under
Federal bankruptcy law or any similar application under state law for so long as
the Acquiring Fund is solvent and does not foresee becoming insolvent.
Notwithstanding clause (a) of the first sentence of this paragraph, but subject
to the written confirmation from Moody's or S&P, or both, as appropriate, that
any such action would not impair the ratings then assigned to outstanding
Acquiring Fund MuniPreferred, the Acquiring Fund, without the vote or consent of
the holders of Acquiring Fund MuniPreferred, may from time to time authorize and
create, and the Acquiring 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 Acquiring Fund MuniPreferred with respect to the payment
of dividends and the distribution of assets upon liquidation of the Acquiring
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 Acquiring Fund outstanding after any such issuance, exclusive of accumulated
and unpaid dividends, may not exceed $268,900,000 (after giving effect to the
Reorganization). For purposes of clause (b) of the first sentence of this
paragraph, (i) none of the actions permitted by the exception to clause (a) of
the first sentence of this paragraph will be deemed to affect such preferences,
rights or powers and (ii) the authorization, creation and issuance of classes or
series of stock ranking junior to shares of Acquiring Fund MuniPreferred with
respect to the payment of dividends and the distribution of assets upon
liquidation of the Acquiring Fund, will be deemed to affect such preferences,
rights or powers only if Moody's or S&P is then rating shares of Acquiring Fund
MuniPreferred and such issuance would, at the time thereof, cause the Acquiring
Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage or the
MuniPreferred Basic Maintenance Amount. If any action set forth above would
adversely affect the rights of one or more series of Acquiring Fund
Munipreferred in a manner different from any other series of Acquiring Fund
MuniPreferred, the Acquiring Fund will not approve any such action without the
affirmative vote of the holders of at least a majority of the shares of each
such series of Acquiring Fund MuniPreferred (voting separately as a class).
16
<PAGE> 21
REDEMPTION
MANDATORY REDEMPTION. In the event the Acquiring Fund does not timely cure a
failure to maintain (a) a Discounted Value of its portfolio equal to the
MuniPreferred Basic Maintenance Amount or (b) the 1940 Act MuniPreferred Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the shares of Acquiring Fund MuniPreferred, shares of
Acquiring Fund MuniPreferred will be subject to mandatory redemption on a date
specified by the Acquiring Fund's Board, out of funds legally available therefor
in accordance with the Acquiring Fund's Declaration, including the Acquiring
Fund Statement and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption. Any
such redemption will be limited to the number of shares of Acquiring Fund
MuniPreferred necessary to restore the required Discounted Value or the 1940 Act
MuniPreferred Asset Coverage, as the case may be.
OPTIONAL REDEMPTION. Shares of Acquiring Fund MuniPreferred of each series are
redeemable, at the option of the Acquiring Fund:
(a) as a whole or from time to time in part, on the second Business Day
preceding any Dividend Payment Date for shares of such series, out of funds
legally available therefor in accordance with the Acquiring Fund's
Articles, including the Acquiring Fund Statement and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption; provided, however, that (i)
shares of such series may not be redeemed in part if after such partial
redemption fewer than 500 shares of such series would remain outstanding
and (ii) the notice establishing a Special Rate Period of shares of such
series, as delivered to the Auction Agent and filed with the Secretary of
the Acquiring Fund, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except
as provided in clause (b) below) or shall be redeemable during the whole or
any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part, out of funds legally available therefor in
accordance with the Acquiring Fund's Declaration, including the Acquiring
Fund Statement and applicable law, on the first day following any Dividend
Period thereof included in a Rate Period of more than 364 Rate Period Days
if, on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equalled or exceeded on
such date of determination the Treasury Note Rate for such Rate Period, at
a redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of any series of
Acquiring Fund 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 Acquiring Fund shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
holders of all outstanding shares of such series.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with shares of Acquiring Fund MuniPreferred with respect to
the distribution of assets upon liquidation of the Acquiring Fund, upon a
liquidation of the Acquiring Fund, whether voluntary or involuntary, the holders
of shares of Acquiring Fund MuniPreferred then outstanding will be entitled to
receive and to be paid out of the assets of the Acquiring Fund available for
distribution to its shareholders, before any payment or distribution shall be
made on the Acquiring Fund common shares, an amount equal to the liquidation
preference with respect to such shares ($25,000 per share), plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same-day funds,
together with any applicable Gross-up Payments in connection with the
liquidation of the Acquiring Fund. After the payment to the holders of shares of
Acquiring Fund MuniPreferred of the full preferential amounts provided for as
described herein, the holders of shares of Acquiring Fund MuniPreferred as such
shall have no right or claim to any of the remaining assets of the Acquiring
Fund.
Neither the sale of all or substantially all the property or business of the
Acquiring Fund, nor the merger or consolidation of the Acquiring Fund into or
with any other corporation nor the merger or consolidation of any corporation
into or with the Acquiring Fund, shall be a liquidation, whether voluntary or
involuntary, for the purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES
The Acquiring Fund is required under Moody's and S&P guidelines to maintain
assets having in the aggregate a Discounted Value at least equal to the
MuniPreferred Basic Maintenance Amount. Moody's and S&P have each established
separate guidelines for determining Discounted Value as described in the
Statement of Additional Information under "Description of MuniPreferred Issued
by the Acquiring Fund--Rating Agency Guidelines." To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the
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<PAGE> 22
calculation of Discounted Value (as defined by such rating agency). The Moody's
and S&P guidelines do not impose any limitations on the percentage of the
Acquiring Fund's assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Acquiring Fund's
portfolio. The amount of such assets included in the portfolio at any time may
vary depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio, although it is not anticipated that
in the normal course of business the value of such assets would exceed 20% of
the Acquiring Fund's total assets. The MuniPreferred Basic Maintenance Amount
includes the sum of (a) the aggregate liquidation preference of shares of
Acquiring Fund MuniPreferred then outstanding and (b) certain accrued and
projected payment obligations of the Acquiring Fund.
The Acquiring Fund is also required under rating agency guidelines to maintain,
with respect to shares of Acquiring Fund MuniPreferred, as of the last Business
Day of each month in which any such shares are outstanding, asset coverage of at
least 200% with respect to senior securities which are shares, including
Acquiring Fund MuniPreferred (or such other asset coverage as may in the future
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are shares of a closed-end investment company as a condition of
declaring dividends on its common shares) ("1940 Act MuniPreferred Asset
Coverage"). Based on the composition of the respective portfolios of the
Acquiring Fund and the Acquired Fund and market conditions as of April 30, 1996,
1940 Act MuniPreferred Asset Coverage with respect to shares of Acquiring Fund
MuniPreferred, assuming the issuance on the date thereof of all shares of
Acquiring Fund MuniPreferred contemplated to be issued pursuant to the
Reorganization, would have been computed as follows:
<TABLE>
<S> <C> <C> <C> <C>
Value of Acquiring Fund assets less liabilities
not constituting senior securities $745,386,521
- ------------------------------------------------------ = ------------------ = 277%
Senior securities representing indebtedness plus $268,900,000
liquidation
value of the shares of Acquiring Fund MuniPreferred
</TABLE>
In the event the Acquiring Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the MuniPreferred Basic Maintenance
Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in each case in
accordance with the requirements of the rating agency or agencies then rating
the shares of Acquiring Fund MuniPreferred, the Acquiring Fund will be required
to redeem shares of Acquiring Fund MuniPreferred as described under
"Redemption-- Mandatory Redemption" above.
The Acquiring Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
under "Rating Agency Considerations" above or a withdrawal of ratings
altogether. In addition, any rating agency providing a rating for the shares of
Acquiring Fund MuniPreferred may, at any time, change or withdraw any such
rating. The Acquiring Fund's Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Acquiring Fund pursuant to the rating agency guidelines in
the event the Acquiring Fund receives written confirmation from Moody's or S&P,
or both, as appropriate, that any such amendment, alteration or repeal would not
impair the ratings then assigned by Moody's and S&P to shares of Acquiring Fund
MuniPreferred.
As recently described by Moody's and S&P, a preferred share rating is an
assessment of the capacity and willingness of an issuer to pay preferred share
obligations. The ratings on the shares of Acquiring Fund MuniPreferred are not
recommendations to purchase, hold or sell those shares, inasmuch as the ratings
do not comment as to market price or suitability for a particular investor. The
rating agency guidelines described above also do not address the likelihood that
an owner of shares of Acquiring Fund MuniPreferred will be able to sell such
shares in an Auction or otherwise. The ratings are based on current information
furnished to Moody's and S&P by the Acquiring Fund and the Adviser and
information obtained from other sources. The ratings may be changed, suspended
or withdrawn as a result of changes in, or the unavailability of, such
information.
A rating agency's guidelines will apply to shares of Acquiring Fund
MuniPreferred only so long as such rating agency is rating such shares. The
Acquiring Fund will pay certain fees to Moody's or S&P, or both, for rating
shares of Acquiring Fund MuniPreferred.
THE AUCTION
GENERAL
The Acquiring Fund Statement provides that, except as otherwise described
herein, the Applicable Rate for the shares of each series of Acquiring Fund
MuniPreferred, including the shares of Acquiring Fund MuniPreferred, Series T
and Series TH, to be issued pursuant to the Reorganization, for each Rate Period
after the Initial Rate Period thereof shall be equal to the rate per annum that
the Auction Agent advises has resulted on the Business Day preceding the first
day of such Subsequent Rate Period (an "Auction Date") from implementation of
the auction procedures (the "Auction Procedures") set forth in the Acquiring
Fund Statement and summarized below, in which persons determine to hold or offer
to sell or, based on dividend rates bid by them, offer to purchase or sell
shares of such series. Each periodic implementation of the Auction Procedures is
referred to herein as an "Auction." See "Description of the Auctions for
MuniPreferred Issued by the Acquiring Fund" in the
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<PAGE> 23
Statement of Additional Information for a more complete description of the
Auction process and Annex B to the Statement of Additional Information for the
Auction Procedures.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a series of
Acquiring Fund MuniPreferred, each customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of such series (a "Beneficial Owner") may submit orders
("Orders") with respect to shares of such series to that Broker-Dealer as
follows:
- - Hold Order--indicating its desire to hold shares of such series without regard
to the Applicable Rate for shares of such series for the next Rate Period
thereof.
- - Bid--indicating its desire to sell shares of such series at $25,000 per share
if the Applicable Rate for shares of such series for the next Rate Period
thereof is less than the rate specified in such Bid (also known as a
hold-at-a-rate order).
- - Sell Order--indicating its desire to sell shares of such series at $25,000 per
share without regard to the Applicable Rate for shares of such series for the
next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of a series of Acquiring Fund MuniPreferred then held by
such Beneficial Owner. A Beneficial Owner of shares of such series that submits
a Bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the Maximum Rate for such shares on the Auction Date therefor will
be treated as having submitted a Sell Order with respect to shares of such
series to its Broker-Dealer. A Beneficial Owner of shares of such series that
fails to submit an Order with respect to such shares of such series to its
Broker-Dealer will be deemed to have submitted a Hold Order for shares of such
series to its Broker-Dealer; provided, however, that if a Beneficial Owner of
shares of such series fails to submit an Order with respect to shares of such
series to its Broker-Dealer for an Auction relating to a Rate Period of more
than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted
a Sell Order with respect to such shares to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of Acquiring Fund
MuniPreferred subject thereto. A Beneficial Owner that offers to become the
Beneficial Owner of additional shares of Acquiring Fund MuniPreferred is, for
purposes of such offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of Acquiring Fund MuniPreferred but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series (in each case, a "Potential
Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to
purchase shares of such series at $25,000 per share if the Applicable Rate for
shares of such series for the next Rate Period thereof is not less than the rate
specified in such Bid. A Bid placed by a Potential Beneficial Owner of shares of
such series specifying a rate higher than the Maximum Rate for shares of such
series on the Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective customers
who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent,
designating themselves (unless otherwise permitted by the Acquiring Fund) as
Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Acquiring Fund nor the Auction Agent will be responsible
for a Broker-Dealer's failure to comply with the foregoing. Any Order placed
with the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder
or a Potential Holder will be treated in the same manner as an Order placed with
a Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Acquiring Fund MuniPreferred held by it or customers
who are Beneficial Owners will be treated in the same manner as a Beneficial
Owner's failure to submit to its Broker-Dealer an Order in respect of shares of
Acquiring Fund MuniPreferred held by it. A Broker-Dealer may also submit Orders
to the Auction Agent for its own account as an Existing Holder or Potential
Holder, provided it is not an affiliate of the Acquiring Fund.
If Sufficient Clearing Bids for shares of a series of Acquiring Fund
MuniPreferred exist (that is, the number of shares of such series subject to
Bids submitted or deemed submitted to the Auction Agent by Broker-Dealers as or
on behalf of Potential Holders with rates equal to or lower than the Maximum
Rate for shares of such series is at least equal to the number of shares of such
series subject to Sell Orders submitted or deemed submitted to the Auction Agent
by Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of such series for the next succeeding Rate Period thereof will be the
lowest rate specified in the Submitted Bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning all the shares of such series available for purchase in the Auction. If
Sufficient Clearing Bids for shares of a series of Acquiring Fund MuniPreferred
do not exist, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the Maximum Rate for shares of such
series on the Auction Date therefor. In such event, Beneficial Owners of shares
of such series that have submitted or are deemed to have submitted Sell Orders
may not be able to sell in such Auction all shares of such series subject to
such Sell Orders. If Broker-Dealers submit or are deemed to have submitted to
19
<PAGE> 24
the Auction Agent Hold Orders with respect to all Existing Holders of shares of
a series of Acquiring Fund MuniPreferred, the Applicable Rate for shares of such
series for the next succeeding Rate Period thereof will be the All Hold Order
Rate.
The Auction Procedures include a pro rata allocation of shares for purchase and
sale, which may result in an Existing Holder continuing to hold or selling, or a
Potential Holder purchasing, a number of shares of a series of Acquiring Fund
MuniPreferred that is fewer than the number of shares of such series specified
in its Order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing Holders or Potential
Holders in respect of customer Orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next Business Day (also a
Dividend Payment Date) after the Auction Date through the Securities Depository.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery to their respective Agent Members.
The Securities Depository will make payment to the sellers' Agent Members in
accordance with the Securities Depository's normal procedures, which now provide
for payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Acquiring Fund MuniPreferred are set forth in Annex C to the Statement of
Additional Information.
The first Auction for shares of Acquiring Fund MuniPreferred, Series T and
Series TH, will be held on the Business Day first preceding the Dividend Payment
Date for the Initial Rate Period of such series. See "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends and Dividend
Periods--General." Thereafter, Auctions for shares of such series will normally
be held every Tuesday and Thursday, respectively, and each Subsequent Rate
Period of shares of such series will normally begin on the following Wednesday
and Friday, respectively.
Whenever the Acquiring Fund intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on shares of
Acquiring Fund MuniPreferred, the Acquiring Fund shall, in the case of Minimum
Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may,
in the case of any other Special Rate Period, notify the Auction Agent of the
amount to be so included not later than the Dividend Payment Date next preceding
the Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Acquiring
Fund, it will be required in turn to notify each Broker-Dealer, who, on or prior
to such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting an Order in the
Auction to be held on such Auction Date.
SECONDARY MARKET TRADING AND TRANSFER OF ACQUIRING FUND MUNIPREFERRED
The Broker-Dealers maintain a secondary trading market in shares of Acquiring
Fund MuniPreferred outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that such
secondary trading market in shares of Acquiring Fund MuniPreferred will provide
owners with liquidity of investment. The shares of Acquiring Fund MuniPreferred
are not registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations System. Investors who purchase shares in
an Auction for a Special Rate Period should note that because the dividend rate
on such shares will be fixed for the length of such Rate Period, the value of
the shares may fluctuate in response to changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction therefor, depending upon market conditions.
Unless otherwise permitted by the Acquiring Fund, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of shares of a series of
Acquiring Fund MuniPreferred only in whole shares and only pursuant to a Bid or
Sell Order placed with the Auction Agent in accordance with the Auction
Procedures or to a Broker-Dealer; provided, however, that in the case of all
transfers other than pursuant to Auctions, (i) any such Beneficial Owner or any
such Existing Holder that is not a Broker-Dealer shall advise its Broker-Dealer
of such transfer, who in turn shall advise the Auction Agent of such transfer
and (ii) any such Existing Holder that is a Broker-Dealer shall advise the
Auction Agent of such transfer.
COMPARISON OF RIGHTS OF HOLDERS OF MUNIPREFERRED OF THE
ACQUIRING FUND AND THE ACQUIRED FUND
The terms of the shares of Acquiring Fund MuniPreferred, Series T and Series TH,
issued pursuant to the Reorganization will be substantially similar to the
outstanding shares of Acquired Fund MuniPreferred, Series T and Series TH,
except that under the Acquired Fund Statement, the Board of the Acquired Fund
does not have the authority to issue additional shares of an existing series of
Acquired Fund MuniPreferred without the approval of holders of shares of such
existing series and the Acquiring Fund does not have dissenters' rights of
appraisal.
COMPARISON OF THE INVESTMENT OBJECTIVES AND POLICIES OF
THE ACQUIRING FUND AND THE ACQUIRED FUND
GENERAL
Each Fund's primary investment objective is to provide, through investment in a
professionally managed portfolio of tax-exempt Municipal Obligations, current
income exempt from regular Federal income tax, consistent with the Fund's
investment policies. The secondary investment objective of each Fund is the
enhancement of portfolio value relative to the
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municipal bond market through investments in tax-exempt Municipal Obligations
that, in the opinion of the Adviser, are underrated or undervalued or that
represent municipal market sectors that are undervalued. This secondary
investment objective will ordinarily involve purchase by each Fund of (1)
underrated or undervalued uninsured Municipal Objections, which would then be
covered by insurance, or (2) undervalued insured Municipal Obligations. See
"Portfolio Investments." Underrated Municipal Obligations are those whose
ratings do not, in the Adviser's opinion, reflect their true value. Municipal
Obligations may be underrated because of the time that has elapsed since their
most recent rating, or because of positive factors that may not have been fully
taken into account by rating agencies, or for other similar reasons. Municipal
Obligations that are undervalued or that represent undervalued municipal market
sectors are Municipal Obligations that, in the Adviser's opinion, are worth more
than the value assigned to them in the marketplace. Municipal Obligations of
particular types or purposes (e.g., hospital bonds, industrial revenue bonds or
bonds issued by a particular municipal issuer) may be undervalued because there
is a temporary excess of supply in that market sector, or because of a general
decline in the market price of Municipal Obligations of the market sector for
reasons that do not apply to the particular Municipal Obligations that are
considered undervalued. Each Fund's investment in underrated or undervalued
Municipal Obligations will be based on the Adviser's belief that the prices of
such Municipal Obligations should ultimately reflect their true value.
Accordingly, "enhancement of portfolio value relative to the municipal bond
market" refers to each 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. Thus, each Fund's secondary investment
objective is not intended to suggest that capital appreciation is itself an
objective of each Fund. Instead, each Fund will seek enhancement of portfolio
value relative to the municipal bond market by prudent selection of Municipal
Obligations, regardless of which direction the market may move. Each Fund's
policy of investing in insured Municipal Obligations may limit the extent to
which it will be able to achieve its secondary investment objective. Any capital
appreciation realized by a Fund will generally result in the distribution of
taxable capital gains to Fund shareholders. Each Fund is currently required to
allocate net capital gains and other income taxable for Federal income tax
purposes, if any, proportionately between its common shares and shares of
MuniPreferred. See "Tax Matters Associated with Investment in the Funds" and
"Proposal No. 1--The Reorganization--The Auction--Auction Procedures."
PORTFOLIO INVESTMENTS
Except to the extent either Fund invests in temporary investments as described
below and more fully in the Statement of Additional Information, each Fund will,
as a fundamental policy, invest all of its assets in tax-exempt Municipal
Obligations which are either covered by insurance guaranteeing the timely
payment of principal and interest thereon or backed by an escrow or trust
account containing sufficient U.S. Government or U.S. Government agency
securities to ensure timely payment of principal and interest. Municipal
Obligations backed by an escrow account or trust account will not constitute
more than 20% of each Fund's assets.
Each insured Municipal Obligation held by a Fund will either be covered by a
separate insurance policy applicable to a specific security, whether obtained by
the issuer of the security or by a third party at the time of original issuance
("Original Issue Insurance") or by the Fund or a third party subsequent to the
time of original issuance ("Secondary Market Insurance"), or covered by a master
municipal obligation guaranty insurance policy purchased by a Fund ("Portfolio
Insurance"). Each Fund, depending on the availability of such policies on terms
favorable to the Fund, may determine not to obtain Portfolio Insurance and to
emphasize investments in Municipal Obligations insured under Original Issue
Insurance or Secondary Market Insurance. Original Issue Insurance, Secondary
Market Insurance and Portfolio Insurance do not guarantee (1) the payment of
principal of and interest on Municipal Obligations on an accelerated basis in
the event of a default thereunder, (2) the value of the common shares of a Fund
or (3) the market value of a Fund's Municipal Obligations. Municipal Obligations
insured under Original Issue Insurance or Secondary Market Insurance are insured
for the remaining term of the security, whereas Municipal Obligations insured
under Portfolio Insurance remain insured only so long as they are held by a
Fund. In any event, each Fund has obtained and in the future will only obtain
Portfolio Insurance issued by insurers whose claims-paying ability is rated
"Aaa" by Moody's or "AAA" by S&P. There is no limitation on the percentage of
each Fund's assets that may be invested in Municipal Obligations insured by an
insurer. A more detailed description of each Fund's portfolio investments and
bond insurance is included under "Investment Objectives and Policies of the
Funds-- Portfolio Investments" and "--Bond Insurance" in the Statement of
Additional Information.
The foregoing investment objectives and policies are fundamental policies of
each Fund and may not be changed without the approval of the holders of a
"majority of the outstanding" common shares and preferred shares of that Fund,
including shares of that Fund's MuniPreferred, voting together as a single
class, and of the holders of a "majority of the outstanding" preferred shares of
the Fund, including shares of that Fund's MuniPreferred, voting as a separate
class. For purposes of the foregoing, "Investment Restrictions" below, and the
first paragraph under "Proposal No. 1--The Reorganization-- Description of
MuniPreferred Issued by the Acquiring Fund--Voting Rights" above, "majority of
the outstanding," when used with respect to particular shares of a Fund, means
(a) 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 (b) more than 50% of
the shares, whichever is less.
Each Fund emphasizes investments in Municipal Obligations with long-term
maturities in order to maintain an average portfolio maturity of 20-30 years,
but the average maturity may be shortened from time to time depending on market
conditions. Moreover, during temporary defensive periods, and in order to keep
cash on hand fully invested, each Fund may
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invest any percentage of its assets in temporary investments, the income on
which may be either tax-exempt or taxable. Each Fund intends to invest in
taxable temporary investments only in the event that suitable tax-exempt
temporary investments are not available at reasonable prices and yields. Among
the taxable temporary investments in which the Funds may invest are repurchase
agreements.
A substantial portion of the income produced by each Fund may be includable in
alternative minimum taxable income in respect of that Fund.
MUNICIPAL OBLIGATIONS
"Municipal Obligations" are debt obligations issued by states, cities and local
authorities, and certain possessions and territories of the United States, to
obtain funds for various public purposes, including the construction and
maintenance of such public facilities as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Other public purposes for which Municipal Obligations may be issued include the
refinancing of outstanding obligations and the obtaining of funds for general
operating expenses and for loans to other public institutions and facilities. In
addition, certain industrial development, private activity and pollution control
bonds may be included within the term Municipal Obligations if the interest paid
thereon qualifies as exempt from regular Federal income tax. The two principal
classifications of Municipal Obligations are "general obligation" and "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds (e.g., industrial development bonds) are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Also included within the general category of Municipal Obligations are
participations in lease obligations or installment purchase contract obligations
of municipal authorities or entities.
The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal Obligation
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The market value of Municipal Obligations will vary
with changes in prevailing interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.
Each 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. On such transactions the payment obligation is fixed at the
time the buyer enters into the commitment. This involves an element of risk to a
Fund when it is the buyer because at the time of delivery the market value of
the Municipal Obligations may be less than such Fund's payment obligation. Each
Fund is required under the rules of the Commission to maintain in a segregated
account liquid assets, consisting of cash, U.S. government securities or other
high grade debt obligations, equal in value to the purchase price due on the
settlement date. Income generated by assets in such a segregated account of a
Fund may be taxable to shareholders of that Fund.
INVESTMENT RESTRICTIONS
Except as described below, neither Fund, as a fundamental policy, may, without
the approval of the holders of a "majority of the outstanding" common shares and
preferred shares of such Fund, including shares of its MuniPreferred, voting
together as a single class, and of the holders of a "majority of the
outstanding" preferred shares of such Fund, including shares of its
MuniPreferred, voting as a separate class:
(1) Issue senior securities, as defined in the 1940 Act, other than
preferred shares, except to the extent such issuance might be involved with
respect to borrowings described under subparagraph (3) under "Investment
Objectives and Policies--Investment Restrictions" in the Statement of
Additional Information or with respect to transactions involving futures
contracts or the writing of options within the limits described in the
Statement of Additional Information under "Certain Trading Strategies of
the Funds--Financial Futures and Options Transactions;"
(2) 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 revenues of non-governmental users, nor shall it apply to
Municipal Obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
(3) Invest in securities other than Municipal Obligations and temporary
investments as described in the Statement of Additional Information under
"Investment Objectives and Policies--Portfolio Investments," or purchase
financial futures and options except for futures and options that represent
no more than 10% of the Fund's total assets and are otherwise within the
limits described in the Statement of Additional Information under "Certain
Trading Strategies of the Funds--Financial Futures and Options
Transactions;" or
(4) 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.
Notwithstanding subparagraphs (1) and (3) above, restrictions imposed by Moody's
or S&P, or both, on engaging in futures and options transactions, as described
in the Statement of Additional Information under "Certain Trading Strategies of
the
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Funds--Financial Futures and Options Transactions," are not fundamental policies
and may be changed by a Fund from time to time without shareholder approval;
provided, however, that if Moody's or S&P, or both, are rating the shares of
that Fund's MuniPreferred, that Fund must receive written confirmation from
Moody's or S&P, or both, as appropriate, that such change would not impair the
ratings then assigned by Moody's and S&P to such shares. See "Investment
Objectives and Policies--Investment Restrictions" in the Statement of Additional
Information for a description of additional fundamental investment policies of
each Fund.
CERTAIN PROVISIONS IN THE ACQUIRING FUND'S DECLARATION OF TRUST
Under Massachusetts law, shareholders of the Acquiring Fund could, under certain
circumstances, be held personally liable for the obligations of that Fund.
However, the Acquiring Fund's Declaration contains an express disclaimer of
shareholder liability for acts or obligations of the Acquiring Fund and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Acquiring Fund or the trustees. The
Acquiring Fund's Declaration further provides for indemnification out of the
assets and property of that Fund for all loss and expense of any shareholder
held personally liable for the obligations of the Acquiring Fund. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Acquiring Fund would be unable to meet its
obligations. The Acquiring Fund believes that the likelihood of such
circumstances is remote.
The Acquiring Fund's Declaration provides that the obligations of that Fund are
not binding upon the trustees individually, but only upon the assets and
property of the Acquiring Fund, and that the trustees shall not be liable for
errors of judgment or mistakes of fact or law. Nothing in the Acquiring Fund's
Declaration, however, protects a trustee against any liability to which he or
she 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 or her office.
The Acquiring Fund's Declaration includes provisions that could have the effect
of limiting the ability of other entities or persons to acquire control of the
Acquiring Fund. Specifically, the Acquiring Fund's Declaration requires the
affirmative vote of the holders of at least 66 2/3% of the Acquiring Fund's
common shares and preferred shares (including shares of Acquiring Fund
MuniPreferred) outstanding at the time, voting together as a single class,
except as described below, to authorize any of the following transactions:
(a) conversion of the Acquiring Fund from a closed-end to an open-end
investment company,
(b) a merger or consolidation of the Acquiring Fund with any corporation or
a reorganization or recapitalization of the Acquiring Fund,
(c) a sale, lease or transfer of all or substantially all of the Acquiring
Fund's assets (other than in the regular course of the Acquiring Fund's
investment activities), or
(d) termination of the trust established by the Acquiring Fund's
Declaration,
unless such transaction has been authorized by the affirmative vote of 66 2/3%
of the total number of trustees fixed in accordance with the Acquiring Fund's
Declaration or By-Laws, in which case the affirmative vote of the holders of at
least a majority of the Acquiring Fund's common shares and preferred shares
(including shares of Acquiring Fund MuniPreferred outstanding at the time),
voting together as a single class, is required. In the case of the conversion of
the Acquiring Fund to an open-end investment company, or in the case of any of
the foregoing transactions constituting a plan of reorganization which adversely
affects the holders of preferred shares of the Acquiring Fund (including shares
of Acquiring Fund MuniPreferred), the action in question will also require the
approval of the holders of 66 2/3% of the preferred shares of the Acquiring Fund
(including shares of Acquiring Fund MuniPreferred) outstanding at the time,
voting as a separate class; provided, however, that such separate class vote
shall be a majority vote if the transaction has been authorized by the
affirmative vote of 66 2/3% of the total number of trustees fixed in accordance
with the Acquiring Fund's Declaration or By-Laws. The vote required to approve
the conversion of the Acquiring Fund from a closed-end to an open-end investment
company or to approve a transaction constituting a plan of reorganization which
adversely affects the holders of preferred shares of the Acquiring Fund is
higher than that required by the 1940 Act. The Acquiring Fund's Board believes
that the provisions of the Acquiring Fund's Declaration relating to such higher
vote are in the best interests of the Acquiring Fund and its shareholders.
Reference should be made to the Acquiring Fund's Declaration on file with the
Commission for the full text of these provisions, which could have the effect of
depriving shareholders of the Acquiring Fund of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Acquiring Fund.
SURRENDER AND EXCHANGE OF ACQUIRED FUND SHARE CERTIFICATES
After the Effective Time, each holder of an outstanding certificate or
certificates formerly representing common shares or shares of MuniPreferred of
the Acquired Fund ("Acquired Fund Shares") will be entitled to receive, upon
surrender of his or her certificates, a certificate or certificates representing
the number of Acquiring Fund Shares distributable with respect to such holder's
Acquired Fund Shares, together with cash in lieu of any fractional Acquiring
Fund common share. Promptly
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after the Effective Time, the Transfer Agent will mail to each holder of
certificates formerly representing Acquired Fund Shares a letter of transmittal
for use in surrendering his or her certificates for certificates representing
Acquiring Fund Shares and cash in lieu of any fractional Acquiring Fund common
share.
Please do not send in any share certificates at this time. Upon consummation of
the Reorganization, holders of Acquired Fund Shares will be furnished
instructions for exchanging their Acquired Fund Share certificates for Acquiring
Fund Share certificates and, if applicable, cash in lieu of fractional Acquiring
Fund common shares.
From and after the Effective Time, certificates formerly representing Acquired
Fund Shares will be deemed for all purposes to evidence ownership of the number
of full Acquiring Fund common shares or shares of Acquiring Fund MuniPreferred,
Series T or Series TH, as the case may be, distributable with respect to such
Acquired Fund Shares in the Reorganization, provided that until such Acquired
Fund Share certificates have been so surrendered, no dividends payable to the
holders of record of Acquiring Fund Shares as of any date subsequent to the
liquidation of the Acquired Fund are required to be paid to the holders of such
outstanding Acquired Fund Share certificates. Unpaid dividends on Acquiring Fund
Shares to holders of record as of any date after the liquidation of the Acquired
Fund and prior to the exchange of certificates by any Acquired Fund shareholder
will be paid to such shareholder, without interest, at the time such shareholder
surrenders his or her Acquired Fund Share certificates for exchange.
From and after the Effective Time, there will be no transfers on the record
transfer books of the Acquired Fund. If, after the Effective Time, certificates
representing Acquired Fund Shares are presented to the Acquired Fund, they will
be cancelled and exchanged for certificates representing the Acquiring Fund
Shares and, if applicable, the cash in lieu of fractional Acquiring Fund common
shares distributable with respect to such Acquired Fund Shares in the
Reorganization.
EXPENSES ASSOCIATED WITH THE REORGANIZATION
In evaluating the Reorganization, management of the Funds estimated the amount
of expenses the Funds would incur to be $320,423, which includes additional
stock exchange listing fees, Commission registration fees, legal and accounting
fees and proxy and distribution costs. The aggregate amount of incremental
expenses due to the Reorganization (estimated to be $320,423) are to be
allocated between the Acquiring Fund (70.2%) and the Acquired Fund (29.8%) based
upon estimated savings to each Fund as a result of expected reduced operating
expenses resulting from the Reorganization.
Reorganization expenses of the Acquiring Fund and the Acquired Fund have been or
will be expensed prior to the Effective Time. Management of the Funds expects
that reduced operating expenses resulting from the Reorganization should allow
the Acquiring Fund to recover the projected costs of the Reorganization within
approximately 22 months after the Effective Time.
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Under Massachusetts law and the Declaration of the Acquiring Fund, shareholders
of the Acquiring Fund do not have dissenters' rights of appraisal with respect
to the Reorganization. Under Minnesota law, shareholders of the Acquired Fund
have dissenters' rights of appraisal with respect to the Reorganization.
GENERAL
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act provide
for rights of shareholders to dissent and obtain payment in cash of the "fair
value" of their shares, as defined in the statute, in the event of a sale of
substantially all of the assets of a Minnesota corporation. The procedures for
asserting dissenters' rights are set forth in such sections, the full texts of
which are reprinted as Annex B to this Joint Proxy Statement-Prospectus.
Shareholders of the Acquired Fund who wish to assert their dissenters' rights
must fully comply with the statutory requirements in order to preserve the right
to obtain payment for their shares under the statute. The following summary of
the applicable provisions of Section 302A.471 and 302A.473 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to such Sections.
PROCEDURE
Any shareholder of the Acquired Fund who wishes to dissent and obtain payment
for his or her shares (a) must file with the Acquired Fund prior to the
shareholder vote with respect to the Agreement at the Annual Meeting, a written
notice stating the shareholder's intention to demand payment of the fair value
of his or her shares if the Reorganization is effectuated and (b) must not vote
his or her shares in favor of approval of the Agreement. Such notice must be
filed at the offices of the Acquired Fund at 333 West Wacker Drive, Chicago,
Illinois 60606, Attention: Secretary. A vote against approval of the Agreement
does not in itself constitute the required written notice described in (a)
above. A shareholder must satisfy requirement (b) above either by voting against
approval of the Agreement in person or by proxy at the Annual Meeting or by
abstaining from voting his or her shares. The shareholder can so abstain by not
voting in favor of approval of the Agreement at the Annual Meeting and either
(i) not signing and returning the proxy card or (ii) marking the space
indicating "Abstain" on the proxy card. If a shareholder returns a signed proxy
card, unless such proxy card indicates that the shareholder wishes
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<PAGE> 29
to abstain or vote against approval of the Agreement, such shareholder's shares
will be voted in favor of approval of the Agreement, and such shareholder will
not be permitted to dissent.
A shareholder of the Acquired Fund may not assert dissenters' rights as to less
than all of the shares registered in such holder's name, except in the situation
in which certain shares are beneficially owned by another person but registered
in such holder's name. If a shareholder wishes to dissent with respect to shares
beneficially owned by another person, such shareholder must dissent with respect
to all such shares and disclose the name and address of the beneficial owner on
whose behalf the holder is dissenting. A beneficial owner who is not the
shareholder of record may assert dissenters' rights with respect to all of his
or her shares if the beneficial owner submits a written consent of the
shareholder of record at the time of or prior to the assertion of such
dissenters' rights.
If the Agreement is approved by the requisite shareholder vote, the Acquired
Fund will be required to mail a notice to each Acquired Fund shareholder who
filed a written notice of intent to demand payment and refrained from voting in
favor of approval of the Agreement. The notice shall state when and where a
demand for payment shall be sent and share certificates shall be deposited in
order to obtain payment. The notice shall also include a form to be completed by
the shareholder for demanding payment and certifying the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder is
dissenting, acquired the shares. In order to receive the fair value of his or
her shares, a dissenting shareholder must demand payment and deposit his or her
share certificates within 30 days after the notice is mailed by the Acquired
Fund. A shareholder who fails to demand payment or fails to deposit share
certificates, as required by such notice, shall have no right to receive payment
for his or her shares under the dissenters' rights provisions.
After the Reorganization takes effect or after receipt of a valid demand for
payment, whichever is later, the Acquired Fund shall remit to each shareholder
who has made such demand of the Acquired Fund and deposited his or her share
certificates, the amount that the Acquired Fund estimates to be the fair value
of the shares, plus any interest that may have accrued commencing five days
after the Effective Time up to and including the date of payment at the judgment
rate of interest then in effect under Minnesota law (currently 5% per annum).
The Acquired Fund shall also include with such remittance, along with certain
financial statements of the Acquired Fund, a brief description of the method
used to reach the estimated fair value of the shares of the Acquired Fund. As
used in Section 302A.473, the term "fair value of the shares" means the value of
the shares immediately before the Effective Time.
The Acquired Fund may withhold any remittance from a dissenting shareholder who
was not a shareholder (or who is dissenting on behalf of a person who was not a
beneficial owner) on April 24, 1996, the date of the first public announcement
of the Reorganization, if the Acquired Fund (a) provides to such shareholder,
along with the materials described in the preceding paragraph, a statement of
the reason for withholding the remittance and (b) offers to pay the fair value
of the shares, plus interest, if the dissenting shareholder agrees to accept
that amount in full satisfaction. The dissenting shareholder may decline the
offer and demand payment as described below. Failure to make such demand
entitles the dissenting shareholder only to the amount offered by the Acquired
Fund.
If a dissenting shareholder of the Acquired Fund believes that the amount
remitted (or the amount offered in the case of certain dissenting shareholders)
by the Acquired Fund is less than the fair value of his or her shares of the
Acquired Fund, plus interest, the shareholder may, within 30 days after the
mailing date of the remittance (or the offer), give written notice to the
Acquired Fund of his or her own estimate of the fair value of the shares of the
Acquired Fund, plus interest, and demand payment of the difference. If the
shareholder fails to do so, the shareholder is entitled only to the amount
remitted (or offered).
If the Acquired Fund receives a demand for supplemental payment from any
dissenting shareholder, it shall, within 60 days after receipt of such demand,
either (a) pay to the dissenter the amount demanded or agreed to by the
dissenter after settlement discussions or (b) file in a court of competent
jurisdiction in Hennepin County, Minnesota, a petition requesting that the court
determine the fair value of the shares, plus interest. All shareholders of the
Acquired Fund whose demands have not been settled with the Acquired Fund shall
be made parties to the proceeding. The court shall determine whether each such
dissenting shareholder has complied with all statutory requirements and shall
determine the fair value of the shares, taking into account any and all factors
the court finds relevant. If the court determines that the fair value of the
shares exceeds the Acquired Fund's estimate of the fair value of the shares of
the Acquired Fund, then the court will enter judgment in favor of such
dissenting shareholders in an amount by which the value determined by the court
exceeds the Acquired Fund's estimated value.
The costs and expenses of the proceeding, including the reasonable expense and
compensation of any appraisers appointed by the court, shall be determined by
the court and assessed against the Acquired Fund, except that the court may
assess part or all of such costs and expenses against any dissenting shareholder
whose action in demanding supplemental payment is found by the court to be
arbitrary, vexatious or not in good faith. If the court finds that the Acquired
Fund has failed to comply substantially with the statutory requirements, the
court may assess against the Acquired Fund all fees and expenses of any experts
or attorneys as the court deems equitable. In addition, fees and expenses may be
assessed against any party the court determines has acted arbitrarily,
vexatiously or not in good faith in bringing a proceeding for supplemental
payment.
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Cash received pursuant to the exercise of dissenters' rights may be subject to
Federal or state income tax. See "Tax Consequences of the
Reorganization--Dissenting Shareholders."
TAX CONSEQUENCES OF THE REORGANIZATION
The Funds have received the opinion of Vedder, Price, Kaufman & Kammholz,
counsel to the Funds, to the effect that the Reorganization will qualify as a
tax-free reorganization under Section 368(a)(1) of the Code. Accordingly,
neither Fund will recognize gain or loss for Federal income tax purposes as a
result of the Reorganization. The following discussion summarizes the
anticipated Federal income tax treatment to shareholders of the Acquired Fund.
EXCHANGE OF ACQUIRED FUND SHARES SOLELY FOR ACQUIRING FUND SHARES
A common shareholder of the Acquired Fund who receives common shares of the
Acquiring Fund pursuant to the Reorganization will recognize no gain or loss for
Federal income tax purposes, except with respect to the cash received for a
fractional Acquiring Fund common share interest, if any. See "Fractional Common
Share Interests" below. Likewise, a holder of shares of Acquired Fund
MuniPreferred who receives shares of Acquiring Fund MuniPreferred pursuant to
the Reorganization will recognize no gain or loss for Federal income tax
purposes.
The aggregate basis of the Acquiring Fund Shares received by a shareholder of
the Acquired Fund (including any fractional Acquiring Fund common share interest
to which he or she may be entitled) will be the same as the shareholder's
aggregate basis in the Acquired Fund Shares surrendered in exchange therefor,
decreased by any cash received and increased by the amount of gain recognized on
the exchange.
The holding period of the Acquiring Fund Shares received by a shareholder of the
Acquired Fund (including any fractional Acquiring Fund common share interest to
which he or she may be entitled) will include the period during which the
shareholder's Acquired Fund Shares were held, provided such Acquired Fund Shares
were held as a capital asset at the Effective Time.
For Federal income tax reasons, the Acquired Fund must declare a distribution to
its shareholders of all net tax-exempt income, net ordinary taxable income and
net capital gains, if any, prior to the end of its fiscal year, which
declaration will occur at or prior to the Effective Time.
FRACTIONAL COMMON SHARE INTERESTS
No fractional Acquiring Fund common shares will be issued pursuant to the
Reorganization. Cash payments received by an Acquired Fund shareholder in lieu
of a fractional Acquiring Fund common share will be treated as received by such
shareholder as a distribution in redemption by the Acquiring Fund of that
fractional common share interest and will be treated as a distribution in full
payment in exchange for the fractional Acquiring Fund common share interest,
resulting in a capital gain or loss for Federal income tax purposes (provided
the redemption is not substantially equivalent to a dividend), assuming the
Acquired Fund common shares exchanged for cash in lieu of the fractional
Acquiring Fund common share were held as a capital asset at the Effective Time.
DISSENTING SHAREHOLDERS
Cash payments received by an Acquired Fund shareholder as a result of the
exercise of his or her dissenters' rights of appraisal will be treated as
received by such shareholder as a distribution in redemption by the Acquired
Fund of his or her shares and will be treated as a distribution in full payment
in exchange for his or her shares, resulting in a capital gain or loss for
Federal income tax purposes, assuming the Acquired Fund Shares exchanged for
cash as a result of the exercise of his or her dissenters' rights were held as a
capital asset at the Effective Time.
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL FEDERAL INCOME
TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE CONSIDERED TO BE TAX
ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL CONCUR
ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. ACQUIRED FUND SHAREHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS AND ANY OTHER
CONSIDERATIONS WHICH MAY BE APPLICABLE TO THEM.
26
<PAGE> 31
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Funds as of
October 31, 1995 and the pro forma combined capitalization of the combined Fund
as if the Reorganization had occurred on that date. The table reflects a pro
forma exchange ratio of approximately 1.1091069 shares of the Acquiring Fund
issued for each share of the Acquired Fund. If the Reorganization is
consummated, the actual exchange ratio may vary from the ratio indicated below.
See "Pro Forma Financial Information" included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
ACQUIRING
ACQUIRING FUND ACQUIRED FUND FUND
(ACTUAL) (ACTUAL) (AS ADJUSTED)(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholders' Equity:
Common Shares, $.01 par value per share;
20,642,068 shares outstanding for Acquiring Fund
(Actual)
15,128,458 shares outstanding for Acquired Fund
(Actual)
37,421,145 shares outstanding for Acquiring Fund
(Adjusted) $ 206,421 $ 151,285 $ 374,212 (2)
Preferred shares, $25,000 stated value per share, at
liquidation value 158,900,000 110,000,000 268,900,000
Paid-in surplus 286,208,026 209,709,001 495,580,098 (3)
Undistributed net investment income 398,674 265,613 398,674 (4)
Net realized gain (loss) from investment transactions (22,439,291) (3,195,748) (25,635,039)(5)
Net unrealized appreciation of investments 4,634,529 11,913,791 16,548,320
- -------------------------------------------------------------------------------------------------------------------
Net Assets $427,908,359 $328,843,942 $756,166,265
===================================================================================================================
</TABLE>
- ------------
(1) The adjusted balances are presented as if the Reorganization were effective
as of October 31, 1995 for information purposes only. The actual Effective
Time of the Reorganization is expected to be September 9, 1996, at which
time the results would be reflective of the actual composition of
shareholders' equity at that date.
(2) Assumes the issuance of 16,779,077 Acquiring Fund Common shares in exchange
for the net assets of the Acquired Fund, which number is based on the net
asset value of the Acquiring Fund Common shares, and the net asset value of
the Acquired Fund, as of October 31, 1995, after adjustment for the
distributions referred to in (4) below. The issuance of such number of
Acquiring Fund Common shares would result in the distribution of 1.1091069
Acquiring Fund Common shares for each Common share of the Acquired Fund upon
liquidation of the Acquired Fund.
(3) Includes the impact of estimated Reorganization costs of $320,423.
(4) Assumes the Acquired Fund distributes all of its undistributed net
investment income ($265,613) to its shareholders.
(5) Assumes the Acquired Fund carries forward all of its net realized losses
from investment transactions ($3,195,748) to the Acquiring Fund, as
permitted under applicable tax regulations.
COMPARATIVE PERFORMANCE INFORMATION
Comparative investment performance for the Funds for certain periods ended April
30, 1996, are shown below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN ON MARKET VALUE TOTAL RETURN ON NET ASSET VALUE
------------------------------------------ ------------------------------------------
ONE THREE FIVE LIFE OF ONE THREE FIVE LIFE OF
YEAR YEARS YEARS FUND YEAR YEARS YEARS FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquiring Fund 12.75% N/A N/A (4.24)% 10.43% N/A N/A 1.93%
Acquired Fund 10.65% 2.08% N/A 1.89% 8.48% 5.43% N/A 6.25%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total Investment Return on Market Value is the average annual combination of
reinvested dividend income, reinvested capital gains distributions, if any, and
changes in price per share. Total Return on Net Asset Value is the average
annual combination of reinvested dividend income, reinvested capital gains
distributions, if any, and changes in net asset value per share. Life of Fund is
calculated from July 22, 1993 for the Acquiring Fund and December 17, 1992 from
the Acquired Fund. Past performance information is not necessarily indicative of
future results.
PROPOSAL NO. 2--ELECTION OF BOARD MEMBERS OF EACH FUND
Shareholders of each Fund are being asked to vote for the election of six (6)
Board Members of their Fund to serve until the next Annual Meeting and until
their successors have been duly elected and qualified or, in the case of the
Acquired Fund, until the earlier liquidation of the Acquired Fund. Under the
terms of the Acquiring Fund's Declaration and the Acquired Fund's Articles,
under normal circumstances holders of shares of that Fund's MuniPreferred are
entitled to elect two Fund Board Members, and the remaining Board Members are to
be elected by holders of that Fund's common shares and shares of MuniPreferred,
voting together as a single class.
It is the intention of the persons named in the enclosed proxy to vote the
shares represented thereby for the election of the nominees listed below unless
the proxy is marked otherwise. (See, however, "The Annual Meetings--Voting;
Proxies"
27
<PAGE> 32
above.) Each of the nominees listed below has agreed to serve as a Board Member
of each Fund if elected; however, should any nominee become unable or unwilling
to accept nomination or election, the proxies for each Fund will be voted for
one or more substitute nominees designated by each Fund's present Board.
Shareholders of each Fund will be entitled to one vote for each share held for
the election of Board Members. The affirmative vote of a plurality of the shares
present and entitled to vote at the Annual Meeting of the Acquiring Fund will be
required to elect the Board Members for the Acquiring Fund. The affirmative vote
of a majority of the shares present and entitled to vote at the Annual Meeting
of the Acquired Fund will be required to elect the Board Members of the Acquired
Fund.
Tables I and II below show each nominee's age, principal occupations and other
business affiliations, the year in which each nominee was first elected or
appointed a Board Member of each Fund and the number of common shares of the
Funds and of all Nuveen funds (excluding money market funds) which each nominee
beneficially owned as of April 30, 1996. All of the nominees, except Mr. Dean,
were last elected to each Board at the 1995 annual meeting of shareholders. Mr.
Dean will be standing for election by each Fund's shareholders for the first
time at the Annual Meeting to fill a vacancy that will occur upon the retirement
of Richard J. Franke from John Nuveen & Co. Incorporated and the Boards on June
30, 1996. Mr. Franke's contributions to the Funds are greatly appreciated. As of
April 30, 1996, Mr. Franke owned 25,500 common shares of each Fund. In addition
to the vacancy that will occur upon the retirement of Mr. Franke from the
Boards, there is currently another vacancy on the Boards. The Funds' nominating
committees are considering candidates for that vacancy. If the Reorganization is
consummated, the Board Members of the Acquired Fund will cease to serve as such
upon the liquidation of the Acquired Fund.
EACH FUND'S BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION
OF THE NOMINEES NAMED BELOW.
TABLE I
NOMINEES FOR EACH FUND TO BE ELECTED BY ALL SHAREHOLDERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FULL COMMON SHARES
BENEFICIALLY OWNED
APRIL 30, 1996
---------------------------------
NAME, AGE AND PRINCIPAL OCCUPATIONS OF YEAR FIRST ELECTED ACQUIRING ACQUIRED ALL NUVEEN
NOMINEES AS OF APRIL 30, 1996(1) OR APPOINTED A BOARD MEMBER FUND(2) FUND(2) FUNDS(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lawrence H. Brown (61) 1993 0 0 3,637
Board Member of the Funds; retired in August 1989
as Senior Vice President of The Northern Trust
Company.
*Anthony T. Dean (51) Nominee 0 0 5,695
Director nominee of the Funds and President-elect
(effective July 1, 1996); President,
Chairman-elect (effective July 1, 1996) and
Trustee of the Select Tax-Free Portfolios advised
by Nuveen Institutional Advisory Corp. (since
July 1994); President-elect (effective July 1,
1996) and Executive Vice President and Director
of The John Nuveen Company (since March 1992),
John Nuveen & Co. Incorporated, Nuveen Advisory
Corp. (since October 1992) and Nuveen
Institutional Advisory Corp. (since October
1992).
Anne E. Impellizzeri (63) 1994 0 0 2,000
Board Member of the Funds; President and Chief
Executive Officer of Blanton-Peale, Institutes
of Religion and Health (since December 1990);
prior thereto, Vice President of New York City
Partnership (from 1987 to 1990) and Vice
President of Metropolitan Life Insurance Company
(from 1980 to 1987).
Peter R. Sawers (63) 1992--Acquired Fund 0 0 8,281
Board Member of the Funds; Adjunct Professor of 1993--Acquiring Fund
Business and Economics, University of Dubuque,
Iowa (since January 1991); Adjunct Professor,
Lake Forest Graduate School of Management, Lake
Forest, Illinois (since January 1992); prior
thereto, Executive Director, Towers Perrin
Australia (management consultant); Chartered
Financial Analyst; Certified Management
Consultant
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 33
TABLE II
NOMINEES FOR EACH FUND TO BE ELECTED
BY HOLDERS OF MUNIPREFERRED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FULL COMMON SHARES
BENEFICIALLY OWNED
APRIL 30, 1996
---------------------------------
NAME, AGE AND PRINCIPAL OCCUPATIONS OF YEAR FIRST ELECTED ACQUIRING ACQUIRED ALL NUVEEN
NOMINEES AS OF APRIL 30, 1996(1) OR APPOINTED A BOARD MEMBER FUND(2) FUND(2) FUNDS(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Margaret K. Rosenheim (69) 1992--Acquired Fund 0 0 5,329
Board Member of the Funds; Helen Ross Professor 1993--Acquiring Fund
of Social Welfare Policy, School of Social
Service Administration, University of Chicago.
*Timothy R. Schwertfeger (47) 1994 0 0 94,921
President and Board Member of the Funds (since
July 1994), Chairman-elect (effective July 1,
1996); Chairman-elect (effective July 1, 1996)
and Executive Vice President and Director of The
John Nuveen Company (since March 1992), John
Nuveen & Co. Incorporated, Nuveen Advisory Corp.
(since October 1992) and Nuveen Institutional
Advisory Corp. (since October 1992).
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) "Interested person" as defined in the Investment Company Act of 1940, as
amended, by reason of being an officer or director of the Funds' investment
adviser, Nuveen Advisory Corp.
(1) The Board Members and nominees, except Anthony T. Dean, are board members of
21 Nuveen open-end funds and 53 closed-end funds managed by Nuveen Advisory
Corp. ("NAC Funds"). Mr. Dean is a board member nominee of 18 closed-end NAC
Funds and is a board member of five closed-end funds managed by Nuveen
Institutional Advisory Corp. ("NIAC Funds"). Mr. Schwertfeger is a board member
nominee of each of the NIAC Funds.
(2) Nuveen Advisory Corp., of which Messrs. Dean, Franke and Schwertfeger are
directors, beneficially owned 7,118 common shares of each Fund. No nominee
beneficially owned any shares of MuniPreferred of the Funds.
(3) The number shown reflects the aggregate number of common shares beneficially
owned in all of the NAC Funds referred to in note (1) above (excluding money
market funds).
The Board Members affiliated with John Nuveen & Co. Incorporated ("Nuveen") or
Nuveen Advisory Corp. (the "Adviser") serve without any compensation from the
Funds. Board Members who are not affiliated with Nuveen or the Adviser receive
a $45,000 annual retainer for serving as a board member of all funds sponsored
by Nuveen and managed by the Adviser and a $1,000 fee per day plus expenses for
attendance at all meetings held on a day on which a regularly scheduled Board
meeting is held, a $1,000 fee per day plus expenses for attendance in person or
a $500 fee per day plus expenses for attendance by telephone at a meeting held
on a day on which no regular Board meeting is held, and a $250 fee per day plus
expenses for attendance in person or by telephone at a meeting of the executive
committee. The annual retainer, fees and expenses are allocated among the funds
managed by the Adviser on the basis of relative net asset sizes. Each Fund has
adopted a Directors' Deferred Compensation Plan pursuant to which a Board Member
of that Fund may elect to have all or a portion of the Board Member's fee
deferred. Board Members may defer fees for any calendar year by the execution of
a Participation Agreement prior to the beginning of the calendar year during
which the Board Member wishes to begin deferral.
The tables below show, for each Board Member who is not affiliated with Nuveen
or the Adviser, the aggregate compensation paid by each Fund for its fiscal year
ended October 31, 1995 and the total compensation that the Nuveen funds accrued
for each Board Member during the calendar year 1995, including any interest
accrued for Board Members on
29
<PAGE> 34
deferred compensation. The rate of earnings on deferred compensation is
equivalent to the average net earnings rate, computed on a quarterly basis, on
the shares of such Nuveen fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
TOTAL
COMPENSATION
NUVEEN FUNDS
ACCRUED FOR
- ----------------------------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION FROM THE
FUNDS
ACQUIRED ACQUIRING
NAME OF BOARD MEMBER FUND FUND BOARD MEMBERS(1)
------------------------------------
<S> <C> <C> <C>
Lawrence H. Brown $586 $702 $55,500
Anne E. Impellizzeri 586 702 63,000
Margaret K. Rosenheim 623 749 62,322(2)
Peter R. Sawers 586 702 55,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes compensation on the boards of the NAC Funds.
(2) Includes $1,572 in interest accrued on deferred compensation from prior
years.
Richard J. Franke, Timothy R. Schwertfeger and Margaret K. Rosenheim currently
serve as members of the executive committee of each Fund's Board. The executive
committee, which meets between regular meetings of the Board, is authorized to
exercise all of the powers of the Board. The executive committee of each Fund
held twelve meetings for the fiscal year ended October 31, 1995. All the
executive committee meetings for each Fund were held for the sole purpose of
declaring a dividend on the Fund's common shares.
Each Fund's Board has an audit committee composed of Lawrence H. Brown, Anne E.
Impellizzeri, Margaret K. Rosenheim and Peter R. Sawers, Board Members of each
Fund who are not "interested persons." The audit committee reviews the work and
any recommendations of each Fund's independent public auditors. Based on such
review, it is authorized to make recommendations to the Board. The audit
committee of each Fund held two meetings for the fiscal year ended October 31,
1995.
Nomination of those Board Members who are not "interested persons" of a Fund is
committed to a nominating committee composed of the Board Members who are not
"interested persons" of that Fund. It identifies and recommends individuals to
be nominated for election as non-interested Board Members. The nominating
committee of each Fund held one meeting for the fiscal year ended October 31,
1995. No policy or procedure has been established as to the recommendation of
Board Member nominees by shareholders.
The Board of each Fund held five meetings for the fiscal year ended October 31,
1995. During the last fiscal year, each Board Member attended 75% or more of
each Fund's Board meetings and the committee meetings (if a member thereof),
except that Mr. Franke was unable to attend certain executive committee meetings
held solely to declare dividends. His attendance at executive committee meetings
which he was scheduled to attend was less than 75%.
The Funds have the same executive officers. The following table sets forth
information as of April 30, 1996 with respect to each executive officer of the
Funds, other than executive officers who are Board Members and included in the
table relating to nominees for the Boards. Officers of the Funds receive no
compensation from the Funds. With respect to each Fund, the term of office of
all officers will expire at the next meeting of the Board of such Fund, which
Board meeting is presently scheduled to be held on July 25, 1996; however, as
previously mentioned, Mr. Franke will be retiring from the Board of Directors
effective June 30, 1996. In the case of the Acquired Fund, such term of office
will expire upon liquidation of the Acquired Fund in the event the
Reorganization is consummated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
POSITION AND OFFICES WITH THE
NAME, AGE AND PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS FUNDS
- -------------------------------------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
William M. Fitzgerald, 32 Vice President
Vice President of Nuveen Advisory Corp. (since December 1995); (since 1996)
prior thereto, Assistant Vice President (from September 1992 to
December 1995) and Assistant Portfolio Manager (from June 1988 to
September 1992) of Nuveen Advisory Corp.
Kathleen M. Flanagan, 48 Vice President
Vice President of John Nuveen & Co. Incorporated. (since 1994)
Richard J. Franke, 64 Chairman of the Board
Chairman of the Board and Director of The John Nuveen Company (since each Fund's organization)
(since March 1992), John Nuveen & Co. Incorporated, Nuveen
Advisory Corp. and Nuveen Institutional Advisory Corp.; formerly
Chairman of the Board and Board Member of the Nuveen Funds advised
by Nuveen Institutional Advisory Corp. (from inception to August
1994); Certified Financial Planner.
</TABLE>
30
<PAGE> 35
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
POSITION AND OFFICES WITH THE
NAME, AGE AND PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS FUNDS
- -------------------------------------------------------------------------------------------------------
<S> <C>
J. Thomas Futrell, 40 Vice President
Vice President of Nuveen Advisory Corp.; Chartered Financial (since each Fund's organization)
Analyst.
Steven J. Krupa, 38 Vice President
Vice President of Nuveen Advisory Corp. (since each Fund's organization)
Anna R. Kucinskis, 50 Vice President
Vice President of John Nuveen & Co. Incorporated. (since each Fund's organization)
Larry W. Martin, 44 Vice President (since 1993) &
Vice President (since September 1992), Assistant Secretary and Assistant Secretary (since each
Assistant General Counsel of John Nuveen & Co. Incorporated; Vice Fund's organization)
President (since May 1993) and Assistant Secretary of Nuveen
Advisory Corp.; Vice President (since May 1993) and Assistant
Secretary (since January 1992) of Nuveen Institutional Advisory
Corp.; Assistant Secretary (since February 1993) of The John Nuveen
Company; Director of Nuveen/Duff & Phelps Investment Advisors
(since January 1995).
O. Walter Renfftlen, 56 Vice President & Controller
Vice President and Controller of The John Nuveen Company (since (since each Fund's organization)
March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp. (since April 1990).
Thomas C. Spalding, Jr., 44 Vice President
Vice President of Nuveen Advisory Corp. and Nuveen Institutional (since each Fund's organization)
Advisory Corp. (since April 1990); Chartered Financial Analyst.
H. William Stabenow, 61 Vice President & Treasurer
Vice President and Treasurer of The John Nuveen Company (since (since each Fund's organization)
March 1992), John Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp. (since January 1992).
James J. Wesolowski, 45 Vice President & Secretary
Vice President, General Counsel and Secretary of The John Nuveen (since each Fund's organization)
Company (since March 1992), John Nuveen & Co. Incorporated,
Nuveen Advisory Corp. and Nuveen Institutional Corp. (since April
1990).
Gifford R. Zimmerman, 39 Vice President (since 1993) &
Vice President (since September 1992); Assistant Secretary and Assistant Secretary (since each
Assistant General Counsel of John Nuveen & Co. Incorporated; Vice Fund's organization)
President (since May 1993) and Assistant Secretary of Nuveen
Advisory Corp.; Vice President (since May 1993) and Assistant
Secretary (since January 1992) of Nuveen Institutional Advisory
Corp.
- -------------------------------------------------------------------------------------------------------
</TABLE>
On April 30, 1996, Board Members and executive officers of the Funds as a group
beneficially owned 25,500 common shares of each Fund and no shares of
MuniPreferred. On April 30, 1996, Board Members, nominees and executive officers
of the Funds as a group beneficially owned 315,656 common shares of all funds
managed by the Adviser (excluding money market funds). As of April 30, 1996, no
shareholder owned more than 5% of any class of shares of any Fund.
Section 30(f) of the 1940 Act and Section 16(a) of the Exchange Act require the
Funds' Board Members and officers, investment adviser, affiliated persons of the
investment adviser and persons who own more than ten percent of a registered
class of either Fund's equity securities to file forms reporting their
affiliation with that Fund and reports of ownership and changes in ownership of
that Fund's shares with the Commission and the NYSE. These persons and entities
are required by Commission regulation to furnish each Fund with copies of all
Section 16(a) forms they file. Based on a review of these forms furnished to
each Fund, each Fund believes that for the fiscal year ended October 31, 1995,
all Section 16(a) filing requirements applicable to that Fund's Board Members
and officers, investment adviser and affiliated persons of the investment
adviser were complied with.
PROPOSAL NO. 3--SELECTION OF INDEPENDENT AUDITORS FOR THE FUNDS
The members of each Fund's Board who are not "interested persons" of that Fund
have unanimously selected Ernst & Young LLP, independent auditors, to audit the
books and records of that Fund for the fiscal year ending October 31, 1996.
Ernst & Young LLP has served each Fund in this capacity since each Fund was
organized and has no direct or indirect financial interest in any Fund except as
independent auditors. The selection of Ernst & Young LLP as independent auditors
of each Fund is being submitted to the shareholders of each Fund for
ratification, which requires the affirmative vote of a majority of the shares of
each Fund present and entitled to vote on the matter. A representative of Ernst
& Young LLP is expected to be present at the Annual Meetings and will be
available to respond to any appropriate questions raised at the Annual Meetings
and to make a statement if he or she wishes. EACH FUND'S BOARD UNANIMOUSLY
RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE RATIFICATION OF THE SELECTION OF THE
INDEPENDENT AUDITORS.
31
<PAGE> 36
MANAGEMENT OF THE FUNDS
BOARD MEMBERS AND OFFICERS
The same individuals constitute the Boards of both Funds, and the Funds have the
same officers. The management of each Fund, including general supervision of the
duties performed by the Adviser under the Investment Management Agreement for
each Fund, is the responsibility of its Board. There are currently six (6) Board
Members of each Fund, two of whom are "interested persons" (as defined in the
1940 Act) and four of whom are disinterested persons. The nominees of the
Acquiring Fund elected at the Acquiring Fund's Annual Meeting will serve as
Board Members of the Acquiring Fund whether or not the Reorganization is
approved. The nominees of the Acquired Fund elected at the Acquired Fund's
Annual Meeting will hold office until the earlier to occur of the Acquired
Fund's 1997 Annual Meeting of Shareholders or, if the Reorganization is
consummated, the earlier liquidation of the Acquired Fund.
INVESTMENT ADVISER
The Adviser, located at 333 West Wacker Drive, Chicago, Illinois, serves as
investment adviser and manager for each Fund. The Adviser is a wholly-owned
subsidiary of Nuveen, 333 West Wacker Drive, Chicago, Illinois 60606. Nuveen is
a subsidiary of The John Nuveen Company which in turn is approximately 78% owned
by The St. Paul Companies, Inc. ("St. Paul"). St. Paul is located at 385
Washington Street, St. Paul, Minnesota 55102, and is principally engaged in
providing property-liability insurance through subsidiaries. Nuveen acted as
co-managing underwriter for the Acquiring Fund in its initial public offering of
shares in July 1993 and its initial public offering of MuniPreferred in November
1993, and for the Acquired Fund in its initial public offering of shares in
December 1992 and its initial public offering of MuniPreferred in April 1993.
Under the Management Agreement, each Fund has agreed to pay an annual management
fee as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
MANAGEMENT FEE SCHEDULE
-------------------------------------------------
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 Acquiring Fund paid aggregate management fees of $2,595,700 for the fiscal
year ended October 31, 1995, for an effective management fee rate of 0.64%. The
Acquired Fund paid aggregate management fees of $2,026,982 for the fiscal year
ended October 31, 1995, for an effective management fee rate of 0.64%.
PORTFOLIO MANAGEMENT
The Adviser places orders for the purchase and sale of portfolio securities for
the accounts of the Funds. Consistent with Rule 10f-3 under the 1940 Act,
portfolio securities may be purchased from Nuveen or its affiliates.
Thomas C. Spalding, Jr., a Vice President of the Acquiring Fund, the Acquired
Fund and the Adviser, has general supervisory responsibility with respect to all
Nuveen-sponsored open-end and exchange-traded funds managed by the Adviser. Mr.
Spalding has been employed by Nuveen since 1976 and by the Adviser since 1978.
The day to day management of the Acquiring Fund is currently the responsibility
of John W. Gambla, an Assistant Portfolio Manager of the Adviser since July 1992
and portfolio manager of the Acquiring Fund since its inception. Mr. Gambla
received his MBA from the University of Chicago Graduate School of Business in
June, 1992 and prior thereto was employed by Abbott Laboratories as a financial
analyst. Mr. Gambla currently manages seven Nuveen-sponsored investment
companies.
The day to day management of the Acquired Fund is currently the responsibility
of Thomas J. O'Shaughnessy, an Assistant Portfolio Manager of the Adviser since
January 1991 and portfolio manager of the Acquired Fund since its inception. Mr.
O'Shaughnessy currently manages seven Nuveen-sponsored investment companies.
32
<PAGE> 37
ADDITIONAL INFORMATION ABOUT THE FUNDS
FINANCIAL HIGHLIGHTS
Selected data for a Common share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
OPERATING PERFORMANCE
-------------------------
NET REALIZED DIVIDENDS FROM NET ORGANIZATION PER
AND INVESTMENT INCOME AND OFFERING COMMON
NET ASSET UNREALIZED --------------------------- COSTS AND NET SHARE
VALUE NET GAIN(LOSS) TO TO PREFERRED SHARE ASSET MARKET
BEGINNING INVESTMENT FROM COMMON PREFERRED UNDERWRITING VALUE END VALUE END
OF PERIOD INCOME INVESTMENTS++ SHAREHOLDERS SHAREHOLDERS+ DISCOUNTS OF PERIOD OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACQUIRING FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 $10.990 $1.001 $2.079 $(.747) $(.293) $ -- $13.030 $11.375
1994 14.290 .978 (3.170) (.775) (.196) (.137) 10.990 9.875
7/22/93 to 10/31/93 14.050 .114 .228 (.064) -- (.038) 14.290 13.875
- ------------------------------------------------------------------------------------------------------------------------------------
ACQUIRED FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 $12.560 $1.073 $1.956 $(.840) $(.279) $ -- $14.470 $12.750
1994 15.420 1.100 (2.824) (.946) (.190) -- 12.560 11.125
12/17/92 to 10/31/93 14.050 .779 1.453 (.584) (.095) (.183) 15.420 15.000
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------
RATIOS/SUPPLEMENTAL DATA
-------------------------------------------------
TOTAL TOTAL RATIO OF NET
INVESTMENT RETURN NET ASSETS RATIO OF INVESTMENT
RETURN ON ON NET END OF EXPENSES TO INCOME TO PORTFOLIO
MARKET ASSET PERIOD (IN AVERAGE NET AVERAGE NET TURNOVER
VALUE** VALUE** THOUSANDS) ASSETS+++ ASSETS+++ RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUIRING FUND
- ----------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 23.46% 26.20% $427,908 .83% 5.07% 30%
1994 (23.99) (18.24) 385,692 .83 4.83 25
7/22/93 to 10/31/93 (7.08) 2.16 295,074 .86* 3.16* --
- ----------------------------------------------------------------------------------------------------
ACQUIRED FUND
- ----------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 22.67% 22.56% $328,844 .82% 5.12% 28%
1994 (20.42) (12.88) 300,008 .82 5.14 16
12/17/92 to 10/31/93 4.01 14.13 343,240 .81* 4.75* 10
- ----------------------------------------------------------------------------------------------------
</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 distributions, if any, and
changes in net asset value per share.
+ The amounts shown are based on Common share equivalents.
++ Net of taxes, if applicable.
+++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders.
GENERAL INFORMATION AND HISTORY
The Acquiring Fund and the Acquired Fund are closed-end, diversified management
investment companies. The Acquiring Fund was organized as a business trust under
the laws of the Commonwealth of Massachusetts on May 26, 1993. The Acquired Fund
was organized as a corporation under the laws of the State of Minnesota on
November 4, 1991. Each Fund is registered under the 1940 Act.
In July 1993 the Acquiring Fund issued an aggregate of 20,000,000 common shares
in an initial public offering and commenced operations. In November 1993, the
Acquiring Fund issued 1,040, 1,040 and 1,098 shares of Acquiring Fund
MuniPreferred, Series M, Series W and Series F, respectively, each with a $.01
par value per share, with a liquidation preference of $50,000 per share.
In December 1992 and February 1993, the Acquired Fund issued an aggregate of
15,070,000 common shares in an initial public offering and commenced operations.
In April 1993, the Acquired Fund issued 1,100 and 1,100 shares of Acquired Fund
MuniPreferred, Series T and Series TH, respectively, each with a $.01 par value
per share, with a liquidation preference of $50,000 per share.
The Board of each Fund approved a two for one stock split of each Fund's shares
of MuniPreferred effective as of the close of business on January 6, 1994, which
lowered the liquidation preference of each share from $50,000 to $25,000 and
doubled the number of outstanding shares of such Fund's MuniPreferred.
33
<PAGE> 38
The following table sets forth the number of outstanding common shares and
shares of MuniPreferred, and certain other share information, of each Fund as of
April 30, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(3) (4)
AMOUNT HELD BY AMOUNT OUTSTANDING
(1) (2) FUND FOR ITS EXCLUSIVE OF AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED OWN ACCOUNT SHOWN UNDER(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACQUIRING FUND
Common shares Unlimited 0 20,642,068
Preferred shares Unlimited 0 6,356
ACQUIRED FUND
Common shares 200,000,000 0 15,128,458
Preferred shares 1,000,000 0 4,400
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Acquiring Fund common shares are listed and trade on the NYSE under the
symbol NPX. The Acquired Fund common shares are listed and trade on the NYSE
under the symbol NPE.
The following table sets forth the high and low sales prices for each Fund's
common shares as reported on the consolidated transaction reporting system for
the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ACQUIRING FUND ACQUIRED FUND
------------------------------- -------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 First Quarter 13 5/8 11 3/8 15 12 5/8
Second Quarter 12 10 3/4 13 1/2 12 1/4
Third Quarter 11 3/4 10 1/4 13 1/8 11 3/4
Fourth Quarter 10 5/8 8 7/8 11 7/8 10 1/8
1995 First Quarter 11 1/4 10 1/8 12 3/4 11 3/4
Second Quarter 11 3/4 10 1/2 13 3/8 12 1/4
Third Quarter 11 3/4 10 3/4 13 1/4 12
Fourth Quarter 11 3/4 11 13 12 3/8
1996 First Quarter 12 11 1/4 13 5/8 12 1/2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
On April 30, 1996, the closing sale prices of the Acquiring Fund common shares
and Acquired Fund common shares were $11.25 and $13, respectively. These prices
represent a discount to net asset value of the Acquiring Fund of 11.35% and a
discount to net asset value of the Acquired Fund of 8.32%.
During the period since the inception of the Funds, common shares of both Funds
have traded at prices above and below net asset value; however, the Funds have
generally traded at discounts to net asset value. Since the termination of
common share price stabilization following each Fund's initial public offering,
closing prices, computed at the end of each week, for the Acquiring Fund common
shares have fluctuated between a maximum premium of 0.74% and a maximum discount
of 15.3% and for the Acquired Fund common shares have fluctuated between a
maximum premium of 5.40% and a maximum discount of 14.75%, determined by the
closing price at the end of each week. It is not possible to state whether
common shares of the combined Fund will trade at a premium or discount to net
asset value following the Reorganization, or what the extent of any such premium
or discount might be.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
Each Fund is a closed-end investment company and as such holders of its common
shares will not have the right to cause such Fund to redeem their shares. Each
Fund's common shares trade in the open market at a price that is a function of
several factors, including net asset value and yield. The shares of each Fund
have traded at both premiums and discounts to net asset value. The Board of each
Fund has currently determined that, at least annually, it will consider actions
that might be taken to reduce or eliminate any material discount from net asset
value in respect of such Fund's common shares, which may include the repurchase
of such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value or the conversion of such Fund
to an open-end investment company. There can be no assurance, however, that
either Fund's Board will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount. In
addition, see "Proposal No. 1--The Reorganization--Description of MuniPreferred
Issued by the Acquiring Fund--Dividends--Restrictions on Dividends and Other
Payments" for a discussion of the limitations on each Fund's ability to engage
in certain transactions. The staff of the Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares on the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by a Fund would be borne by that Fund and would not reduce
the stated consideration to be paid to tendering shareholders.
34
<PAGE> 39
Subject to its investment limitations, either Fund may borrow to finance the
repurchase of its shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by either
Fund in anticipation of share repurchases or tenders will reduce that Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by a Fund's Board would have to comply with the Exchange Act and the 1940 Act
and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net asset
value will be made by a Fund's Board at the time it considers such issue, it is
each Board's present policy, which may be changed by such Board, not to
authorize repurchases of such Fund's common shares or a tender offer for such
shares if (a) such transactions, if consummated, would (i) result in the
delisting of such shares from the NYSE, or (ii) impair such Fund's status as a
regulated investment company under the Code (which would make such Fund a
taxable entity, causing its income to be taxed at the corporate level in
addition to the taxation of shareholders who receive dividends from such Fund)
or as a regulated closed-end investment company under the 1940 Act; (b) such
Fund would not be able to liquidate portfolio securities in an orderly manner
and consistent with its investment objectives and policies in order to
repurchase shares; or (c) there is, in such Board's judgment, any (i) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting such Fund, (ii) general
suspension of or limitation on prices for trading securities on the NYSE, (iii)
declaration of a banking moratorium by Federal or state authorities or any
suspension of payment by United States or New York State banks in which such
Fund invests, (iv) material limitation affecting such Fund or the issuers of its
portfolio securities by Federal or State authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (v) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (vi) other event or condition
which would have a materially adverse effect (including any adverse tax effect)
on such Fund or its shareholders if shares of such Fund were repurchased. The
Board of each Fund may in the future modify these conditions in light of
experience.
For each Fund, conversion to an open-end company would require the approval of
the holders of such Fund's outstanding common shares and shares of
MuniPreferred, voting together as a single class, and holders of such Fund's
shares of MuniPreferred voting as a separate class. See "Proposal No. 1--The
Reorganization--Certain Provisions in the Acquiring Fund's Declaration of Trust"
for a discussion of voting requirements applicable to conversion of a Fund to an
open-end company. If a Fund converted to an open-end investment company, it
would be required to redeem all shares of its MuniPreferred then outstanding for
cash at the redemption price specified under "Proposal No. 1--The
Reorganization--Description of MuniPreferred Issued by the Acquiring
Fund--Redemption." In addition, such Fund would be required to liquidate
portfolio securities to meet required and requested redemptions, and its common
shares would no longer be listed on the NYSE. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
companies typically engage in a continuous offering of their shares. Open-end
companies are thus subject to periodic asset in-flows and out-flows that can
complicate portfolio management. The Board of either Fund may at any time
propose conversion of such Fund to an open-end company depending upon its
judgment as to the advisability of such action in light of circumstances then
prevailing.
The repurchase by a Fund of its common shares at prices below net asset value
would result in an increase in the net asset value of those common shares that
remain outstanding. However, there can be no assurance that common share
repurchases or tenders at or below net asset value would result in a Fund's
common shares trading at a price equal to their net asset value. Nevertheless,
the fact that a Fund's common shares may be the subject of repurchase or tender
offers at net asset value from time to time, or that a Fund may be converted to
an open-end company, may reduce any spread between market price and net asset
value that might otherwise exist. Common shares that have been repurchased by a
Fund will be retired automatically and shall have the status of authorized but
unissued shares.
In addition, a purchase by a Fund of its common shares will decrease that Fund's
total assets, which would likely have the effect of increasing such Fund's
expense ratio. Any purchase by a Fund of its common shares at a time when
MuniPreferred shares of such Fund are outstanding will increase the leverage
applicable to the outstanding common shares then remaining.
Before deciding whether to take any action in response to a discount from net
asset value, a Fund's Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of such Fund's portfolio, the
impact of any action that might be taken on such Fund or its shareholders and
market considerations. Based on these considerations, even if a Fund's common
shares should trade at a discount, such Fund's Board may determine that, in the
interest of such Fund and its shareholders, no action should be taken.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT
The Custodian of the assets of each Fund and the transfer agent and dividend
disbursing agent with respect to each Fund's common shares is Chase, with its
principal place of business at One Chase Plaza, New York, New York 10081 and its
corporate transfer office at 770 Broadway, New York, New York 10003. Bankers
Trust Company, 4 Albany Street, New York,
35
<PAGE> 40
New York 10006, a banking corporation organized under the laws of New York, is
the Auction Agent with respect to shares of each Fund's MuniPreferred and acts
as transfer agent, registrar, dividend disbursing agent and redemption agent
with respect to such shares.
TAX MATTERS ASSOCIATED WITH INVESTMENT IN THE FUNDS
The following is based on the advice of Vedder, Price, Kaufman & Kammholz,
counsel to the Funds.
The Federal income tax implications for Acquired Fund shareholders who will own
Acquiring Fund Shares as a result of the Reorganization will be substantially
the same as the Federal income tax implications currently applicable to such
shareholders with respect to their ownership of Acquired Fund Shares. Each Fund
qualifies under Subchapter M of the Code as a regulated investment company and
satisfies conditions which enable dividends on common shares or shares of
MuniPreferred which are attributable to interest on Municipal Obligations to be
exempt from Federal income tax in the hands of owners of such shares, subject to
the possible application of the alternative minimum tax. Each Fund, which
intends to distribute substantially all of its net income and gains to its
shareholders, is required to allocate net capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss) and other taxable
income, if any, proportionately between common shares and shares of
MuniPreferred in accordance with the current position of the Internal Revenue
Service.
The amount of taxable income allocable to shares of a Fund's MuniPreferred will
depend upon the amount of such income realized by the Fund, including any net
income received from taxable temporary investments, but is not generally
expected to be significant. Annually, each Fund will inform each owner of shares
of MuniPreferred of the amount and nature of the income and gains allocated to
the owner by the Fund. If a Fund allocates net capital gains or other taxable
income without first notifying owners of shares of MuniPreferred, in certain
circumstances payments will be made to such owners to offset the tax effect
thereof as described under "Proposal No. 1--The Reorganization--Description of
MuniPreferred Issued by the Acquiring Fund--Dividends and Dividend
Periods--Gross-up Payments" above.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain Municipal Obligations is included as an item of tax preference in
determining the amount of a taxpayer's alternative minimum taxable income. To
the extent that a Fund receives income from Municipal Obligations treated as tax
preference items for purposes of the alternative minimum tax, a portion of the
dividends paid by it, although otherwise exempt from Federal income tax, will be
taxable to owners of shares to the extent that their tax liability is determined
under the 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 exempt-interest dividends received
from each Fund, are included in calculating adjusted current earnings.
A more detailed summary of the provisions of the Code and regulations thereunder
presently in effect as they directly govern the taxation of each Fund and their
respective shareholders appears in the Statement of Additional Information.
These provisions and interpretations are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning Federal income tax matters.
LEGAL OPINIONS
Certain legal matters in connection with the common shares and shares of
MuniPreferred of the Acquiring Fund to be issued pursuant to the Reorganization
will be passed upon by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois.
Vedder, Price, Kaufman & Kammholz will rely as to certain matters of
Massachusetts law on the opinion of Bingham, Dana & Gould, Boston,
Massachusetts.
EXPERTS
The financial highlights of the Funds as of October 31, 1995 appearing in this
Joint Proxy Statement--Prospectus, and the financial statements of the Funds as
of October 31, 1995 appearing in the Statement of Additional Information, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing. Ernst & Young LLP audits and reports on the Funds' annual financial
statements, reviews certain regulatory reports and the Funds' Federal income tax
returns, and performs other professional accounting, auditing, tax and advisory
services when engaged to do so by the Funds.
SHAREHOLDER PROPOSALS
To be considered for presentation at a Fund's Annual Meeting of Shareholders to
be held in 1997, a shareholder proposal must be received at the offices of such
Fund, 333 West Wacker Drive, Chicago, Illinois 60606, not later than February
17, 1997.
36
<PAGE> 41
GENERAL
Management of the Funds does not intend to present and does not have reason to
believe that others will present any items of business at the Annual Meetings,
except as described in this Joint Proxy Statement--Prospectus. However, if other
matters are properly presented at the meetings for a vote, the proxies will be
voted upon such matters in accordance with the judgment of the persons acting
under the proxies.
A list of shareholders of each Fund entitled to be present and to vote at that
Fund's Annual Meeting will be available at the offices of the Funds, 333 West
Wacker Drive, Chicago, Illinois, for inspection by any shareholder of that Fund
during regular business hours for ten days prior to the date of the Annual
Meetings.
Failure of a quorum to be present at either Fund's Annual Meeting will
necessitate adjournment and will subject such Fund to additional expense. The
persons named in the enclosed proxy may also move for an adjournment of the
meeting to permit further solicitation of proxies with respect to any of the
proposals if they determine that adjournment and further solicitation is
reasonable and in the best interests of the shareholders. Under each Fund's
By-Laws, an adjournment of a meeting requires the affirmative vote of a majority
of the shares present in person or represented by proxy at such meeting.
IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
James J. Wesolowski
Secretary
37
<PAGE> 42
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION ("Agreement") is made as of
the first day of May, 1996 by and between Nuveen Insured Premium Income
Municipal Fund 2 (the "Acquiring Fund"), a Massachusetts business trust, and
Nuveen Insured Premium Income Municipal Fund, Inc., a Minnesota corporation (the
"Acquired Fund" and, together with the Acquiring Fund, the "Funds"). Each of the
Funds maintains its principal place of business at 333 West Wacker Drive,
Chicago, Illinois 60606.
This Agreement is intended to be, and is adopted as, a plan of reorganization
(the "Reorganization") pursuant to Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"). The Reorganization will
consist of (a) the acquisition by the Acquiring Fund of substantially all of the
assets of the Acquired Fund in exchange solely for common shares, par value $.01
per share, of the Acquiring Fund ("Acquiring Fund Common Shares"), shares of
Municipal Auction Rate Cumulative Preferred Shares, par value $.01 per share
("MuniPreferred(R)"), of the Acquiring Fund ("Acquiring Fund MuniPreferred" and,
collectively with the Acquiring Fund Common Shares, "Acquiring Fund Shares") and
the assumption by the Acquiring Fund of substantially all of the liabilities of
the Acquired Fund; and (b) the pro rata distribution, after the Closing Date
hereinafter referred to, of such Acquiring Fund Shares to the shareholders of
the Acquired Fund in liquidation of the Acquired Fund as provided herein, all
upon the terms and conditions hereinafter set forth in this Agreement.
In consideration of the premises and of the covenants and agreements set forth
herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR SHARES OF THE
ACQUIRING FUND AND ASSUMPTION OF LIABILITIES, IF ANY; LIQUIDATION OF THE
ACQUIRED FUND.
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, the Acquired Fund
agrees to sell, assign, transfer and deliver, as of the close of
business on the Closing Date (the "Effective Time"), substantially all
of its assets as set forth in paragraph 1.2 to the Acquiring Fund, free
and clear of all liens and encumbrances, except as otherwise provided
herein, and in exchange therefor the Acquiring Fund agrees (a) to assume
substantially all of the liabilities, if any, of the Acquired Fund, as
set forth in paragraph 1.3 and (b) to issue and deliver to the Acquired
Fund, for distribution in accordance with paragraph 1.5 to the Acquired
Fund's shareholders, (i) the number of Acquiring Fund Common Shares
having an aggregate net asset value equal to the value of the assets,
less the liabilities, of the Acquired Fund so transferred, assigned and
delivered, all determined in the manner and as of the date and time
provided in paragraph 2, and (ii) 2,200 shares of Acquiring Fund
MuniPreferred, Series T and 2,200 shares of Series TH. The preferences,
voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption of the Acquiring Fund
MuniPreferred, Series T and Series TH, shall be identical in all
material respects to those of the outstanding shares of Acquiring Fund
MuniPreferred, Series M, Series W and Series F. Dividends on shares of
Acquired Fund MuniPreferred, Series T and Series TH, shall accumulate to
and including the Closing Date and then cease to accumulate, and
dividends on shares of Acquiring Fund MuniPreferred, Series T and Series
TH, respectively, issued pursuant to the Reorganization shall accumulate
in respect of their "Initial Rate Period" from and including the day
after the Closing Date at the same rate borne on the Closing Date by the
shares of Acquired Fund MuniPreferred, Series T and Series TH. The
"Subsequent Rate Periods," "Dividend Payment Dates" in respect of such
"Subsequent Rate Periods" and initial and subsequent "Auctions" for the
shares of Acquiring Fund MuniPreferred, Series T and Series TH, issued
pursuant to this paragraph 1.1 shall be fixed to be identical to the
dividend and auction provisions applicable to the outstanding shares of
Acquired Fund MuniPreferred, Series T and Series TH, respectively, as of
immediately prior to the Effective Time. The "Initial Rate Period" and
"Dividend Payment Rate" in respect of such Initial Rate Period, for
shares of Acquiring Fund MuniPreferred, Series T and Series TH, issued
pursuant to the Reorganization, shall be as set forth in the Joint Proxy
Statement--Prospectus, as hereinafter defined. Such transactions shall
take place at the closing provided for in paragraph 3.1 (the "Closing").
1.2 Except as otherwise provided herein, as of the Effective Time, the
Acquiring Fund shall acquire the assets of the Acquired Fund (consisting
without limitation of all cash, cash equivalents, municipal obligations
and other portfolio securities, receivables (including interest and
dividends receivable) and any deferred or prepaid expenses shown as
assets) as set forth in the respective Statement of Net Assets referred
to in paragraph 7.3 as of the Closing Date. Notwithstanding the
foregoing, the assets to be acquired will not include cash in the amount
necessary to pay expenses of the Acquired Fund in connection with the
transactions contemplated by this Agreement, to pay the dividends and/or
other distributions contemplated by paragraph 1.4 and to pay
shareholders exercising dissenters' rights under Minnesota law. The
Acquired Fund has no plan or intent to sell or otherwise dispose of any
of its assets, other than in the ordinary course of business.
A-1
<PAGE> 43
1.3 Except as otherwise provided herein, as of the Effective Time, the
Acquiring Fund will assume from the Acquired Fund all debts,
liabilities, obligations and duties of the Acquired Fund of whatever
kind or nature, whether absolute, accrued, contingent or otherwise,
arising in the ordinary course of business, whether or not determinable
as of the Effective Time and whether or not specifically referred to in
this Agreement. Notwithstanding the foregoing, the Acquiring Fund will
not assume the Acquired Fund's obligation to pay certain expenses
incurred by the Acquired Fund in connection with the transactions
contemplated by this Agreement, to pay shareholders exercising
dissenters' rights to the extent of the cash held for such purpose as
contemplated by paragraph 1.2 hereof or assume the Acquired Fund's
obligation to pay the dividends and/or other distributions contemplated
by paragraph 1.4; and further provided that the Acquired Fund agrees to
utilize its best efforts to discharge all of its known debts,
liabilities, obligations and duties (other than pursuant to paragraph
1.4) prior to the Effective Time.
1.4 At or prior to the Effective Time, the Acquired Fund (a) will declare
all accumulated but unpaid dividends on the shares of Acquired Fund
MuniPreferred, Series T and Series TH, up to and including the day on
which the Effective Time occurs, such dividends to be paid to the
holders thereof on the Dividend Payment Date in respect of the Initial
Rate Period of shares of Acquiring Fund MuniPreferred, Series T and
Series TH, for which such shares of Acquired Fund MuniPreferred, Series
T and Series TH, were exchanged, and (b) will declare a dividend and/or
other distribution to be paid within 30 days after the Closing Date to
its shareholders of record so that, upon such payment, it will have
distributed all of its investment company taxable income (computed
without regard to any deduction for dividends paid), net tax-exempt
income and realized net capital gains, if any, through and including the
Closing Date.
1.5 On a date as soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), the Acquired Fund will liquidate and
distribute (a) pro rata to its common shareholders of record, determined
as of the Effective Time, the Acquiring Fund Common Shares received by
the Acquired Fund pursuant to paragraph 1.1 (together with any dividends
declared with respect thereto to holders of record as of a time after
the Effective Time and prior to the Liquidation Date ("Interim
Dividends")), in exchange for common shares of the Acquired Fund held by
the common shareholders of such Fund and (b) to its preferred
shareholders of record, determined as of the Effective Time, one share
of Acquiring Fund MuniPreferred, Series T and Series TH (together with
any Interim Dividends), in exchange for each share of Acquired Fund
MuniPreferred, Series T and Series TH, respectively, held by the
preferred shareholders of the Acquired Fund. Such liquidation and
distribution will be accomplished by opening accounts on the books of
the Acquiring Fund in the names of the shareholders of the Acquired Fund
and transferring to each account (x) in the case of a common
shareholder, such shareholder's pro rata share of the Acquiring Fund
Common Shares received by the Acquired Fund (rounded down to the nearest
whole Share) and (y) in the case of a preferred shareholder, a number of
the shares of Acquiring Fund MuniPreferred, Series T and Series TH,
received by the Acquired Fund equal to the number of shares of Acquired
Fund MuniPreferred, Series T and Series TH, respectively, held by such
shareholder, and by paying to the shareholders of the Acquired Fund any
Interim Dividends on such transferred shares.
1.6 After the Liquidation Date, each holder of an outstanding certificate or
certificates representing shares of the Acquired Fund will be entitled
to receive, upon surrender of his or her certificates, a certificate or
certificates representing the number of Acquiring Fund Common Shares
and/or shares of Acquiring Fund MuniPreferred, Series T and Series TH,
and a check for cash in lieu of any fractional Acquiring Fund Common
Share as provided by paragraph 1.7, distributable with respect to the
shares of the Acquired Fund that are surrendered. No dividends or other
distributions payable to the holders of record of the Acquiring Fund
Shares as of a date on or after the Liquidation Date are required to be
paid to any shareholder holding certificates representing shares of the
Acquired Fund ("Acquired Fund Share Certificates") as of the Closing
Date until the Acquiring Fund is notified by the Acquired Fund's
transfer agent that such shareholder has surrendered his or her
outstanding Acquired Fund Share Certificates or, in the event of lost,
stolen or destroyed Acquired Fund Share Certificates, posted adequate
bond or submitted an affidavit of lost certificate, or both. The
Acquired Fund will, at its expense, request its shareholders to
surrender their outstanding Acquired Fund Share Certificates, post
adequate bond and/or submit an affidavit of lost certificate, as the
case may be. Upon the surrender of Acquired Fund Share Certificates (or,
if applicable, after the posting of a bond and/or submission of an
affidavit of lost certificate), there shall be paid to the shareholder
in whose name the Acquiring Fund Shares shall be registered all
dividends or other distributions that shall have become payable with
respect to such Acquiring Fund Shares between the Liquidation Date and
the time of such surrender. In no event shall the shareholder entitled
to receive such dividends and distributions be entitled to receive
interest thereon.
1.7 No certificates or scrip representing fractional Acquiring Fund Common
Shares shall be distributed upon the surrender for exchange of Acquired
Fund Share Certificates. In lieu of distributing any such fractional
Acquiring Fund Common Shares, the Acquired Fund's transfer agent shall,
on behalf of all holders of fractional Acquiring Fund Common Shares, on
or before the tenth business day following the Liquidation Date,
aggregate all such fractional Acquiring Fund Common Shares and sell the
resulting whole Acquiring Fund Common Shares on the New York Stock
Exchange (the "NYSE") for the accounts of such holders, and each such
holder shall be entitled to
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receive his or her respective pro rata share of the net proceeds of such
sale upon surrender of his or her Acquired Fund Share Certificates in
accordance with paragraph 1.6.
1.8 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund shares
surrendered in exchange therefor on the books of the Acquired Fund as of
that time shall be paid by the person to whom such Acquiring Fund Shares
are to be issued as a condition to the registration of such transfer.
1.9 Any reporting responsibility of the Acquired Fund with the Securities
and Exchange Commission (the "SEC"), the NYSE, or any state securities
commission is and shall remain the responsibility of the Acquired Fund
up to and including the Liquidation Date.
1.10 All books and records of the Acquired Fund, including all books and
records required to be maintained under the Investment Company Act of
1940, as amended (the "Investment Company Act"), and the rules and
regulations thereunder, shall be available to the Acquiring Fund from
and after the Closing Date and shall be turned over to the Acquiring
Fund on or prior to the Liquidation Date.
1.11 The Acquired Fund will apply to terminate its registration under the
Investment Company Act promptly following the Liquidation Date and
thereafter shall be dissolved.
2. VALUATION
2.1 The value of the Acquired Fund's assets and liabilities to be acquired
and assumed, respectively, by the Acquiring Fund shall be computed as of
the Effective Time, using the valuation procedures set forth in the
Funds' Joint Proxy Statement--Prospectus (the "Joint Proxy
Statement--Prospectus") to be used in connection with the
Reorganization. The value of the Acquired Fund's net assets shall be
calculated net of the liquidation preference (including accumulated and
unpaid dividends) of all outstanding shares of Acquired Fund
MuniPreferred.
2.2 The net asset value of an Acquiring Fund Common Share shall be computed
as of the Effective Time by dividing the value of the Acquiring Fund's
total assets, less liabilities and less the liquidation preference
(including accumulated and unpaid dividends) of all outstanding shares
of Acquiring Fund MuniPreferred, by the number of Acquiring Fund Common
Shares outstanding (excluding shares issuable pursuant to the
Reorganization), using the valuation procedures set forth in the Joint
Proxy Statement--Prospectus.
2.3 The number of Acquiring Fund Common Shares to be issued in exchange for
the Acquired Fund's net assets shall be calculated by dividing the net
asset value of the Acquired Fund (determined in accordance with
paragraph 2.1) by the net asset value of an Acquiring Fund Common Share
(determined in accordance with paragraph 2.2).
2.4 All computations of net asset value shall be made by or under the
direction of The Chase Manhattan Bank, N.A. ("Chase") in accordance with
its regular practice as custodian of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be September 9, 1996 or such later date as the
parties may agree in writing, provided that the Closing Date shall not
be a date on which an "Auction" would ordinarily occur with respect to
shares of either Fund's MuniPreferred, Series T or Series TH. All acts
taking place at the Closing shall be deemed to take place simultaneously
as of the Effective Time unless otherwise provided. The Closing shall be
at the office of the Acquiring Fund or at such other place as the
parties may agree.
3.2 Chase as custodian for the Acquired Fund, shall deliver to the Acquiring
Fund at the Closing a certificate of an authorized officer stating that
(a) the Acquired Fund's portfolio securities, cash and any other assets
have been transferred in proper form to the Acquiring Fund on the
Closing Date and (b) all necessary taxes, if any, have been paid, or
provision for payment has been made, in conjunction with the delivery of
portfolio securities.
3.3 In the event that on the proposed Closing Date (a) the NYSE is closed to
trading or trading thereon is restricted or (b) trading or the reporting
of trading on the NYSE or elsewhere is disrupted so that accurate
appraisal of the value of the net assets of the Acquired Fund or of the
net asset value per Acquiring Fund Common Share is impracticable, the
Closing Date shall be postponed until the first business day after the
date when such trading shall have been fully resumed and such reporting
shall have been restored, provided that such day is not a day on which
an Auction would ordinarily occur with respect to shares of the Acquired
Fund's MuniPreferred, Series T or Series TH.
3.4 The Acquired Fund shall deliver to the Acquiring Fund on or prior to the
Liquidation Date a list of the names and addresses of its shareholders
and the number of outstanding shares of the Acquired Fund owned by each
such shareholder (the "Shareholder Lists"), all as of the Effective
Time, certified by the Secretary or Assistant Secretary of the Acquired
Fund. The Acquiring Fund shall issue and deliver to the Acquired Fund at
the Closing a confirmation or other evidence satisfactory to the
Acquired Fund that Acquiring Fund Shares have been or will be credited
to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing each party shall deliver
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to the other such bills of sale, checks, assignments, stock
certificates, receipts and other documents as such other party or its
counsel may reasonably request to effect the transactions contemplated
by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Fund represents and warrants as follows:
4.1.1 The Acquired Fund is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Minnesota and has the power to own all of its properties and
assets and, subject to approval of the shareholders of the
Acquired Fund, to carry out the Agreement.
4.1.2 The Acquired Fund is a closed-end diversified management
investment company duly registered under the Investment Company
Act, and such registration is in full force and effect.
4.1.3 The Acquired Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of the
Acquired Fund or of any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquired Fund is
a party or by which the Acquired Fund is bound.
4.1.4 The Acquired Fund has no material contracts or other commitments
(except this Agreement and the obligations to pay the dividends
and/or distributions contemplated by paragraph 1.4) that will not
be terminated on or prior to the Closing Date without any
liability or penalty to the Acquired Fund or the Acquiring Fund.
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to the knowledge of the Acquired Fund,
threatened against the Acquired Fund or any of its properties or
assets. The Acquired Fund knows of no facts that might form the
basis for the institution of such proceedings, and the Acquired
Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
4.1.6 The audited Statement of Net Assets, Statement of Operations,
Statement of Changes in Net Assets, Financial Highlights and
Portfolio of Investments of the Acquired Fund at October 31, 1995
and for the period then ended (copies of which have been furnished
to the Acquiring Fund) have been prepared in accordance with
generally accepted accounting principles consistently applied and
present fairly, in all material respects, the financial condition
of the Acquired Fund as of such date, and there are no known
material liabilities of the Acquired Fund (contingent or
otherwise) not disclosed therein.
4.1.7 Since October 31, 1995, there has not been any materially adverse
change in the Acquired Fund's financial condition, assets,
liabilities or business, other than changes occurring in the
ordinary course of business, or any incurrence by the Acquired
Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this
paragraph 4.1.7, a decline in net asset value or net asset value
per common share of the Acquired Fund as a result of changes in
the value of investments held by the Acquired Fund or a
distribution or payment of dividends shall not constitute a
materially adverse change.
4.1.8 All federal, state and other tax returns and reports of the
Acquired Fund required by law to have been filed or furnished by
the date hereof have been filed or furnished, and all federal,
state and other taxes, interest and penalties shown as due on said
returns and reports have been paid insofar as due, or provision
has been made for the payment thereof, and, to the best of the
Acquired Fund's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to such returns
or reports.
4.1.9 Since it commenced operations, the Acquired Fund has met the
requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year.
4.1.10 The authorized capital of the Acquired Fund consists of
200,000,000 common shares and 1,000,000 preferred shares, par
value $.01 per share. All issued and outstanding shares of the
Acquired Fund are duly and validly issued and outstanding, fully
paid and non-assessable. All issued and outstanding shares of the
Acquired Fund will, at the time of the Closing, be held by the
persons and in the amounts set forth in the applicable Shareholder
List submitted to the Acquiring Fund in accordance with the
provisions of paragraph 3.4. The Acquired Fund does not have
outstanding any options, warrants or other rights to subscribe for
or purchase any shares of the Acquired Fund, nor is there
outstanding any security convertible into shares of the Acquired
Fund.
4.1.11 At the Closing Date, the Acquired Fund will have good and
marketable title to the assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.1 and full right, power and authority
to sell, assign, transfer
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and deliver such assets hereunder free of any liens or other
encumbrances, and, upon delivery and payment for such assets, the
Acquiring Fund will acquire good and marketable title thereto.
4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Trustees of the Acquired Fund
(including the determinations required by Rule 17a-8(a) under the
Investment Company Act) and by all necessary action, other than
shareholder approval, on the part of the Acquired Fund, and,
subject to shareholder approval, this Agreement constitutes a
valid and binding obligation of the Acquired Fund.
4.1.13 The information furnished and to be furnished by the Acquired Fund
for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection
with the transactions contemplated hereby is, and shall be,
accurate and complete in all material respects and is in
compliance, and shall comply, in all material respects with
applicable federal securities and other laws and regulations.
4.1.14 On the effective date of the Registration Statement referred to in
paragraph 5.5, at the time of the Annual Meeting of the Acquired
Fund's shareholders and on the Closing Date, the Joint Proxy
Statement--Prospectus (a) will comply in all material respects
with the provisions and regulations of the Securities Act of 1933,
as amended (the "1933 Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and the Investment Company Act and
the rules and regulations thereunder and (b) will not contain any
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Joint Proxy
Statement--Prospectus made in reliance upon and in conformity with
information furnished by the Acquiring Fund for use therein.
4.1.15 No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act, the 1934 Act
and the Investment Company Act, and such as may be required under
state securities laws.
4.1.16 There are no brokers or finder's fees payable on behalf of the
Acquired Fund in connection with the transactions provided for
herein.
4.2 The Acquiring Fund represents and warrants as follows:
4.2.1 The Acquiring Fund is a business trust duly organized, validly
existing and in good standing under the laws of the Commonwealth
of Massachusetts and has the power to own all of its properties
and assets and, subject to approval of the shareholders of the
Acquiring Fund, to carry out the Agreement.
4.2.2 The Acquiring Fund is a closed-end diversified management
investment company duly registered under the Investment Company
Act, and such registration is in full force and effect.
4.2.3 The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Declaration of Trust or By-Laws of the Acquiring
Fund or of any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquiring Fund
is a party or by which the Acquiring Fund is bound.
4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is
presently pending or, to the knowledge of the Acquiring Fund,
threatened against the Acquiring Fund or any of its properties or
assets. The Acquiring Fund knows of no facts that might form the
basis for the institution of such proceedings, and the Acquiring
Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated.
4.2.5 The audited Statement of Net Assets, Statement of Operations,
Statement of Changes in Net Assets, Financial Highlights and
Portfolio of Investments of the Acquiring Fund at October 31, 1995
and for the period then ended (copies of which have been furnished
to the Acquired Fund) have been prepared in accordance with
generally accepted accounting principles and present fairly, in
all material respects, the financial condition of the Acquiring
Fund as of such date, and there are no known material liabilities
of the Acquiring Fund (contingent or otherwise) not disclosed
therein.
4.2.6 Since October 31, 1995 there has not been any materially adverse
change in the Acquiring Fund's financial condition, assets,
liabilities or business, other than changes occurring in the
ordinary course of business, or any incurrence by the Acquiring
Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquired Fund. For the purposes of this
paragraph 4.2.6, a decline in net asset value or net asset value
per Acquiring Fund
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Common Share as a result of changes in the value of investments
held by the Acquiring Fund or a distribution or payment of
dividends shall not constitute a materially adverse change.
4.2.7 All federal, state and other tax returns and reports of the
Acquiring Fund required by law to have been filed or furnished by
the date hereof have been filed or furnished, and all federal,
state and other taxes, interest and penalties shown as due on said
returns and reports have been paid insofar as due, or provision
has been made for the payment thereof, and, to the best of the
Acquiring Fund's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such
returns or reports.
4.2.8 Since it commenced operations, the Acquiring Fund has met the
requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year.
4.2.9 The authorized capital of the Acquiring Fund consists of an
unlimited number of common shares and preferred shares. All issued
and outstanding Acquiring Fund Common Shares and shares of
Acquiring Fund MuniPreferred are, and all Acquiring Fund Common
Shares and shares of Acquiring Fund MuniPreferred to be issued in
exchange for the net assets of the Acquired Funds pursuant to this
Agreement will be when so issued, duly and validly issued and
outstanding, fully paid and non-assessable, except that
shareholders of the Acquiring Fund may under certain circumstances
be held personally liable for its obligations. Except as
contemplated by this Agreement, the Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for
or purchase any Acquiring Fund Shares, nor is there outstanding
any security convertible into any Acquiring Fund Shares.
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of the Acquiring Fund
(including the determinations required by Rule 17a-8(a) under the
Investment Company Act) and by all necessary action, other than
shareholder approval, on the part of the Acquiring Fund, and,
subject to shareholder approval, this Agreement constitutes a
valid and binding obligation of the Acquiring Fund.
4.2.11 The information furnished and to be furnished by the Acquiring
Fund for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby is, and shall
be, accurate and complete in all material respects and is in
compliance, and shall comply, in all material respects with
applicable federal securities and other laws and regulations.
4.2.12 On the effective date of the Registration Statement, at the time
of the Annual Meeting of the Acquiring Fund shareholders and on
the Closing Date, the Registration Statement and the Joint Proxy
Statement--Prospectus (a) will comply in all material respects
with the provisions of the 1933 Act, the 1934 Act and the
Investment Company Act and the rules and regulations thereunder
and (b) will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
paragraph 4.2.12 shall not apply to statements in or omissions
from the Joint Proxy Statement--Prospectus and the Registration
Statement made in reliance upon and in conformity with information
furnished by the Acquired Fund for use therein.
4.2.13 No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by this Agreement,
except such as have been obtained under the 1933 Act, the 1934 Act
and the Investment Company Act, and such as may be required under
state securities laws.
4.2.14 There are no brokers' or finders' fees payable on behalf of the
Acquiring Fund in connection with the transactions provided for
herein.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as may otherwise be required by paragraph 1.4, each Fund will
operate its respective business in the ordinary course between the date
hereof and the Closing Date, it being understood that the ordinary
course of business will include declaring and paying customary dividends
and other distributions.
5.2 Each Fund will call a shareholders' meeting to consider and act upon
this Agreement and the transactions contemplated herein and to take all
other action necessary to obtain approval of the transactions
contemplated hereby.
5.3 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the
beneficial ownership of the Acquired Fund's shares.
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5.4 Subject to the provisions of this Agreement, each Fund will take or
cause to be taken all action, and will do or cause to be done all
things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.5 Each Fund will prepare and file with the SEC the Joint Proxy
Statement--Prospectus, and the Acquiring Fund will prepare and file with
the SEC a registration statement on Form N-14 relating to the Acquiring
Fund Shares to be issued hereunder (together with any amendments thereof
and supplements thereto, the "Registration Statement"), in compliance
with the 1933 Act, the 1934 Act and the Investment Company Act and the
rules and regulations thereunder.
5.6 Each Fund will, from time to time, as and when requested by the other
Fund, execute and deliver or cause to be executed and delivered all such
assignments and other instruments, and will take or cause to be taken
such further action, as the other Fund may deem necessary or desirable
in order to (a) vest in and confirm to the Acquiring Fund title to and
possession of all the assets of the Acquired Fund to be sold, assigned,
transferred and delivered to the Acquiring Fund pursuant to this
Agreement, (b) vest in and confirm to the Acquired Fund title to and
possession of all the Acquiring Fund Shares to be transferred to the
Acquired Fund pursuant to this Agreement, (c) assume all of the Acquired
Fund's liabilities in accordance with this Agreement, and (d) otherwise
to carry out the intent and purpose of this Agreement.
5.7 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the Investment
Company Act and such of the state Blue Sky or securities laws as it may
deem appropriate in order to continue its operations after the Closing
Date.
5.8 The expenses incurred by the Funds in connection with this Agreement and
the transactions contemplated hereby shall be allocated between the
Funds in a fair and equitable manner based upon estimated savings to
each Fund resulting from the transactions contemplated hereby, whether
or not the transactions contemplated hereby are consummated.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions provided for
herein shall, at its election, be subject to the performance by the Acquiring
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions.
6.1 All representations and warranties of the Acquiring Fund contained in
this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by the President or a Vice President of
the Acquiring Fund, in form and substance satisfactory to the Acquired
Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Fund in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Acquired Fund shall reasonably request.
6.3 The Acquired Fund shall have received an opinion from Vedder, Price,
Kaufman & Kammholz, counsel to the Acquiring Fund, dated as of the
Closing Date, to the effect that:
6.3.1 The Acquiring Fund has been duly organized and is validly existing
as a business trust in good standing under the laws of the
Commonwealth of Massachusetts with requisite power and authority
to own its properties and, to the knowledge of such counsel, to
carry on its business as presently conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
the Acquiring Fund and, assuming due authorization, execution and
delivery of the Agreement by the Acquired Fund, constitutes a
valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equitable principles;
6.3.3 The Acquiring Fund Common Shares and shares of Acquiring Fund
MuniPreferred, Series T and Series TH, to be distributed to
shareholders of the Acquired Fund under this Agreement will, when
issued in exchange for the net assets of the Acquired Fund as
contemplated by this Agreement, be validly issued and outstanding
and fully paid and non-assessable (except to the extent set forth
in the Joint Proxy Statement--Prospectus) and free of preemptive
rights;
6.3.4 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the Acquiring Fund's Declaration of Trust or By-Laws or (ii) any
federal law of the United States, the laws of the State of
Illinois or the laws of the Commonwealth of Massachusetts
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applicable to the Acquiring Fund; provided, however, that such
counsel may state that it expresses no opinion with respect to
federal or state securities laws, other antifraud laws and
fraudulent transfer laws; and provided, further that insofar as
performance by the Acquiring Fund of its obligations under this
Agreement is concerned such counsel may state that it expresses no
opinion as to bankruptcy, insolvency, reorganization, moratorium
or similar laws of general applicability relating to or affecting
creditors' rights;
6.3.5 All regulatory consents, authorizations, approvals and filings
required to be obtained or made by the Acquiring Fund under the
federal laws of the United States, the laws of the Commonwealth of
Massachusetts and state Blue Sky or securities laws for the
consummation of the transactions contemplated by this Agreement
have been obtained or made;
6.3.6 The Acquiring Fund has been registered with the SEC as an
investment company and, to the knowledge of such counsel, no order
has been issued or proceeding instituted to suspend such
registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquiring Fund or any of its properties or assets, and (b) the
Acquiring Fund is not a party to or subject to the provision of
any order, decree or judgment of any court or governmental body,
which materially and adversely affects its business.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions provided
for herein with respect to the Acquired Fund shall, at its election, be subject
to the performance by the Acquired Fund of all the obligations to be performed
by it hereunder on or before the Closing Date and the following further
conditions:
7.1 All representations and warranties of the Acquired Fund contained in
this Agreement shall be true and correct in all material respects as of
the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same
force and effect as if made on and as of the Closing Date.
7.2 The Acquired Fund shall have delivered to the Acquiring Fund a
certificate executed in its name by the President or Vice President of
the Acquired Fund, in form and substance satisfactory to the Acquiring
Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquired Fund in this Agreement
are true and correct at and as of the Closing Date except as they may be
affected by the transactions contemplated by this Agreement, and as to
such other matters as the Acquiring Fund shall reasonably request.
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a Statement of Net Assets, which Statement shall be
prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of its portfolio securities
showing the adjusted tax bases and holding periods of such securities as
of the Closing Date, certified by the Treasurer of the Acquired Fund.
7.4 On or immediately prior to the Closing Date, the Acquired Fund shall
have declared the dividends and/or distributions contemplated by
paragraph 1.4.
7.5 The Acquiring Fund shall have received an opinion from Vedder, Price,
Kaufman & Kammholz, counsel to the Acquired Fund, dated as of the
Closing Date, to the effect that:
7.5.1 The Acquired Fund has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Minnesota with requisite power and authority to own its properties
and, to the knowledge of such counsel, to carry on its business as
presently conducted;
7.5.2 This Agreement has been duly authorized, executed and delivered by
the Acquired Fund and, assuming due authorization, execution and
delivery of the Agreement by the Acquiring Fund, constitutes a
valid and binding obligation of the Acquired Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors'
rights and to general equitable principles;
7.5.3 Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby violate (i)
the Acquired Fund's Articles of Incorporation or By-Laws or (ii)
any federal law of the United States, the laws of the State of
Illinois or the laws of the State of Minnesota applicable to the
Acquired Fund; provided, however, that such counsel may state that
it expresses no opinion with respect to federal or state
securities laws, other antifraud laws and fraudulent transfer
laws; and provided, further that insofar as performance by the
Acquired Fund of its obligations under this Agreement is concerned
such counsel may state that it expresses no opinion as to
bankruptcy, insolvency, reorganization, moratorium or similar laws
of general applicability relating to or affecting creditors'
rights;
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7.5.4 All regulatory consents, authorizations, approvals and filings
required to be obtained or made by the Acquired Fund under the
federal laws of the United States, the laws of the State of
Minnesota and state Blue Sky or securities laws for the
consummation of the transactions contemplated by this Agreement
have been obtained or made;
7.5.5 The Acquired Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration; and
7.5.6 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquired Fund or any of its properties or assets, and (b) the
Acquired Fund is not a party to or subject to the provision of any
order, decree or judgment of any court or governmental body, which
materially and adversely affects its business.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite votes of (a) the Board of Trustees of the
Acquiring Fund and the Board of Directors of the Acquired Fund,
including as to the determinations required by Rule 17a-8(a) under the
Investment Company Act and (b) the holders of the outstanding shares of
the Acquiring Fund and the Acquired Fund in accordance with the
provisions of the Acquiring Fund's Declaration of Trust and By-Laws and
the Acquired Fund's Articles of Incorporation and By-Laws and the
requirements of the NYSE; each Fund shall have delivered certified
copies of the resolutions evidencing such approvals to the other Fund;
and the Acquiring Fund shall have given Bankers Trust Company or its
successor, and the Depository Trust Company or its successor, at least
five business days notice of such approval.
8.2 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated herein.
8.3 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including
"no-action" positions of such federal or state authorities) deemed
necessary by the Acquiring Fund or the Acquired Fund to permit
consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a materially
adverse effect on the assets or properties of the Acquiring Fund or the
Acquired Fund, provided that either party hereto may waive any part of
this condition as to itself.
8.4 The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending the effectiveness thereof shall have
been issued, and, to the best knowledge of the Funds no investigation or
proceeding under the 1933 Act for that purpose shall have been
instituted or be pending, threatened or contemplated.
8.5 The Funds shall have received an opinion of Vedder, Price, Kaufman &
Kammholz satisfactory to the Funds and based upon such reasonably
requested representations and warranties as requested by counsel,
substantially to the effect that, for federal income tax purposes:
8.5.1 The acquisition by the Acquiring Fund of substantially all the
assets of the Acquired Fund in exchange solely for Acquiring Fund
Shares and the assumption by the Acquiring Fund of the Acquired
Fund's liabilities, if any, followed by the distribution by the
Acquired Fund of the Acquiring Fund Shares to the shareholders of
the Acquired Fund in exchange for their Acquired Fund shares in
complete liquidation of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the
Internal Revenue Code, and the Acquiring Fund and the Acquired
Fund each will be "a party to a reorganization" within the meaning
of Section 368(b) of the Internal Revenue Code;
8.5.2 The Acquired Fund's shareholders will recognize no gain or loss
upon the exchange of all of their Acquired Fund shares for
Acquiring Fund Shares in complete liquidation of the Acquired
Fund, except with respect to cash received for a fractional
Acquiring Fund Common Share, if any;
8.5.3 No gain or loss will be recognized by the Acquired Fund upon the
transfer of substantially all its assets to the Acquiring Fund in
exchange solely for Acquiring Fund Shares and the assumption by
the Acquiring Fund of the Acquired Fund's liabilities, if any, and
with respect to the subsequent distribution of those Acquiring
Fund Shares to the Acquired Fund shareholders in complete
liquidation of the Acquired Fund;
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<PAGE> 51
8.5.4 No gain or loss will be recognized by the Acquiring Fund upon the
acquisition of substantially all the Acquired Fund's assets in
exchange solely for Acquiring Fund Shares and the assumption of
the Acquired Fund's liabilities, if any;
8.5.5 The basis of the assets acquired by the Acquiring Fund will be, in
each instance, the same as the basis of those assets when held by
the Acquired Fund immediately before the transfer, and the holding
period of such assets acquired by the Acquiring Fund will include
the holding period thereof when held by the Acquired Fund;
8.5.6 The basis of the Acquiring Fund Shares to be received by the
Acquired Fund's shareholders upon liquidation of the Acquired Fund
will be, in each instance, the same as the basis of the Acquired
Fund shares surrendered in exchange therefor, decreased by any
cash received and increased by the amount of gain recognized on
the exchange; and
8.5.7 The holding period of the Acquiring Fund Shares to be received by
the Acquired Fund's shareholders will include the period during
which the Acquired Fund shares to be surrendered in exchange
therefor were held, provided such Acquired Fund shares were held
as capital assets by those shareholders on the date of the
exchange.
8.6 The Acquiring Fund shall have obtained written confirmation from both
Moody's Investors Service, Inc. and Standard & Poor's Corporation that
(a) consummation of the transactions contemplated by this Agreement will
not impair the "aaa" and AAA ratings, respectively, assigned by such
rating agencies to the existing shares of Acquiring Fund MuniPreferred,
Series M, Series W and Series F, and (b) the shares of Acquiring Fund
MuniPreferred, Series T and Series TH, to be issued pursuant to
paragraph 1.1 will be rated "aaa" or AAA, respectively, by such rating
agencies.
9. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
9.1 This Agreement constitutes the entire agreement between the Funds.
9.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereby.
10. TERMINATION
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the shareholders of the Funds:
10.1 By mutual agreement of the Funds;
10.2 By either Fund, if a condition to the obligations of such Fund shall not
have been met and it reasonably appears that it will not or cannot be
met; or
10.3 By either Fund, if the Closing shall not have occurred on or before
January 31, 1997;
In the event of any such termination, there shall be no liability for damages on
the part of either Fund (other than the liability of the Funds to pay expenses
pursuant to paragraph 5.8) or any Director, Trustee or officer of any Fund.
11. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by the
parties; provided, however, that following the shareholders' meetings called by
the Funds pursuant to paragraph 5.2, no such amendment may have the effect of
changing the provisions for determining the number of Acquiring Fund Common
Shares or shares of Acquiring Fund MuniPreferred to be distributed to the
Acquired Fund's shareholders under this Agreement without their further approval
and the further approval of the Funds' Boards of Directors or Trustees
(including the determination required by Rule 17a-8(a) under the Investment
Company Act), and provided further that nothing contained in this paragraph 11
shall be construed as requiring additional approval to amend this Agreement to
change the Closing Date or the Effective Time.
12. NOTICES
Any notice, report, demand or other communication required or permitted by any
provision of this Agreement shall be in writing and shall be given by hand
delivery, prepaid certified mail or overnight delivery service addressed to John
Nuveen & Co. Incorporated, 333 West Wacker Drive, Chicago, Illinois 60606,
Attention: James J. Wesolowski.
13. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
13.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
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13.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of Illinois.
13.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by
reason of this Agreement.
13.5 All persons dealing with the Acquiring Fund must look solely to the
property of the Acquiring Fund for the enforcement of any claims against
the Acquiring Fund as neither the Trustees, officers, agents or
shareholders of the Acquiring Fund assume any personal liability for
obligations entered into on behalf of the Acquiring Fund.
13.6 All persons dealing with the Acquired Fund must look solely to the
property of the Acquired Fund for the enforcement of any claims against
the Acquired Fund as neither the Directors, officers, agents or
shareholders of the Acquired Fund assume any personal liability for
obligations entered into on behalf of the Acquired Fund.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
by the President or Vice President of each Fund.
<TABLE>
<S> <C>
NUVEEN INSURED PREMIUM INCOME NUVEEN PREMIUM INCOME MUNICIPAL
MUNICIPAL FUND 2 FUND, INC.
/s/ TIMOTHY R. /s/ TIMOTHY R. SCHWERTFEGER
SCHWERTFEGER By:
By: --------------------------------------------
- -------------------------------------------- President
President
</TABLE>
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<PAGE> 53
ANNEX B
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT
RELATING TO THE ACQUIRED FUND DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.--Subdivision 1. Actions creating
rights. A shareholder of a corporation may dissent from, and obtain payment for
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or
new class or series with similar or different voting rights; except that
an amendment to the articles of an issuing public corporation that
provides that section 302A.671 does not apply to a control share
acquisition does not give rise to the right to obtain payment under this
section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court,
or a disposition for cash on terms requiring that all or substantially all
of the net proceeds of disposition be distributed to the shareholders in
accordance with their respective interests within one year after the date
of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
Subdivision 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subdivision 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subdivision 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.--Subdivision
1. Definitions. (a) For purposes of this section, the terms defined in this
subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action referred to in section 302A.471, subdivision 1 or the successor
by merger of that issuer.
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(c) "Fair value of the shares" means the value of the shares of a corporation
immediately before the effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date of
the corporate action referred to in section 302A.471, subdivision 1 up to and
including the date of payment, calculated at the rate provided in section 549.09
for interest on verdicts and judgments.
Subdivision 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subdivision 3. Notice of dissent. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
Subdivision 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
(b) In order to received the fair value of the shares, a dissenting shareholder
must demand payment and deposit certificated shares or comply with any
restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
Subdivision 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description of
the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a) from
a person who was not a shareholder on the date the action dissented from was
first announced to the public or who is dissenting on behalf of a person who was
not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit of
certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
Subdivision 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subdivision 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest.
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<PAGE> 55
The petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subdivision 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply substantially
with this section, the court may assess all fees and expenses of any experts or
attorneys as the court deems equitable. These fees and expenses may also be
assessed against a person who has acted arbitrarily, vexatiously, or not in good
faith in bringing the proceeding, and may be awarded to a party injured by those
actions.
(c) The court may award, in its discretion, fees and expenses to an attorney for
the dissenters out of the amount awarded to the dissenters, if any.
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<PAGE> 56
ANNEX C
GLOSSARY OF TERMS
Capitalized terms used but not defined in this Annex C have the meanings given
them in the forepart of this Joint Proxy Statement--Prospectus.
" 'AA' COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate Period of
shares of a series of Acquiring Fund MuniPreferred, means: (1)(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
certain commercial paper dealers to the Auction Agent for the close of business
on the Business Day next preceding such date.
"AGENT MEMBER" means a member of or participant in the Securities Depository
that will act on behalf of a Bidder.
"ALL HOLD ORDER RATE," with respect to a Rate Period of shares of a series of
Acquiring Fund MuniPreferred for which an Auction is held, means the lesser of
the Kenny Index (if the Rate Period for which the Auction is held consists of
fewer than 183 Rate Period Days) or the product of (i)(1) 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, (2) 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 (3) 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 (i)(1), (2) or (3),
as applicable, being referred to herein as the "Benchmark Rate"), and (ii) 1
minus the maximum marginal regular Federal income tax rate, if any, applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income, whichever is greater; provided, however,
that if the Acquiring Fund has notified the Auction Agent of its intent to
allocate to shares of Acquiring Fund MuniPreferred 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 (A) if the Taxable Yield Rate (as defined below) is greater than the
Benchmark Rate, then the Benchmark Rate, or (B) 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 (ii) and (y) the product of the maximum
marginal regular Federal income tax rate, if any, applicable to ordinary income
or the maximum marginal regular Federal corporate income tax rate 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 Acquiring Fund 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.
"APPLICABLE RATE," with respect to shares of a series of Acquiring Fund
MuniPreferred, means the rate per annum at which dividends are payable on shares
of such series for any Rate Period thereof.
"AUCTION AGENCY AGREEMENT" means an agreement between the Acquiring 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 each series of Acquiring Fund MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
"AUCTION AGENT" means the entity appointed as such by a resolution of the
Acquiring Fund's Board.
"BIDDER" means a Beneficial Owner or a Potential Beneficial Owner placing an
Order with its Broker-Dealer or an Existing Holder or Potential Holder placing
an Order with the Auction Agent or on whose behalf an Order is placed with an
Auction Agent.
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"BROKER-DEALER" means any broker-dealer, commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer, 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 Acquiring Fund and has
entered into a Broker-Dealer Agreement that remains effective.
"BROKER-DEALER AGREEMENT" means an agreement among the Acquiring Fund, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the Auction Procedures.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close.
"DATE OF ORIGINAL ISSUE," with respect to shares of a series of Acquiring Fund
MuniPreferred, means the day on which the Acquiring Fund initially issued shares
of such series (in the case of Acquiring Fund MuniPreferred, Series M, Series W
and Series F) or the day following the day on which the Effective Time occurs
(in the case of Acquiring Fund MuniPreferred, Series T and Series TH).
"DIVIDEND PAYMENT DATE," with respect to shares of a series of Acquiring Fund
MuniPreferred, means any date on which dividends on shares of such series are
payable as provided under "Proposal No. 1--The Reorganization--Description of
MuniPreferred Issued by the Acquiring Fund--Dividends and Dividend Periods."
"DIVIDEND PERIOD," with respect to shares of a series of Acquiring Fund
MuniPreferred, means the period from and including the Date of Original Issue
(in the case of Acquiring Fund MuniPreferred, Series M, Series W and Series F)
or the day following the Date of Original Issue (in the case of Acquiring Fund
MuniPreferred, Series T and Series TH) 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.
"EXISTING HOLDER," with respect to shares of a series of Acquiring Fund
MuniPreferred, means a Broker-Dealer (or any such other person as may be
permitted by the Acquiring Fund) that is listed on the records of the Auction
Agent as a holder of shares of such series.
"INITIAL RATE PERIOD," with respect to shares of a series of Acquiring Fund
MuniPreferred, means the period from and including the Date of Original Issue to
but excluding November 23, 1993, November 18, 1993, and November 22, 1993 (in
the case of Acquiring Fund MuniPreferred, Series M, Series W and Series F,
respectively) and the period consisting of the number of days following the Date
of Original Issue that would have remained in the rate period of Acquired Fund
MuniPreferred, Series T and Series TH, but for the Reorganization (in the case
of Acquiring Fund MuniPreferred, Series T and Series TH).
"MINIMUM RATE PERIOD" means any Rate Period consisting of 7 Rate Period Days.
"POTENTIAL HOLDER," with respect to shares of a series of Acquiring Fund
MuniPreferred, means a Broker-Dealer (or any such other person as may be
permitted by the Acquiring 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.
"RATE MULTIPLE," for shares of a series, an Acquiring Fund MuniPreferred on any
Auction Date for shares of such series, means a percentage, determined as set
forth below, based on the prevailing rating of shares of such series in effect
at the close of business on the Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
---------------------------------------------------
PREVAILING RATING PERCENTAGE
---------------------------------------------------
<S> <C>
"aa3"/AA- or higher 110%
"a3"/A- 125%
"baa3"/BBB- 150%
"ba3"/BB- 200%
Below "ba3"/BB- 250%
---------------------------------------------------
</TABLE>
provided, however, that in the event the Acquiring 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
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income, whichever is
greater. If the ratings for shares of a series of Acquiring Fund MuniPreferred
are split between two of the foregoing categories, the lower rating will
determine the prevailing rating of shares of such series. If the shares of a
series of Acquiring Fund MuniPreferred are rated by only one rating agency, such
rating will be the prevailing rating of shares of such series.
"RATE PERIOD," with respect to shares of a series of Acquiring Fund
MuniPreferred, means the Initial Rate Period of shares of such series and any
Subsequent Rate Period of such shares of such series.
C-2
<PAGE> 58
"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 either
(i) the shortening or lengthening, as the case may be, of such Rate Period or
Dividend Period as set forth under "Proposal No. 1--The
Reorganization--Description of MuniPreferred Issued by the Acquiring
Fund--Dividends and Dividend Periods" because the day on which dividends would
otherwise be payable is not a Business Day or (ii) the shortening of such Rate
Period pursuant to the provisions relating to the designation of Special Rate
Periods as set forth in the Statement of Additional Information under
"Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--Designation of Special Rate Periods."
"REFERENCE RATE" means (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.
"SECURITIES DEPOSITORY" means The Depository Trust Company and its successors
and assigns or any other securities depository selected by the Acquiring Fund
which agrees to follow the procedures required to be followed by such securities
depository in connection with shares of Acquiring Fund MuniPreferred.
"SPECIAL RATE PERIOD," with respect to shares of a series of Acquiring Fund
MuniPreferred, means any Subsequent Rate Period of shares of such series
commencing on the date designated by the Acquiring Fund, as set forth under
"Proposal No. 1--The Reorganization--Description of MuniPreferred Issued by the
Acquiring Fund--Dividends and Dividend Periods--Designation of Special Rate
Periods," and ending on the last day of the last Dividend Period thereof.
"SUBMISSION DEADLINE" means 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.
"SUBMITTED BID" means a valid Bid submitted or deemed submitted to the Auction
Agent by a Broker-Dealer by the Submission Deadline.
"SUBMITTED HOLD ORDER" means a valid Hold Order submitted or deemed submitted to
the Auction Agent by a Broker-Dealer by the Submission Deadline.
"SUBSEQUENT RATE PERIOD," with respect to shares of a series of Acquiring Fund
MuniPreferred, means any period from and including the first day following the
Initial Rate Period of shares of such series to but excluding the next Dividend
Payment Date for shares of such series and any period thereafter from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.
"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,
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index or any 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 Acquiring Fund
MuniPreferred) and S&P (if S&P is then rating the shares of Acquiring Fund
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.
"TREASURY BILL" means a direct obligation of the U.S. government having a
maturity at the time of issuance of 364 days or less.
"TREASURY BILL RATE," on any date for any Rate Period, means: (a) 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
C-3
<PAGE> 59
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 (b) 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 certain U.S. government securities dealers to the Auction Agent.
"TREASURY NOTE" means 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.
"TREASURY NOTE RATE," on any date for any Rate Period, means: (a) 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 (b) in the event that any
such rate is not published in The Wall Street Journal, then the yield as
calculated by reference to the arithmetic average of the bid price quotations of
the most recently auctioned Treasury Note with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of the
close of business on the Business Day immediately preceding such date obtained
from certain U.S. government securities dealers to the Auction Agent.
C-4
<PAGE> 60
JOINT PROXY STATEMENT-PROSPECTUS
JUNE 17, 1996
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND, INC.
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND 2
NPX 7/96
<PAGE> 61
NUVEEN INSURED PREMIUM
INCOME MUNICIPAL FUND 2
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the common shares and
shares of MuniPreferred(R) (collectively, the "Acquiring Fund Shares") to be
issued by Nuveen Insured Premium Income Municipal Fund 2 (the "Acquiring Fund")
pursuant to an Agreement and Plan of Reorganization and Liquidation dated as of
May 1, 1996 (the "Agreement") by and between the Acquiring Fund and Nuveen
Insured Premium Income Municipal Fund, Inc. (the "Acquired Fund" and, together
with the Acquiring Fund, the "Funds"), providing for a reorganization (the
"Reorganization") in which, among other things, the Acquiring Fund would (a)
acquire substantially all of the assets of the Acquired Fund in exchange for
newly issued Acquiring Fund Shares and (b) assume substantially all of the
liabilities of the Acquired Fund. This Statement of Additional Information does
not constitute a prospectus, but should be read in conjunction with the Joint
Proxy Statement--Prospectus relating to the Acquiring Fund Shares dated June 17,
1996. This Statement of Additional Information does not include all information
that a shareholder should consider before voting on the proposals contained in
the Joint Proxy Statement--Prospectus, and shareholders should obtain and read
the Joint Proxy Statement--Prospectus prior to voting. A copy of the Joint Proxy
Statement--Prospectus may be obtained without charge by mailing a written
request to either of the Funds, Attention: Administration, 333 West Wacker
Drive, Chicago, Illinois 60606 or by calling (800) 257-8787. Capitalized terms
used but not defined in the text of this Statement of Additional Information
have the meanings given them in Annex D hereto.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies of the Funds........................................... S-2
Certain Trading Strategies of the Funds................................................... S-9
Management of the Funds................................................................... S-11
Portfolio Transactions of the Funds....................................................... S-12
Description of MuniPreferred Issued by the Acquiring Fund................................. S-13
Description of the Auctions for MuniPreferred Issued by the Acquiring Fund................ S-29
Tax Matters Associated with Investment in the Funds....................................... S-40
Index to Financial Statements............................................................. F-1
Index to Pro Forma Financial Statements................................................... P-1
Ratings of Investments (ANNEX A).......................................................... A-1
Auction Procedures (ANNEX B).............................................................. B-1
Settlement Procedures (ANNEX C)........................................................... C-1
Glossary of Terms (ANNEX D)............................................................... D-1
Portfolio Insurance (ANNEX E)............................................................. E-1
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS JUNE 17, 1996.
<PAGE> 62
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
GENERAL
Each Fund's primary investment objective is to provide, through investment
in a professionally managed portfolio of tax-exempt Municipal Obligations,
current income exempt from regular Federal income taxes, consistent with each
Fund's investment policies. Each Fund's secondary investment objective is the
enhancement of portfolio value relative to the municipal bond market through
investments in tax-exempt Municipal Obligations that, in the opinion of the
Adviser, are underrated or undervalued or that represent municipal market
sectors that are undervalued. This secondary investment objective will
ordinarily involve purchase by each Fund of (1) underrated or undervalued
uninsured Municipal Objections, which would then be covered by insurance, or (2)
undervalued insured Municipal Obligations. See "Portfolio Investments."
Underrated Municipal Obligations are those whose ratings do not, in the
Adviser's opinion, reflect their true value. Municipal Obligations may be
underrated because of the time that has elapsed since their most recent rating,
or because of positive factors that may not have been fully taken into account
by rating agencies, or for other similar reasons. Municipal Obligations that are
undervalued or that represent undervalued municipal market sectors are Municipal
Obligations that, in the Adviser's opinion, are worth more than the value
assigned to them in the marketplace. Municipal Obligations of particular types
or purposes (e.g., hospital bonds, industrial revenue bonds or bonds issued by a
particular municipal issuer) may be undervalued because there is a temporary
excess of supply in that market sector, or because of a general decline in the
market price of Municipal Obligations of the market sector for reasons that do
not apply to the particular Municipal Obligations that are considered
undervalued. Each Fund's investment in underrated or undervalued Municipal
Obligations is based on the Adviser's belief that the prices of such Municipal
Obligations should ultimately reflect their true value. Accordingly,
"enhancement of portfolio value relative to the municipal bond market" refers to
each 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. Thus, each Fund's secondary investment objective
is not intended to suggest that capital appreciation is itself an objective of a
Fund. Instead, each Fund will seek enhancement of portfolio value relative to
the municipal bond market by prudent selection of Municipal Obligations,
regardless of which direction the market may move. Each Fund's policy of
investing in insured Municipal Obligations may limit the extent to which it will
be able to achieve its secondary investment objective. Any capital appreciation
realized by a Fund will generally result in the distribution of taxable capital
gains to Fund shareholders. Each Fund currently is required to allocate net
capital gains and other income taxable for Federal income tax purposes, if any,
proportionately between its common shares and shares of its MuniPreferred, and
dividends paid on shares of its MuniPreferred during specified periods will
include an allocated portion of any such net capital gains and other taxable
income. See "Tax Matters Associated with Investment in the Funds" and
"Description of the Auctions for MuniPreferred Issued by the Acquiring
Fund--Auction Dates; Advance Notice of Allocation of Taxable Income" below. Each
Fund's investment objectives are fundamental policies of that Fund.
Neither Fund has established a limit on the percentage of its portfolio
that may be invested in Municipal Obligations subject to the alternative minimum
tax provisions of Federal tax law, and a substantial portion of the income
produced by a Fund may be includable in alternative minimum taxable income in
respect of that Fund. Shares of a Fund 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 a Fund's shares will depend
upon a comparison of the after-tax yield likely to be provided from that Fund
with that from comparable tax-exempt investments not subject to the alternative
minimum tax, and from comparable fully taxable investments, in light of each
such investor's tax position. Special considerations apply to corporate
investors. See "Tax Matters Associated with Investment in the Funds" below.
PORTFOLIO INVESTMENTS
Except to the extent a Fund invests in temporary investments as described
below, each Fund will, as a fundamental policy, invest all of its assets in
tax-exempt Municipal Obligations which are either covered by insurance
guaranteeing the timely payment of principal and interest thereon or backed by
an escrow or trust account containing sufficient U.S. Government or U.S.
Government agency securities to ensure timely payment of principal and interest.
Municipal Obligations backed by an escrow or trust account will not constitute
more than 20% of the Fund's assets.
Each insured Municipal Obligation held by a Fund will either be (1) covered
by an insurance policy applicable to a specific security, whether obtained by
the issuer of the security or a third party at the time of original issuance
("Original Issue Insurance") or by a Fund or a third party subsequent to the
time of original issuance ("Secondary Market Insurance"), or (2) covered by a
master municipal insurance policy purchased by a Fund ("Portfolio
S-2
<PAGE> 63
Insurance"). While each Fund currently intends to obtain one or more policies of
Portfolio Insurance, each Fund, depending on the availability of such policies
on terms favorable to that Fund, may determine not to obtain such policies and
to emphasize investments in Municipal Obligations insured under Original Issue
Insurance or Secondary Market Insurance. In any event, each Fund will only
obtain policies of Portfolio Insurance issued by insurers whose claims-paying
ability is rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") or "AAA"
by Standard & Poor's, a division of McGraw Hill Companies ("S&P"). Each Fund
currently intends to obtain insurance policies only from mono-line insurers
specializing in insuring municipal debt. Municipal Obligations covered by
Original Issue Insurance or Secondary Market Insurance are themselves assigned a
rating of "Aaa" or "AAA," as the case may be, by virtue of the "Aaa" or "AAA"
claims-paying ability of the insurer and would generally be assigned a lower
rating if the rating were based primarily upon the credit characteristics of the
issuer without regard to the insurance feature. By way of contrast, the ratings,
if any, assigned to Municipal Obligations insured under Portfolio Insurance will
be based primarily upon the credit characteristics of the issuers without regard
to the insurance feature, and will generally carry a rating that is below "Aaa"
or "AAA." While in the portfolio of a Fund, however, a Municipal Obligation
backed by Portfolio Insurance will effectively be of the same quality as a
Municipal Obligation issued by an issuer of comparable credit characteristics
that is backed by Original Issue Insurance or Secondary Market Insurance.
Each Fund's policy of investing in Municipal Obligations insured by
insurers whose claims-paying ability is rated "Aaa" or "AAA" will apply only at
the time of the purchase of a security, and each Fund will not be required to
dispose of securities in the event Moody's or S&P, as the case may be,
downgrades its assessment of the claims-paying ability of a particular insurer
or the credit characteristics of a particular issuer. In this connection, it
should be noted that in the event Moody's or S&P or both should downgrade its
assessment of the claims-paying ability of a particular insurer, it could also
be expected to downgrade the ratings assigned to Municipal Obligations insured
under Original Issue Insurance or Secondary Market Insurance issued by such
insurer, and Municipal Obligations insured under Portfolio Insurance issued by
such insurer would also be of reduced quality in the portfolio of a Fund.
Moody's and S&P continually assess the claims-paying ability of insurers and the
credit characteristics of issuers, and there can be no assurance that they will
not downgrade their assessments subsequent to the time the Fund purchases
securities. See "Bond Insurance" below.
In addition to insured Municipal Obligations, each Fund may invest in
Municipal Obligations rated "Aaa" or "AAA" that are entitled to the benefit of
an escrow or trust account which contains securities issued or guaranteed by the
U.S. Government or U.S. Government agencies and backed by the full faith and
credit of the United States sufficient in amount to ensure the payment of
interest and principal on the original interest payment and maturity dates
("collateralized obligations"). Such collateralized obligations generally will
not be insured and will include, but are not limited to, Municipal Obligations
that have been (1) advance refunded where the proceeds of the refunding have
been used to purchase U.S. Government or U.S. Government agency securities that
are placed in escrow and whose interest or maturing principal payments, or both,
are sufficient to cover the remaining scheduled debt service on the Municipal
Obligations, and (2) issued under state or local housing finance programs which
use the issuance proceeds to fund mortgages that are then exchanged for U.S.
Government or U.S. Government agency securities and deposited with a trustee as
security for the Municipal Obligations. Such collateralized obligations are
normally regarded as having the credit characteristics of the underlying U.S.
Government or U.S. Government agency securities.
Each Fund emphasizes investments in Municipal Obligations with long-term
maturities in order to maintain an average portfolio maturity of 20-30 years,
but the average maturity may be shortened from time to time depending on market
conditions. As a result, each Fund's portfolio at any given time may include
both long-term and intermediate-term Municipal Obligations. If current market
conditions persist, each Fund expects it will concentrate its initial portfolio
in Municipal Obligations which may not be redeemed at the option of the issuer
for approximately seven to eight years from the date of purchase by that Fund.
See "Certain Trading Strategies of the Funds--Portfolio Trading and Turnover
Rate." Moreover, during temporary defensive periods (e.g., times when, in the
Adviser's opinion, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which
long-term or intermediate-term Municipal Obligations are available), and in
order to keep cash on hand fully invested, each Fund may invest any percentage
of its assets in temporary investments, the income on which may be subject to
regular Federal income taxes. Temporary investments are high quality, short-term
securities which may be either tax-exempt or taxable. Each Fund intends to
invest in taxable temporary investments only in the event that suitable
tax-exempt temporary investments are not available at reasonable prices and
yields. Tax-exempt temporary investments include various obligations issued by
state and local governmental issuers, such as tax-exempt notes (bond
anticipation notes, tax anticipation notes and revenue anticipation notes or
other such Municipal Obligations maturing in three years or less from the date
of
S-3
<PAGE> 64
issuance) and municipal commercial paper. Each Fund will invest only in taxable
temporary investments which are U.S. Government securities or securities rated
within the highest grade by Moody's or S&P, and which mature within one year
from the date of purchase or carry a variable or floating rate of interest. See
Appendix A for a general description of Moody's and S&P's ratings of securities
in such categories. Taxable temporary investments of a Fund may include
certificates of deposit issued by U.S. banks with assets of at least $1 billion,
or commercial paper or corporate notes, bonds or debentures with a remaining
maturity of one year or less, or repurchase agreements. See "Certain Trading
Strategies of The Funds--Repurchase Agreements." To the extent each Fund invests
in temporary investments the income on which is subject to regular Federal
income taxes, the Fund will not at such times be in a position to achieve its
investment objective of providing current income exempt from regular Federal
income taxes.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and the Funds will not be
required to dispose of securities in the event Moody's or S&P downgrades its
assessment of the credit characteristics of a particular issuer.
BOND INSURANCE
Each insured Municipal Obligation in which a Fund invests will be covered
by Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
While each Fund has obtained several policies of Portfolio Insurance, a Fund may
emphasize investments in Municipal Obligations insured under Original Issue
Insurance or Secondary Market Insurance. Each Fund has obtained Portfolio
Insurance from the insurers described in Annex E and may in the future obtain
Portfolio Insurance from insurers not described therein. In any event, each Fund
has obtained and in the future will only obtain Portfolio Insurance issued by
insurers whose claims-paying ability is rated "Aaa" by Moody's or "AAA" by S&P.
There is no limitation on the percentage of a Fund's assets that may be invested
in Municipal Obligations insured by any given insurer.
Original Issue Insurance. Original Issue Insurance is purchased with
respect to a particular issue of Municipal Obligations by the issuer thereof or
a third party in conjunction with the original issuance of such Municipal
Obligations. Under such insurance, the insurer unconditionally guarantees to the
holder of the Municipal Obligation the timely payment of principal and interest
on such obligation when and as such payments shall become due but shall not be
paid by the issuer, except that in the event of any acceleration of the due date
of the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the payments guaranteed may be made in such amounts and at such times
as payments of principal would have been due had there not been such
acceleration. The insurer is responsible for such payments less any amounts
received by the holder from any trustee for the Municipal Obligation issuers or
from any other source. Original Issue Insurance does not guarantee payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control Municipal Obligations), the value of the
shares of the Fund or the market value of Municipal Obligations, or payments of
any tender purchase price upon the tender of the Municipal Obligations. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on New York Municipal Obligations resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.
In the event that interest on or principal of a Municipal Obligation
covered by insurance is due for payment but is unpaid by reason of nonpayment by
the issuer thereof, the applicable insurer will make payments to its fiscal
agent (the "Fiscal Agent") or directly to the Fund, in accordance with such
insurer's payment procedure, equal to such unpaid amounts of principal and
interest not later than one business day after the insurer has been notified
that such nonpayment has occurred (but not earlier than the date such payment is
due). The Fiscal Agent will disburse to the Fund the amount of principal and
interest which is then due for payment but is unpaid upon receipt by the Fiscal
Agent of (i) evidence of the Fund's right to receive payment of such principal
and interest and (ii) evidence, including any appropriate instruments of
assignment, that all of the rights to payment of such principal or interest then
due for payment shall thereupon vest in the insurer. Upon payment by the insurer
of any principal or interest payments with respect to any Municipal Obligations,
the insurer shall succeed to the rights of the Fund with respect to such
payment.
Original Issue Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such Municipal
Obligations. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the Municipal Obligations
so insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
S-4
<PAGE> 65
Secondary Market Insurance. Subsequent to the time of original issuance of
a Municipal Obligation, each Fund or a third party may, upon the payment of a
single premium, purchase insurance on such New York Municipal Obligation.
Secondary Market Insurance generally provides the same type of coverage as is
provided by Original Issue Insurance and, as is the case with Original Issue
Insurance, Secondary Market Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether a Fund ultimately disposes of such Municipal
Obligations.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular Municipal Obligation would be to enable each Fund to enhance the
value of such Municipal Obligation. A Fund, for example, might seek to purchase
a particular Municipal Obligation and obtain Secondary Market Insurance with
respect thereto if, in the opinion of the Adviser, the market value of such
Municipal Obligation, as insured, would exceed the current value of the
Municipal Obligation without insurance plus the cost of the Secondary Market
Insurance. Similarly, if a Fund owns but wishes to sell a Municipal Obligation
that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance with respect thereto if, in the opinion of the
Adviser, the net proceeds of a sale by the Fund of such obligation, as insured,
would exceed the current value of such obligation plus the cost of the Secondary
Market Insurance.
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 Obligations purchased by a Fund.
Except as described below, Portfolio Insurance generally provides the same type
of coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal Obligations insured under one Portfolio Insurance policy
would generally not be insured under any other policy purchased by a Fund. A
Municipal Obligation is eligible for coverage under a policy if it meets certain
requirements of the insurer.
If a Municipal Obligation is already covered by Original Issue Insurance or
Secondary Market Insurance, then such Municipal Obligation is not required to be
additionally insured under any policy of Portfolio Insurance that a Fund may
purchase. All premiums respecting Municipal Obligations covered by Original
Issue Insurance or Secondary Market Insurance are paid in advance by the issuer
or other party obtaining the insurance.
Portfolio Insurance policies are effective only as to Municipal Obligations
owned by and held by each Fund, and do not cover Municipal Obligations for which
the contract for purchase fails. A "when-issued" Municipal Obligation will be
covered under a Portfolio Insurance policy upon the settlement date of the issue
of such "when-issued" Municipal Obligation.
In determining whether to insure Municipal Obligations held by a Fund, 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 Obligations. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as a Fund is in existence, the Municipal Obligations covered by
the policy continue to be held by a Fund, and a Fund pays the premiums for the
policy. Each insurer will generally reserve the right at any time upon written
notice to a Fund to refuse to insure any additional securities purchased by the
Fund after the effective date of such notice. Each Fund will generally reserve
the right to terminate each policy upon written notice to an insurer if it
determines that the cost of such policy is not reasonable in relation to the
value of the insurance to the Fund.
Each Portfolio Insurance policy shall terminate as to any Municipal
Obligation that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such Municipal Obligation,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such Municipal Obligation, the policy will terminate as to such Municipal
Obligation on the business day immediately following such payment date. Each
policy will terminate as to all Municipal Obligations covered thereby on the
date on which the last of the covered Municipal Obligations mature, are redeemed
or are sold by a Fund.
One or more policies of Portfolio Insurance may provide each Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
Municipal Obligation that is to be sold by a Fund. Each Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such Municipal
Obligation. It is expected that a Fund will exercise the right to obtain
Permanent Insurance for a Municipal Obligation only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance.
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The Permanent Insurance premium with respect to each such obligation is
determined based upon the insurability of each such obligation as of the date of
purchase by a Fund and will not be increased or decreased for any change in the
creditworthiness of such obligation unless such obligation is in default as to
payment of principal or interest, or both. In such event, the Permanent
Insurance premium shall be subject to an increase predetermined at the date of
purchase by a Fund.
Each Fund generally intends to retain any insured securities 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 security and the market value of similar
securities of minimum investment grade (i.e., rated "BBB") that are not in
default. In certain circumstances, however, the Adviser may determine that an
alternative value for the insurance, such as the difference between the market
value of the defaulted security and either its par value or the market value of
securities of a similar nature that are not in default or in significant risk of
default, is more appropriate. To the extent that a Fund holds such defaulted
securities, it may be limited in its ability to manage its investment portfolio
and to purchase other Municipal Obligations. Except as described above with
respect to securities 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 Obligations that it holds. See "Net Asset
Value."
Because each Portfolio Insurance policy will terminate as to Municipal
Obligations sold by a Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by each
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance generally will remain in effect as long as Municipal Obligations
covered thereby are outstanding, such insurance may enhance the marketability of
such securities, even when such securities are in default or in significant risk
of default, but the exact effect, if any, on marketability cannot be estimated.
Accordingly, each Fund may determine to retain or, alternatively, to sell
Municipal Obligations covered by Original Issue Insurance or Secondary Market
Insurance that are in default or in significant risk of default.
Premiums for a Portfolio Insurance policy are generally paid by a Fund
monthly, and are adjusted for purchases and sales of Municipal Obligations
covered by the policy during the month. The yield on a Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered Municipal Obligations held
by the Fund. In the event a Fund were to purchase Secondary Market Insurance
with respect to any Municipal Obligation then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.
MUNICIPAL OBLIGATIONS
Also included within the general category of Municipal Obligations
described in the Joint Proxy Statement--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
"nonappropriation" clauses which provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In the case of a
"nonappropriation" lease, a 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. Each Fund
seeks to minimize these risks by not investing more than 5% of its total
investment assets in Municipal Lease Obligations that contain "non-
appropriation" clauses, and 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.
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Certain Municipal Obligations 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 Joint Proxy Statement--Prospectus, the term
Municipal Obligations also includes obligations, such as tax-exempt notes,
municipal commercial paper and Municipal Lease Obligations, having relatively
short-term maturities, although, as noted above, each Fund emphasizes
investments in Municipal Obligations with long-term maturities.
Obligations of issuers of Municipal Obligations 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, the obligations of such issuers may become subject to laws enacted in
the future by Congress, state legislatures or referenda extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that, as a result of legislation or other conditions, the
power or ability of any issuer to pay, when due, the principal of and interest
on its Municipal Obligations may be materially affected.
INVESTMENT RESTRICTIONS
Except as described below, neither Fund, as a fundamental policy, may,
without the approval of the holders of a "majority of the outstanding" common
shares and preferred shares of such Fund, including shares of its MuniPreferred,
voting together as a single class, and of the holders of a "majority of the
outstanding" preferred shares of such Fund, including shares of its
MuniPreferred, voting as a separate class:
(1) Issue senior securities, as defined in the 1940 Act, other than
preferred shares, 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 Funds--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 that represent no more than 10% of the Fund's total assets and are
otherwise within the limits described under "Certain Trading Strategies of
the Funds--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
objectives, 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 revenues 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 it from
investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security;
(7) Purchase or sell commodities or commodities contracts, except for
transactions involving futures contracts within the limits described under
"Certain Trading Strategies of the Funds--Financial Futures and Options
Transactions" below;
(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 objectives, policies and limitations;
(9) Invest in securities other than Municipal Obligations and
temporary investments as described under "Investment Objectives and
Policies of the Funds--Portfolio Investments" above, or purchase financial
futures and options except within the limits described under "Certain
Trading Strategies of the Funds--Financial Futures and Options
Transactions" below;
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(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 trustees, or
those officers and directors of the Adviser, 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 purposes of the foregoing, "majority of the outstanding," when used with
respect to particular shares of a particular Fund, means (i) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.
Notwithstanding the limitations set forth in subparagraphs (1), (2), (7)
and (9) above, restrictions imposed by Moody's or S&P, or both, on engaging in
futures and options transactions, as described under "Certain Trading Strategies
of the Funds--Financial Futures and Options Transactions" below, are not
fundamental policies and may be changed by a Fund from time to time without
shareholder approval; provided, however, that if Moody's or S&P, or both, are
rating the shares of that Fund's MuniPreferred, that Fund must receive written
confirmation from Moody's or S&P, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and S&P to such shares.
See also "Description of MuniPreferred Issued by the Acquiring Fund--Rating
Agency Guidelines" below for a description of other rating agency restrictions,
none of which is a fundamental policy of either Fund and which may be changed by
either Fund from time to time without shareholder approval subject to the
foregoing provision.
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, such a guarantee or letter of credit would be considered a
separate security and would be treated as an issue of such government, other
entity or bank. When a Municipal Obligation is insured by bond insurance, it
shall not be considered a security that is issued or guaranteed by the insurer;
instead, the issuer of such security will be determined in accordance with the
principles set forth above. The foregoing restrictions do not limit the
percentage of a Fund's assets that may be invested in Municipal Obligations
insured by any given insurer.
In addition to the limitations set forth above, neither Fund will, as a
matter of operating policy, (1) invest more than 5% of its total assets in
unsecured obligations of issuers which, together with their predecessors, have
been in operation for less than three years, (2) invest for the purpose of
exercising control or management, (3) invest more than 10% of its total assets
in securities that are unmarketable, illiquid or not readily marketable
(securities that cannot reasonably be sold within seven days, including
repurchase agreements maturing in more than seven days), (4) borrow in excess of
5% of its total assets if and so long as its preferred shares are outstanding or
(5) invest more than 10% of its net assets in Municipal Obligations issued by
United States possessions or territories, which also bear interest that is
exempt from regular Federal income taxes and are therefore considered to be
Municipal Obligations for purposes of the Joint Proxy Statement--Prospectus.
These policies are not fundamental and may be changed by the Board of either
Fund 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.
Neither Fund has any intention to file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as such Fund is solvent and does not foresee becoming insolvent.
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<PAGE> 69
CERTAIN TRADING STRATEGIES OF THE FUNDS
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objectives
of each 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 the Adviser 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. A Fund may also engage to a limited extent in
short-term trading consistent with its investment objectives. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or purchased
in anticipation of a market rise (a decline in interest rates) and later sold,
but a Fund will not engage in trading solely to recognize a gain.
Subject to the foregoing, each Fund will attempt to achieve its investment
objectives by prudent selection of Municipal Obligations with a view to holding
them for investment. While there can be no assurance thereof, each Fund
anticipates that its annual portfolio turnover rate generally will not exceed
100%. However, the rate of turnover will not be a limiting factor when a Fund
deems it desirable to sell or purchase securities. Therefore, depending upon
market conditions, a Fund's annual portfolio turnover rate may exceed 100% in
particular years.
WHEN-ISSUED AND DELAYED DELIVERY
Each 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 a Fund
enters into a commitment to purchase securities on a when-issued or delayed
delivery basis, it is required under the rules of the Securities and Exchange
Commission (the "Commission") to maintain in a segregated account liquid assets,
consisting of cash, U.S. government securities or other high grade debt
obligations, equal in value to the purchase price due on the settlement date.
Income generated by assets in such a segregated account of a Fund may be taxable
to shareholders of that Fund. Each Fund currently is required to allocate net
capital gains and other income taxable for Federal income tax purposes, if any,
proportionately between its common shares and shares of its MuniPreferred, and
dividends paid on shares of its MuniPreferred during specified periods will
include an allocated portion of any such net capital gains and other taxable
income. See "Tax Matters Associated with Investment in the Funds" and
"Description of the Auctions for MuniPreferred Issued by the Acquiring
Fund--Auction Dates; Advance Notice of Allocation of Taxable Income" below. 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
Each Fund may attempt to hedge 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 are anticipated by the Adviser to
correlate with the prices of the Municipal Obligations owned by such Fund.
Neither Fund has any 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, a 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 owned by a Fund may decline on account of an
increase in interest rates and to hedge against increases in the cost of the
securities such Fund intends to purchase as a result of a decline in interest
rates. A Fund's use of futures and options for hedging purposes can be expected
to result in taxable income or gain to its shareholders. Each Fund is currently
required to allocate any taxable income or gain proportionately between its
common shares and shares of its MuniPreferred. See "Tax Matters Associated with
Investment in the Funds" and "Description of Auctions for MuniPreferred Issued
by the Acquiring Fund--Auction Dates; Advance Notice of Allocation of Taxable
Income" below.
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 a 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
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<PAGE> 70
debt securities or indexes may serve as a hedge against a modest decline in
prices of Municipal Obligations held in a 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 a Fund
intends to acquire. The writing of such 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
these transactions will be engaged in by a Fund only for hedging purposes, these
futures and options portfolio strategies should not subject such Fund to those
risks frequently associated with speculation in futures or options transactions.
Regulations of the Commodity Futures Trading Commission (the "CFTC") applicable
to each Fund require that transactions in futures and options on futures be
engaged in only for bona fide hedging purposes or if the aggregate initial
margin deposits and premiums paid by such Fund do not exceed 5% of the market
value of its assets. Neither Fund will purchase futures unless it has segregated
cash, government securities or high grade liquid debt equal to the contract
price of the futures less any margin on deposit, or unless the long futures
position is covered by the purchase of a put option. Neither Fund will sell
futures unless such 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. In addition, each Fund is subject to the Federal income
tax requirement that it derive less than 30% of its gross income from the gain
on the sale or other disposition of securities held for less than three months.
With respect to its engaging in transactions involving the purchase or writing
of put and call options on debt securities or indexes, neither Fund will
purchase such options if more than 5% of its assets would be invested in the
premiums for such options, and it will only write "covered" or "secured"
options, wherein the securities or cash required to be delivered upon exercise
are held by such Fund, with such cash being maintained in a segregated account.
These requirements and limitations may limit a Fund's ability to engage in
hedging transactions. So long as Moody's or S&P, or both, are rating a Fund's
shares of MuniPreferred, that 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 such 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 Commission. 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 a 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 exchanges and the CFTC. If a
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 such Fund fails to complete the anticipated purchase transaction, such Fund
may experience 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 such securities. If a Fund
decides to use futures contracts or options on futures contracts for hedging
purposes, such 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
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initial and maintenance margin requirements for a Fund that are greater than
those which would otherwise be applicable to such Fund under applicable rules of
the exchanges and the CFTC.
REPURCHASE AGREEMENTS
As temporary investments, a Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. government securities or Municipal Obligations) agrees to repurchase the
same security at a specified price on a future date agreed upon by the parties.
The agreed-upon repurchase price determines the yield during such Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements by a Fund is taxable to
shareholders of that Fund and, therefore, is required to be allocated
proportionately by that Fund between its common shares and shares of its
MuniPreferred. See "Tax Matters Associated with Investment in the Funds" and
"Description of the Auctions for MuniPreferred Issued by the Acquiring
Fund--Auction Dates; Advance Notice of Allocation of Taxable Income" below. A
Fund will enter into repurchase agreements only with registered securities
dealers or domestic banks that, in the opinion of the Adviser, present minimal
credit risk. The risk to a Fund is limited to the ability of the issuer to pay
the agreed-upon repurchase price on the delivery date; however, although the
value of the underlying collateral at the time the transaction is entered into
always equals or exceeds the agreed-upon repurchase price, if the value of the
collateral declines, there is a risk of loss of both principal and interest. In
the event of default, the collateral may be sold but a Fund might incur a loss
if the value of the collateral declines, and might incur disposition costs or
experience delays in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon the collateral by a Fund may be delayed or limited. The Adviser
will monitor the value of the collateral at the time the transaction is entered
into and at all times subsequent during the term of the repurchase agreement in
an effort to determine that such value always equals or exceeds the agreed-upon
repurchase price. In the event the value of the collateral declines below the
repurchase price, the Adviser will demand additional collateral from the issuer
to increase the value of the collateral to at least that of the repurchase
price, including interest.
MANAGEMENT OF THE FUNDS
The Management Agreements provide that the Adviser shall act as investment
adviser for each Fund, manage the Funds' respective investments, administer
their business affairs, provide office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permit any of its
officers and employees to serve without compensation as directors or trustees
and officers of the Funds if elected to such positions. Under its respective
Management Agreement, each Fund has agreed to pay all other costs and expenses
of its operations, including the compensation of its directors or trustees
(other than those affiliated with the investment adviser), custodian, transfer,
dividend disbursing and service agent expenses, legal fees, expenses of
independent auditors, costs of acquiring and disposing of portfolio securities,
expenses of preparing, printing and distributing reports to shareholders and
governmental agencies, and taxes, if any.
The Adviser is a wholly-owned subsidiary of John Nuveen & Co. Incorporated
("Nuveen"), located at 333 West Wacker Drive, Chicago, Illinois 60606, the
oldest and largest investment banking firm specializing in the underwriting and
distribution of tax-exempt securities. Nuveen, which maintains the largest
research department of all investment banking firms devoted exclusively to
municipal securities, has issued over $30 billion of tax-exempt unit trusts
since 1961 and currently sponsors 74 management investment company portfolios
(including the Funds) with approximately $31.5 billion in tax-exempt securities
under management. Over 1,000,000 individuals have invested to date in Nuveen's
tax-exempt funds and trusts. Founded in 1898, Nuveen is a majority-owned
subsidiary of The John Nuveen Company, which, in turn, is approximately 78%
owned by The St. Paul Companies, Inc., 385 Washington Street, St. Paul,
Minnesota 55102, a management company of St. Paul, Minnesota, principally
engaged in providing property-liability insurance through subsidiaries. Nuveen
acted as co-managing underwriter for the Acquiring Fund in its initial public
offering of common shares in July, 1993 and its public offering of MuniPreferred
in November, 1993, and for the Acquired Fund in its initial public offering of
common shares in December, 1992 and its public offering of MuniPreferred in
April, 1993.
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Under the Management Agreements each Fund has agreed to pay an annual
management fee as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEE SCHEDULE
-------------------------------------------------------------
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 Acquiring Fund paid aggregate management fees of $2,595,700 for the
fiscal year ended October 31, 1995, for an effective management fee rate of
0.64%. The Acquired Fund paid aggregate management fees of $2,026,982 for the
fiscal year ended October 31, 1995, for an effective management fee rate of
0.64%. For the fiscal year ended October 31, 1994, the Acquiring Fund paid
aggregate management fees of $2,659,885 and the Acquired Fund paid aggregate
management fees of $2,069,408. For the period from July 22, 1993 (the
commencement of operations) to October 31, 1993, the Acquiring Fund paid
aggregate management fees of $478,577. For the period from December 17, 1992
(the commencement of operations) to October 31, 1993, the Acquired Fund paid
aggregate management fees of $1,600,103.
The names, addresses and principal occupations of the principal executive
officers and the directors of the Adviser are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS
- ----------------------------------------------------------- -----------------------------------------------------------
<S> <C>
Richard J. Franke.......................................... Chairman of the Board and Director, John Nuveen & Co.
Chairman of the Board and Director Incorporated
(Principal Executive Officer)
333 West Wacker Drive
Chicago, Illinois 60606
Donald E. Sveen............................................ President and Director, John Nuveen & Co. Incorporated
President and Director
333 West Wacker Drive
Chicago, Illinois 60606
Anthony T. Dean............................................ Executive Vice President and Director, John Nuveen & Co.
Executive Vice President and Director Incorporated
333 West Wacker Drive
Chicago, Illinois 60606
Timothy R. Schwertfeger.................................... Executive Vice President and Director, John Nuveen & Co.
Executive Vice President and Director Incorporated
333 West Wacker Drive
Chicago, Illinois 60606
John P. Amboian............................................ Executive Vice President, John Nuveen & Co. Incorporated
Executive Vice President
333 West Wacker Drive
Chicago, Illinois 60606
</TABLE>
Mr. Dean, a nominee, Mr. Franke, a current Board member, and Mr.
Schwertfeger, a Board Member and nominee, of each Fund, are "interested persons"
of the Adviser. The remaining Board Members and nominees to the Board of each
Fund are not "interested persons" of the Adviser. The other officers of the
Funds are officers or employees of the Adviser. See also "Proposal No.
2--Election of Board Members of Each Fund" in the Joint Proxy
Statement--Prospectus. Messrs. Franke and Sveen will be retiring from the Board
of Directors of the Adviser effective June 30, 1996.
PORTFOLIO TRANSACTIONS OF THE FUNDS
The Adviser, in effecting purchases and sales of portfolio securities for
the account of each Fund, places orders in such manner as, in the opinion of the
Adviser's 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 Funds have not paid and do not
expect to pay any brokerage commissions. Purchases from
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underwriters include a commission or concession paid by the issuer 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 each Fund to select dealers which, in addition, furnish research information
(primarily credit analyses of issuers) and statistical and other services to the
Adviser. It is not possible to place a dollar value on information, statistical
and other services received from dealers. Since it is only supplementary to the
Adviser's own research efforts, the receipt of research information is not
believed to reduce significantly the Adviser's expenses. Any research benefits
obtained are available to all of the Adviser's other clients. While the Adviser
is primarily responsible for the placement of the business of each Fund, the
policies and practices of the Adviser in this regard must be consistent with the
foregoing and are at all times subject to review by the Board of each Fund.
The Adviser 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 Funds. Subject to applicable
laws and regulations, the Adviser will attempt to allocate equitably portfolio
transactions among each Fund and the portfolios of its other clients purchasing
or selling securities whenever decisions are made to purchase or sell securities
by a Fund or Funds and one or more of such other clients simultaneously. In
making such allocations, the main factors to be considered will be the
respective investment objectives of the Funds and such other clients, the
relative size of the portfolio holdings of the same or comparable securities,
the availability of cash for investment by a Fund and such other clients, the
size of investment commitments generally held by such Fund and such other
clients and opinions of the persons responsible for recommending investments to
such Fund and such other clients. While this procedure could have a detrimental
effect on the price or amount of the securities available to a Fund from time to
time, it is the opinion of the Board of each Fund that the benefits available
from the Adviser's organization will outweigh any disadvantage that may arise
from exposure to simultaneous transactions. Notwithstanding the similarity of
the investment objectives of the Funds with those of other funds managed by the
Adviser, each of these funds will be separately managed and the composition of
their investment portfolios will differ. Accordingly, the investment performance
of each of these funds will likely not be the same.
Under the 1940 Act, a 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 purchased
by a Fund, the amount of Municipal Obligations which may be purchased in any one
issue and the assets of such Fund which may be invested in a particular issue.
In addition, purchases of securities made pursuant to the terms of the Rule must
be approved at least quarterly by the Board of a Fund, including a majority of
the members thereof who are not interested persons of such Fund.
For the fiscal years ended October 31, 1995, October 31, 1994 and October
31, 1993, neither Fund paid any brokerage commissions.
DESCRIPTION OF MUNIPREFERRED ISSUED
BY THE ACQUIRING FUND
This description of the shares of Acquiring Fund MuniPreferred, including
Acquiring Fund MuniPreferred, Series T and Series TH, issued pursuant to the
Reorganization, does not purport to be complete and is subject to and qualified
in its entirety by reference to the Declaration of Trust of the Acquiring Fund
(the "Declaration") and the form of the Acquiring Fund's Statement Establishing
and Fixing the Rights and Preferences of Municipal Auction Rate Cumulative
Preferred Shares (the "Acquiring Fund Statement"). Copies of the Declaration and
the Acquiring Fund Statement are filed as exhibits to the Registration Statement
of which this Statement of Additional Information is a part and may be
inspected, and copies thereof may be obtained, as described under "Available
Information" in the Joint Proxy Statement--Prospectus.
GENERAL
The shares of Acquiring Fund MuniPreferred, Series T and Series TH, issued
pursuant to the Reorganization will rank on a parity with each other, with
outstanding shares of Acquiring Fund MuniPreferred, Series M, Series W and
Series F, and with shares of any other series of preferred shares of the
Acquiring Fund as to the payment of dividends and the distribution of assets
upon liquidation.
DIVIDENDS
GENERAL. The holders of shares of each series of Acquiring Fund
MuniPreferred, including Acquiring Fund MuniPreferred, Series T and Series TH,
issued pursuant to the Reorganization, will be entitled to receive, when, as
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<PAGE> 74
and if declared by the Board of the Acquiring Fund, out of funds legally
available therefor in accordance with the Declaration, including, the Acquiring
Fund Statement and applicable law, cumulative cash dividends at the Applicable
Rate for shares of such series, determined as set forth under "Determination of
Dividend Rate" below, and no more (except as otherwise provided below under
"Gross-up Payments"), payable on the respective dates determined as set forth
below. No interest, or sum of money in lieu of interest, will be payable in
respect of any dividend payment or payments on shares of Acquiring Fund
MuniPreferred which may be in arrears, and, except as otherwise provided herein,
no additional sum of money will be payable in respect of any such arrearage.
Dividends on shares of each series of Acquiring Fund MuniPreferred shall
accumulate at the Applicable Rate for shares of such series from the day
following the day on which the Effective Time occurs (in the case of Acquiring
Fund MuniPreferred, Series T and Series TH) or from the day on which the
Acquiring Fund issued such shares (in the case of Acquiring Fund MuniPreferred,
Series M, Series W and Series F). Dividends on shares of each series of
Acquiring Fund MuniPreferred shall be payable, when, as and if declared by the
Acquiring Fund's Board out of funds legally available therefor in accordance
with the Acquiring Fund's Declaration, including the Acquiring Fund's Statement
and applicable law, on shares of (a) Acquiring Fund MuniPreferred, Series M, on
each Tuesday; (b) Acquiring Fund MuniPreferred Series T, on the first Wednesday
following the end of the Initial Rate Period thereof, and thereafter on each
Wednesday; (c) Acquiring Fund MuniPreferred, Series W, on each Thursday; (d)
Acquiring Fund MuniPreferred, Series TH, on the first Friday following the end
of the Initial Rate Period thereof, and thereafter on each Friday; and (e)
Acquiring Fund MuniPreferred, Series F, on each Monday; provided, however, that
(i) if the Monday or the Tuesday on which dividends would otherwise be payable
as set forth above is not a Business Day, then such Dividends shall be payable
on such shares on the first Business Day that falls after such Monday or
Tuesday, as the case may be; (ii) if the Wednesday, Thursday or Friday on which
dividends would otherwise be payable as set forth above is not a Business Day,
then such dividends shall be payable on such shares on the first Business Day
that falls prior to such Wednesday, Thursday or Friday, as the case may be; and
(iii) the Acquiring Fund in its discretion may establish Dividend Payment Dates
in respect of any Special Rate Period of shares of either series of Acquiring
Fund MuniPreferred consisting of more than 28 Rate Period Days that differ from
those set forth above; 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 and filed with the Secretary of the Acquiring
Fund; and further provided that (i) any such Dividend Payment Date shall be a
Business Day and (ii) 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 as set forth below under "Designation of
Special Rate Periods" below.
The amount of dividends per share payable on shares of a series of
Acquiring Fund 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. Any dividend payment made on
shares of Acquiring Fund MuniPreferred shall first be credited against the
earliest accumulated but unpaid dividends due with respect to such shares.
Each dividend on shares of Acquiring Fund MuniPreferred will be paid on the
Dividend Payment Date therefor to the holders of record as their names appear on
the record books of the Acquiring Fund on the Business Day next preceding such
Dividend Payment Date. 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 of record as their names appear on the record books of the
Acquiring Fund on such date, not exceeding 15 days preceding the payment date
thereof, as may be fixed by the Board of the Acquiring Fund.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Acquiring Fund to the accounts of the respective Agent Members in next-day
funds. Each of the current Broker-Dealers, however, has represented to the
Acquiring Fund that such Broker-Dealer (or if such Broker-Dealer does not act as
Agent Member, the Agent Member designated by such Broker-Dealer) will make such
dividend payments available in same-day funds on each Dividend Payment Date to
Beneficial Owners that use such Broker-Dealer or its designee as Agent Member. A
Beneficial Owner of shares of Acquiring Fund MuniPreferred that does not use one
of the current Broker-Dealers or a designee thereof as its Agent Member should
contact the Agent Member used by such Beneficial Owner to determine whether such
Agent Member will make dividend payments available to such Beneficial Owner in
next-day or same-day funds. If any Agent Member does not make such dividends
available in same-day funds to a Beneficial Owner, such Beneficial Owner who
uses such Agent Member would not have same-day funds available to it until the
next Business Day,
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<PAGE> 75
which in the case of a Dividend Payment Date that is a Monday, Tuesday,
Wednesday, Thursday or Friday, would be the following Tuesday, Wednesday,
Thursday, Friday or Monday, respectively, if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rate on shares of Acquiring
Fund MuniPreferred, Series T and Series TH, during the period from and after the
day following the date on which the Effective Time occurs to and including the
last day of the Initial Rate Period of shares of such series will be the
dividend rate in effect immediately prior to the Effective Time for the shares
of Acquired Fund MuniPreferred, Series T and Series TH, respectively. For each
Subsequent Rate Period of shares of such series thereafter, and for each
Subsequent Rate Period of shares of outstanding Acquiring Fund MuniPreferred,
Series M, Series W and Series F, the dividend rate on shares of such series will
be equal to the rate per annum that results from an Auction for shares of such
series on the Auction Date next preceding such Subsequent Rate Period; provided,
however, if:
(a) an Auction for any such Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such series
for such Subsequent Rate Period will be the Maximum Rate for shares of such
series on the Auction Date therefor;
(b) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
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 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 the next succeeding paragraph and the Acquiring 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 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 the next succeeding paragraph (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 Acquiring Fund, 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 the next succeeding paragraph
(including the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate Liquidation Preference of the
outstanding shares of such series to be redeemed, no Auction will be held in
respect of shares of such series for the Subsequent Rate Period thereof and the
dividend rate for shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period;
(c) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
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 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 the next succeeding paragraph or the Acquiring Fund shall not
have paid the applicable Late Charge to the Auction Agent, no Auction will be
held in respect of shares of such series for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereof thereafter to and including
the Rate Period during which (1) such Failure to Deposit is cured in accordance
with the next succeeding paragraph and (2) the Acquiring Fund pays the
applicable Late Charge to the Auction Agent, 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 will 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-"); or
(d) any Failure to Deposit shall have occurred with respect to shares of
such series during a Special Rate Period thereof of more than 364 Rate Period
Days, or during any Rate Period thereof succeeding any Special Rate Period of
more than 364 Rate Period Days during which 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
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<PAGE> 76
Period subsequent to such Rate Period, such Failure to Deposit shall not have
been cured in accordance with the next succeeding paragraph or the Acquiring
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 the next succeeding paragraph and (2) the
Acquiring Fund pays the applicable Late Charge to the Auction Agent, 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 Acquiring Fund MuniPreferred for any Rate Period thereof being herein
referred to as the "Applicable Rate" for shares of such series).
A Failure to Deposit with respect to shares of a series of Acquiring Fund
MuniPreferred shall have been cured (if such Failure to Deposit is not solely
due to the willful failure of the Acquiring 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 immediately above, the Acquiring
Fund shall have paid to the Auction Agent (a) all accumulated and unpaid
dividends on the shares of such series and (b) without duplication, the
Redemption Price for the shares, if any, of such series for which Notice of
Redemption has been mailed; provided, however, that the foregoing clause (b)
shall not apply to the Acquiring Fund's failure to pay the Redemption Price in
respect of shares of Acquiring Fund MuniPreferred when the related Notice of
Redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
GROSS-UP PAYMENTS. Holders of shares of Acquiring Fund MuniPreferred shall
be entitled to receive, when, as and if declared by the Board of the Acquiring
Fund, out of funds legally available therefor in accordance with the Articles,
the Acquiring Fund Statement and applicable law, dividends in an amount equal to
the aggregate Gross-up Payment in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Acquiring Fund allocates any net capital gains or
other income taxable for Federal income tax purposes to a dividend paid on
Acquiring Fund MuniPreferred without having given advance notice thereof to the
Auction Agent as described under "Description of the Auctions for MuniPreferred
Issued by the Acquiring Fund--Auction Dates; Advance Notice of Allocation of
Taxable Income" below (such allocation is 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 Acquiring Fund MuniPreferred or the liquidation of the
Acquiring Fund, the Acquiring Fund will, prior to the end of the calendar year
in which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Acquiring Fund's dividend disbursing agent to send such notice with a
Gross-up Payment to each holder of shares (initially Cede, as nominee of the
Securities Depository) that was entitled to such dividend payment during such
calendar year at such holder's address as the same appears or last appeared on
the stock books of the Acquiring Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Acquiring Fund makes a Taxable Allocation to a dividend paid on shares
of Acquiring Fund MuniPreferred, the Acquiring 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 Acquiring 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 Acquiring Fund.
The Acquiring Fund shall not be required to make Gross-up Payments with
respect to any net capital gains or other taxable income determined by the IRS
to be allocable in a manner different from that allocated by the Acquiring Fund.
A "Gross-up Payment" means payment to a holder of shares of Acquiring Fund
MuniPreferred of an amount which, when taken together with the aggregate amount
of Taxable Allocations made to such holder to which such Gross-up Payment
relates, would cause such holder's dividends in dollars (after Federal income
tax consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations
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would have been excludable from the gross income of such holder. A 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 Acquiring Fund
MuniPreferred is subject to the Federal alternative minimum tax with respect to
dividends received from the Acquiring 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 Acquiring Fund MuniPreferred at the maximum marginal regular Federal income
tax rate, if any, 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 during the calendar year in question.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Board
of the Acquiring Fund may not declare any dividend (except a dividend payable in
Acquiring Fund common shares), or declare any other distribution, upon Acquiring
Fund common shares, or purchase Acquiring Fund common shares, unless in every
such case the Acquiring Fund preferred shares, including Acquiring Fund
MuniPreferred, Series T and Series TH, have, at the time of any such declaration
or purchase (and after giving effect thereto), an asset coverage (as defined in
and determined pursuant to the 1940 Act) of at least 200% (or such other
percentage as may in the future be required by law).
In addition, for so long as any shares of Acquiring Fund MuniPreferred,
including Acquiring Fund MuniPreferred, Series T and Series TH, are outstanding,
except as set forth in the following paragraph or otherwise described herein,
(a) the Acquiring Fund may not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in,
or in options, warrants or rights to subscribe for or purchase, Acquiring Fund
common shares or other shares, if any, ranking junior to the shares of Acquiring
Fund MuniPreferred as to the payment of dividends and the distribution of assets
upon liquidation) in respect of Acquiring Fund common shares or any other shares
of the Acquiring Fund ranking junior to or on a parity with shares of Acquiring
Fund MuniPreferred as to the payment of dividends or the distribution of assets
upon liquidation, or call for redemption, redeem, purchase or otherwise acquire
for consideration any Acquiring Fund common shares or any other such junior
shares (except by conversion into or exchange for shares of the Acquiring Fund
ranking junior to the shares of Acquiring Fund MuniPreferred as to the payment
of dividends and the distribution of assets upon liquidation), or any such
parity shares (except by conversion into or exchange for shares of the Acquiring
Fund ranking junior to or on a parity with shares of Acquiring Fund
MuniPreferred as to payment of dividends and the distribution of assets upon
liquidation), unless (i) full cumulative dividends on shares of each series of
Acquiring Fund 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 Acquiring Fund has
redeemed the full number of shares of Acquiring Fund MuniPreferred required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(b) if either Moody's or S&P is rating the shares of Acquiring Fund
MuniPreferred, the Acquiring Fund may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in, or in options, warrants or rights to subscribe for or purchase, Acquiring
Fund common shares or other shares, if any, ranking junior to shares of
Acquiring Fund MuniPreferred as to the payment of dividends and the distribution
of assets upon liquidation) in respect of Acquiring Fund common shares or any
other shares of the Acquiring Fund ranking junior to shares of Acquiring Fund
MuniPreferred as to the payment of dividends or the distribution of assets upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Acquiring Fund common shares or any other such junior shares
(except by conversion into or exchange for shares of the Acquiring Fund ranking
junior to shares of Acquiring Fund MuniPreferred as to the payment of dividends
or the distribution of assets upon liquidation), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets or S&P Eligible
Assets, or both, as the case may be, would at least equal the MuniPreferred
Basic Maintenance Amount (see "Rating Agency Guidelines" and "Redemption"
below).
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of shares
ranking, as to the payment of dividends, on a parity with shares of Acquiring
Fund MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of
Acquiring Fund MuniPreferred through its most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of each series of Acquiring Fund
MuniPreferred through its most recent Dividend Payment Date or upon the shares
of any other class or series of shares ranking on a parity as to the payment of
dividends with shares of Acquiring Fund MuniPreferred through their most recent
respective dividend payment dates, all dividends declared upon shares of
Acquiring Fund MuniPreferred and any other such class or series of shares
ranking on a parity as to the payment of dividends with shares of Acquiring Fund
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MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of Acquiring Fund MuniPreferred and such other
class or series of shares shall in all cases bear to each other the same ratio
that accumulated dividends per share on the shares of Acquiring Fund
MuniPreferred and such other class or series of shares bear to each other (for
purposes of this sentence, the amount of dividends declared per share of
Acquiring Fund MuniPreferred shall be based on the Applicable Rate for such
share for the Dividend Periods during which dividends were not paid in full).
Under the Code, the Acquiring Fund must, among other things, distribute at
least 90% of its investment company taxable income and 90% of its net tax-exempt
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may under certain circumstances impair the Acquiring
Fund's ability to maintain such qualification. See "Tax Matters Associated with
Investment in the Funds" below.
DESIGNATION OF SPECIAL RATE PERIODS. The Acquiring Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a series of
Acquiring Fund MuniPreferred as a Special Rate Period consisting of a specified
number of Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to adjustment as described below. A designation
of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) 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 (iii) if the Acquiring Fund
shall have mailed a Notice of Redemption with respect to any shares of such
series, as described under "Redemption--Notice of Redemption" below, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent. In the event the Acquiring Fund wishes to designate any
succeeding Subsequent Rate Period of shares of a series of Acquiring Fund
MuniPreferred as a Special Rate Period consisting of more than 28 Rate Period
Days, the Acquiring 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 Acquiring 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.
In the event the Acquiring Fund wishes to designate a Subsequent Rate
Period of shares of a series of Acquiring Fund MuniPreferred 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
Acquiring Fund MuniPreferred, Series M, (b) a Wednesday that is a Business Day
in the case of Acquiring Fund MuniPreferred, Series T, (c) a Thursday that is a
Business Day in the case of Acquiring Fund MuniPreferred, Series W, (d) a Friday
that is a Business Day in the cases of Acquiring Fund MuniPreferred, Series TH
or (e) a Monday that is a Business Day in the case of Acquiring Fund
MuniPreferred Series F, then the Acquiring 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 Acquiring Fund
MuniPreferred, Series M, (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 Acquiring Fund MuniPreferred, Series T, (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 Acquiring Fund MuniPreferred,
Series W, (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
Acquiring Fund MuniPreferred, Series TH, 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 Acquiring Fund MuniPreferred, Series F.
If the Acquiring Fund proposes to designate any succeeding Subsequent Rate
Period of shares of a series of Acquiring Fund MuniPreferred as a Special Rate
Period, not less than 20 nor more than 30 days prior to the date the Acquiring
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
of shares of such series), notice shall be (a) published or caused to be
published by the Acquiring Fund in a newspaper of general circulation to the
financial community in The City of New York, New York, which carries financial
news, and (b) mailed by the Acquiring Fund by first-class mail, postage prepaid,
to the holders of shares of such series. Each such notice shall state (i) that
the Acquiring 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 (ii) that the Acquiring 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 (A) its determination, subject to certain conditions, to
exercise such option, in which case the Acquiring Fund shall specify the Special
Rate Period designated, or (B) its determination not to exercise such option.
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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 Acquiring Fund MuniPreferred as to which notice has been given as set
forth in the preceding paragraph (or such later time or date, or both, as may be
agreed to by the Auction Agent), the Acquiring Fund shall deliver to the Auction
Agent either:
(a) a notice ("Notice of Special Rate Period") stating (i) that the
Acquiring 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, (ii) the Auction Date immediately prior to the first day of
such Special Rate Period, (iii) that such Special Rate Period shall not commence
if (A) an Auction for shares of such series shall not be held on such Auction
Date for any reason or (B) 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, (iv) the scheduled Dividend Payment Dates for shares
of such series during such Special Rate Period and (v) 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 (1) 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 (2) the Moody's Discount Factors applicable to Moody's
Eligible Assets will be determined by reference to the first Moody's Exposure
Period longer than the Moody's Exposure Period then applicable to the Acquiring
Fund); or
(b) a notice stating that the Acquiring 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.
If the Acquiring Fund fails to deliver either such notice (and, in the case
of the notice described in clause (a) above, a MuniPreferred Basic Maintenance
Report to the effect set forth in clause (a) 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 Acquiring 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 clause (b) above.
VOTING RIGHTS
Holders of shares of Acquiring Fund MuniPreferred, including Acquiring Fund
MuniPreferred, Series T and Series TH, are entitled to vote on certain matters
as described under "Investment Objectives and Policies-- Investment
Restrictions" above and in the Joint Proxy Statement--Prospectus under "Proposal
No. 1--The Reorganization--Description of MuniPreferred Issued by the Acquiring
Fund--Voting Rights" and "--Certain Provisions in the Acquiring Fund's
Declaration of Trust" and "Proposal No. 1--The Reorganization--Comparison of
the--Investment Objectives and Policies of the Acquiring Fund and the Acquired
Fund--General."
In connection with the election of the Acquiring Fund's trustees, holders
of outstanding Acquiring Fund preferred shares, including Acquiring Fund
MuniPreferred, voting as a separate class, shall be entitled to elect two of the
Acquiring Fund's trustees, and the remaining trustees will be elected by holders
of Acquiring Fund common shares and Acquiring Fund preferred shares, including
Acquiring Fund MuniPreferred, voting together as a single class. In addition, if
at any time dividends (whether or not earned or declared) on outstanding
Acquiring Fund preferred shares, including Acquiring Fund MuniPreferred, shall
be due and unpaid in an amount equal to two full years' dividends thereon, and
sufficient cash or specified securities shall not have been deposited with the
Auction Agent for the payment of such dividends, then, as the sole remedy of
holders of outstanding Acquiring Fund preferred shares, including Acquiring Fund
MuniPreferred, the number of trustees constituting the Acquiring Fund's Board
shall be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of Acquiring Fund preferred
shares, including Acquiring Fund MuniPreferred, as described above, would
constitute a majority of the Acquiring Fund's Board as so increased by such
smallest number; and at a special meeting of shareholders which will be called
and held as soon as practicable, and at all subsequent meetings at which
trustees are to be elected, the holders of Acquiring Fund preferred shares,
including Acquiring Fund MuniPreferred, voting as a separate class, will be
entitled to elect the smallest number of additional trustees that, together with
the two trustees which such holders will be in any event entitled to elect,
constitutes a majority of the total number of trustees of the Acquiring Fund as
so increased. The terms of office of the persons
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who are trustees at the time of that election will continue. If the Acquiring
Fund thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Acquiring Fund preferred shares, including
Acquiring Fund MuniPreferred, the voting rights stated in the preceding sentence
shall cease, and the terms of office of all of the additional trustees elected
by the holders of Acquiring Fund preferred shares, including Acquiring Fund
MuniPreferred (but not of the trustees with respect to whose election the
holders of Acquiring Fund common shares were entitled to vote or the two
trustees the holders of Acquiring Fund preferred shares have the right to elect
in any event), will terminate automatically.
The Acquiring Fund may not, without the affirmative vote of the holders of
at least a majority of the shares of Acquiring Fund MuniPreferred outstanding at
the time (voting separately as one class):
(a) authorize, create or issue any class or series of shares ranking prior
to or on a parity with the shares of Acquiring Fund MuniPreferred with respect
to the payment of dividends or the distribution of assets upon liquidation or
authorize, create or issue additional shares of any series of Acquiring Fund
MuniPreferred (except that the Acquiring Fund may, without the vote of the
holders of Acquiring Fund MuniPreferred, authorize, create or issue additional
shares of any series of preferred shares ranking on a parity with shares of
Acquiring Fund MuniPreferred with respect to the payment of dividends and the
distribution of assets upon liquidation if, after giving effect thereto, the
aggregate liquidation preference of all Acquiring Fund preferred shares then
outstanding, exclusive of accumulated and unpaid dividends, would not exceed
$268,900,000 (after giving effect to the Reorganization); provided, however, if
the Acquiring Fund obtains written confirmation from Moody's (if Moody's is then
rating the shares of Acquiring Fund MuniPreferred) and S&P (if S&P is then
rating the shares of Acquiring Fund MuniPreferred) that the issuance of any such
additional class or series would not impair the rating then assigned by such
rating agency to the Acquiring Fund MuniPreferred, the Acquiring Fund may,
without the vote of the holders of Acquiring Fund MuniPreferred, authorize,
create or issue classes or series of Acquiring Fund preferred shares ranking on
a parity with shares of Acquiring Fund MuniPreferred with respect to the payment
of dividends and the distribution of assets upon liquidation notwithstanding
that, after giving effect thereto, the aggregate liquidation preference of all
Acquiring Fund preferred shares then outstanding would exceed $268,900,000
(after giving effect to the Reorganization); or
(b) amend, alter or repeal the provisions of the Declaration or the
Acquiring Fund Statement, whether by merger, consolidation or otherwise, so as
to affect any preference, right or power of such shares of Acquiring Fund
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 and (ii) the authorization, creation and issuance
of classes or series of shares ranking junior to shares of Acquiring Fund
MuniPreferred with respect to the payment of dividends and the distribution of
assets upon liquidation will be deemed to affect such preferences, rights or
powers only if Moody's or S&P is then rating the Acquiring Fund MuniPreferred
and such issuance would, at the time thereof, cause the Acquiring Fund not to
satisfy the 1940 Act MuniPreferred Asset Coverage or the MuniPreferred Basic
Maintenance Amount.
So long as any shares of Acquiring Fund MuniPreferred are outstanding, the
Acquiring Fund shall not, without the affirmative vote of the holders of at
least 66 2/3% of the shares of Acquiring Fund MuniPreferred outstanding at the
time (voting separately as one class), file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Acquiring Fund is solvent and does not foresee becoming insolvent.
If any action set forth above would adversely affect the rights of one or more
series of Acquiring fund MuniPreferred in a manner different from any other
series of Acquiring Fund MuniPreferred, the Acquiring Fund will not approve any
such action without the affirmative vote of the holders of at least a majority
of the shares of each such series of Acquiring Fund MuniPreferred (voting
separately as a class).
Voting provisions will not apply with respect to shares of Acquiring Fund
MuniPreferred if, at or prior to the time when a vote is required, such shares
shall have been (a) redeemed or (b) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
RATING AGENCY GUIDELINES
The Acquiring Fund intends that, so long as shares of Acquiring Fund
MuniPreferred are outstanding, the composition of its portfolio will reflect
guidelines established by at least one of Moody's or S&P in connection with the
Acquiring Fund's receipt at the Effective Time of ratings of "aaa" from Moody's
or AAA from S&P in respect of shares of Acquiring Fund MuniPreferred, Series T
and Series TH. Moody's and S&P, nationally recognized independent rating
agencies, issue ratings for various securities reflecting their perceived
creditworthiness of such securities. The Acquiring Fund pays certain fees to
Moody's or S&P, or both, for rating shares of Acquiring Fund MuniPreferred. The
guidelines described below have been developed by Moody's and S&P in connection
with other
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issuances of asset-backed and similar securities, including debt obligations and
adjustable rate preferred shares, generally on a case-by-case basis through
discussions with the issuers of those securities. The guidelines are designed to
ensure that assets underlying outstanding debt or preferred shares will be
sufficiently varied and will be of sufficient quality and amount to justify
investment grade ratings. The guidelines do not have the force of law, but have
been adopted by the Acquiring Fund in order to satisfy current requirements
necessary for Moody's or S&P, or both, to issue the above-described ratings for
shares of Acquiring Fund MuniPreferred, Series T and Series TH, which ratings
are generally relied upon by institutional investors in purchasing such
securities. In the context of a closed-end investment company such as the
Acquiring Fund, therefore, the guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act. A rating
agency's guidelines will apply to shares of Acquiring Fund MuniPreferred only so
long as such rating agency is rating such shares. The Acquiring Fund's Board
may, without shareholder approval, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by the Acquiring Fund
pursuant to the rating agency guidelines in the event the Acquiring Fund
receives written confirmation from Moody's or S&P, or both, as appropriate, that
any such change would not impair the ratings then assigned by Moody's and S&P to
shares of Acquiring Fund MuniPreferred.
So long as either Moody's or S&P, or both, are rating the Acquiring Fund
MuniPreferred, the Acquiring Fund may not, among other things, (a) engage in
futures or options transactions, except in accordance with the then-current
guidelines of such rating agencies, (b) borrow money, except that the Acquiring
Fund may, without obtaining the written confirmation described below, borrow
money for the purpose of clearing securities transactions if the MuniPreferred
Basic Maintenance Amount would continue to be satisfied after giving effect to
such borrowing and certain other conditions are met, (c) issue any class or
series of shares ranking on a parity with shares of Acquiring Fund MuniPreferred
with respect to the payment of dividends or the distribution of assets upon
liquidation of the Acquiring Fund, (d) engage in any short sales of securities,
(e) lend any securities, (f) merge or consolidate into or with any corporation,
(g) change the pricing service utilized in determining the market value of any
asset of the Acquiring Fund, or (h) enter into reverse repurchase agreements,
unless in each case (except as described above) it has received written
confirmation from S&P or Moody's, or both, as appropriate, that any such action
would not impair the rating then assigned by such rating agency to shares of
Acquiring Fund MuniPreferred. While the Acquiring Fund does not intend to
borrow, and while the Acquiring Fund is restricted as a matter of operating
policy from borrowing in excess of 5% of its total assets so long as the shares
of Acquiring Fund MuniPreferred are outstanding and is otherwise restricted from
borrowing pursuant to rating agency guidelines, under certain circumstances and
notwithstanding adverse interest rate or market conditions, the Acquiring Fund
is permitted to borrow under its investment restrictions for temporary or
emergency purposes (e.g., to make required distributions or pay dividends) or to
repurchase shares when such borrowing is deemed to be in the best interest of
its common shareholders. See "Additional Information About the Funds--Repurchase
of Common Shares; Conversion to Open-End Fund" in the Joint Proxy
Statement--Prospectus for the circumstances under which the Acquiring Fund may
purchase its common shares and incur indebtedness in connection therewith.
Should the Acquiring Fund borrow, the Acquiring Fund would be required to pay
when due the interest obligation on any debt incurred by the Acquiring Fund
before it would be able to pay dividends on shares of Acquiring Fund
MuniPreferred, and it is likely that the Acquiring Fund would be required to pay
the principal amount of any such debt prior to meeting the liquidation
preference of the shares of Acquiring Fund MuniPreferred. Because the interest
expense on borrowings by the Acquiring Fund will reduce the Acquiring Fund's net
investment earnings available to pay dividends on shares of Acquiring Fund
MuniPreferred, borrowing may impair the Acquiring Fund's ability to pay such
dividends on shares of Acquiring Fund MuniPreferred. The risk is heightened in
the event the Acquiring Fund incurs variable rate debt, the interest rate on
which may increase with increases in prevailing market rates.
ASSET MAINTENANCE
1940 ACT MUNIPREFERRED ASSET COVERAGE. The Acquiring Fund is required under
rating agency guidelines to maintain, as of the last Business Day of each month
in which any shares of Acquiring Fund MuniPreferred are outstanding, asset
coverage of at least 200% with respect to such shares (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares of a closed-end
investment company as a condition of declaring dividends on its common shares).
If the Acquiring Fund fails to maintain such asset coverage in accordance with
the requirements of the rating agency or agencies then rating the shares of
Acquiring Fund MuniPreferred ("1940 Act MuniPreferred Asset Coverage") and such
failure is not cured as of the last Business Day of the following month (the
"1940 Act Cure Date"), the Acquiring Fund will be required under certain
circumstances to redeem certain of the shares of Acquiring Fund MuniPreferred.
See "Redemption" below.
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MUNIPREFERRED BASIC MAINTENANCE AMOUNT. The Acquiring Fund is required
under rating agency guidelines to maintain, as of each Business Day ( a
"Valuation Date") on which shares of Acquiring Fund MuniPreferred are
outstanding, assets having in the aggregate a Discounted Value at least equal to
the MuniPreferred Basic Maintenance Amount established by the rating agency or
agencies then rating the shares of Acquiring Fund MuniPreferred. If the
Acquiring Fund fails to meet such requirement on any Valuation Date and such
failure is not cured on or before the seventh Business Day after such Valuation
Date (the "MuniPreferred Basic Maintenance Cure Date"), the Acquiring Fund will
be required under certain circumstances to redeem certain of the shares of
Acquiring Fund MuniPreferred. See "Redemption" below.
The "MuniPreferred Basic Maintenance Amount" as of any Valuation Date is
defined as the dollar amount equal to the sum of:
(a)(i) the product of the number of shares of Acquiring Fund MuniPreferred
outstanding on such date multiplied by $25,000, plus any redemption premium
applicable to shares of Acquiring Fund MuniPreferred then subject to redemption;
(ii) 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
Acquiring Fund MuniPreferred outstanding that follow such Valuation Date;
(iii) subject to certain exceptions, the aggregate amount of dividends
that would accumulate on shares of each series of Acquiring Fund
MuniPreferred outstanding from such first respective Dividend Payment Date
therefor through the 56th day after such Valuation Date, at the Maximum
Rate (calculated as if such Valuation Date were the Auction Date for the
Rate Period commencing on such Dividend Payment Date) for a Minimum Rate
Period of shares of such series to commence on such Dividend Payment Date,
assuming, solely for purposes of the foregoing, that if on such Valuation
Date the Acquiring Fund shall have delivered a Notice of Special Rate
Period to the Auction Agent 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
Acquiring Fund shall have delivered a Notice of Special Rate Period to the
Auction Agent 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;
(iv) the amount of anticipated Acquiring Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Acquiring Fund's Maximum Potential Gross-up
Payment Liability as of such Valuation Date; and
(vi) any current liabilities as of such Valuation Date to the extent
not reflected in any of (a)(i) through (a)(v) (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
(b) the value of any Acquiring Fund assets irrevocably deposited by the
Acquiring Fund for the payment of any of (a)(i) through (a)(vi), all as
calculated in accordance with the requirements of the rating agency or agencies
then rating the shares of Acquiring Fund MuniPreferred.
For purposes of the foregoing, "Maximum Potential Gross-up Payment
Liability," as of any Valuation Date, means the aggregate amount of Gross-up
Payments that would be due if the Acquiring 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 Acquiring Fund, as of the end of the calendar month
immediately preceding such Valuation Date, and assuming such Gross-up Payments
are fully taxable.
In managing the Acquiring Fund's portfolio, the Adviser will not alter the
composition of the Acquiring Fund's portfolio if, in the reasonable belief of
the Adviser, the effect of such alteration would be to cause the Acquiring Fund
to have Moody's Eligible Assets or S&P Eligible Assets with an aggregate
Discounted Value, as of the immediately preceding Valuation Date, less than the
MuniPreferred Basic Maintenance Amount as of such Valuation Date; provided,
however, that in the event that, as of the immediately preceding Valuation Date,
the aggregate Discounted Value of each of Moody's Eligible Assets and S&P
Eligible Assets exceeded the MuniPreferred Basic Maintenance Amount by 5% or
less, the Adviser will not alter the composition of the Acquiring Fund's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of such assets unless the
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Acquiring Fund shall have confirmed that, after giving effect to such
alteration, the aggregate Discounted Value of such assets would exceed the
MuniPreferred Basic Maintenance Amount.
Upon any failure to maintain the required Discounted Value, the Acquiring
Fund will seek to alter the composition of its portfolio to reattain the
MuniPreferred Basic Maintenance Amount on or prior to the MuniPreferred Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses an/or gains on dispositions of portfolio securities.
On or before the third Business Day after a Valuation Date on which the
Acquiring Fund fails to meet 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 Acquiring Fund is required to deliver to the
Auction Agent (so long as either Moody's or S&P is rating the shares of
Acquiring Fund MuniPreferred) a report with respect to the calculation of the
MuniPreferred Basic Maintenance Amount and the value of its portfolio holdings
as of the date of such failure or such cure date, as the case may be (a
"MuniPreferred Basic Maintenance Report"). The Acquiring Fund will also deliver,
as required, a MuniPreferred Basic Maintenance Report 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, in each case on or
before the third Business Day after such day. Within ten Business Days after
delivery of such report relating to the last Business Day of each of February,
May, August and November of each year, the Acquiring Fund will deliver a letter
prepared by its independent accountants regarding the accuracy of the
calculations made by the Acquiring Fund in its most recent MuniPreferred Basic
Maintenance Report. If any such letter prepared by the Acquiring Fund's
independent auditors shows that an error was made in the most recent
MuniPreferred Basic Maintenance Report, the calculation or determination made by
the Acquiring Fund's independent accountants will be conclusive and binding on
such Fund.
The Discount Factors and guidelines for determining the market value of the
Acquiring Fund's portfolio holdings, described below, have been based by the
rating agencies on criteria such as the sensitivity of the market value of the
relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market.
S&P AAA RATING GUIDELINES. For purposes of calculating the Discounted Value
of the Acquiring Fund's portfolio under current S&P guidelines, the fair market
value of Municipal Obligations eligible for consideration under such guidelines
("S&P Eligible Assets") must be discounted by certain discount factors set forth
in the table below ("S&P Discount Factors"). The Discounted Value of a Municipal
Obligation under S&P guidelines is the fair market value thereof divided by the
S&P Discount Factor. The S&P Discount Factor used to discount a particular
Municipal Obligation will be determined by reference to (i)(A) in the event such
Municipal Obligation is covered by an Original Issuance Insurance policy or a
Portfolio Insurance policy which does not provide the Acquiring Fund with the
option to obtain Permanent Insurance with respect to such Municipal Obligation,
or is not covered by bond insurance, the S&P or Moody's rating on such Municipal
Obligation, (B) in the event such Municipal Obligation is covered by a Secondary
Market Insurance policy, the S&P insurance claims-paying ability rating of the
issuer of the policy or (C) in the event such Municipal Obligation is covered by
a Portfolio Insurance policy which provides the Acquiring Fund with the option
to obtain Permanent Insurance with respect to such Municipal Obligation, at the
Acquiring Fund's option, the S&P or Moody's rating on such Municipal Obligation
or the S&P insurance claims-paying ability rating of the issuer of the Portfolio
Insurance policy, and (ii) the "S&P Exposure Period" (currently, seven Business
Days) and the S&P rating on such Municipal Obligation. S&P Discount Factors for
a range of exposure periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS
RATING CATEGORY
------------------------------
EXPOSURE PERIOD AAA AA A BBB
------------------------------------------------------ --- --- --- ---
<S> <C> <C> <C> <C>
40 Business Days...................................... 190% 195% 210% 250%
22 Business Days...................................... 170 175 190 230
10 Business Days...................................... 155 160 175 215
7 Business Days....................................... 150 155 170 210
3 Business Days....................................... 130 135 150 190
</TABLE>
Since the S&P Exposure Period currently applicable to the Acquiring Fund is
seven Business Days, the S&P Discount Factors currently applicable to S&P
Eligible Assets will be determined by reference to the factors set forth
opposite the line entitled "7 Business Days." Notwithstanding the foregoing, (a)
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
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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, (b) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold; and (c) except as set forth in
clause (a) 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 (a)(iii) of the
following paragraph, 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, will be considered to be short-term Municipal Obligations. "Receivables
for Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets
as of any Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date.
The S&P guidelines impose certain minimum issue size, issuer, geographical
diversification and other requirements for purposes of determining S&P Eligible
Assets:
(a) In order to be considered S&P Eligible Assets, Municipal Obligations
owned by the Acquiring Fund must:
(i) Be interest bearing and pay interest at least semi-annually;
(ii) Be payable in U.S. dollars;
(iii) Be publicly rated BBB or higher by S&P or, if not rated by S&P
but rated by Moody's, be rated at least A by Moody's;
(iv) Not be private placements; and
(v) Be part of an issue 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 lower than $10 million), be issued by an
issuer with a total of at least $50 million of securities
outstanding.
(b) Municipal Obligations of any one issuer or guarantor (excluding bond
insurers) shall be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 10% of the aggregate
fair 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 fair market value of
such Municipal Obligations exceeds 5% of the aggregate fair market value of S&P
Eligible Assets.
(c) Long-term Municipal Obligations issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 20% of the aggregate
fair market value of S&P Eligible Assets.
(d) Municipal Obligations rated by Moody's but not rated by S&P shall be
considered S&P Eligible Assets only to the extent the fair market value of such
Municipal Obligations does not exceed 50% of the aggregate fair market value of
S&P Eligible Assets.
For purposes of determining as of any Valuation Date whether the Acquiring
Fund has S&P Eligible Assets with an aggregate Discounted Value at least equal
to the MuniPreferred Basic Maintenance Amount, the Acquiring Fund will include
as a liability in the calculation of the MuniPreferred Basic Maintenance Amount
an amount calculated semi-annually equal to 150% of the estimated cost of
obtaining Permanent Insurance with respect to S&P Eligible Assets that (i) are
covered by Portfolio Insurance policies which provide the Acquiring Fund with
the option to obtain such Permanent Insurance and (ii) are discounted by an S&P
Discount Factor determined by reference to the insurance claims-paying ability
rating of the issuer of such Portfolio Insurance policy.
MOODY'S "AAA" RATING GUIDELINES. For purposes of calculating the Discounted
Value of the Acquiring Fund's portfolio under current Moody's guidelines,
Municipal Obligations eligible for consideration under such guidelines ("Moody's
Eligible Assets") must be discounted by certain discount factors set forth in
the table below ("Moody's Discount Factors"). The Discounted Value of a
Municipal Obligation under Moody's guidelines is, as of any Valuation Date, (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 (i) the
lesser of the market value or call price thereof, including
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any call premium, divided by (ii) the applicable Moody's Discount Factor. The
Moody's Discount Factor used to discount a particular Municipal Obligation will
be determined by reference to the "Moody's Exposure Period" (currently, the
period commencing on a given Valuation Date and ending 56 days thereafter) and
the Moody's rating on such Municipal Obligation. Moody's Discount Factors for a
range of exposure periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS
RATING CATEGORY
-----------------------------------------------------------------------
EXPOSURE PERIOD AAA AA A BBB 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 7 weeks............. 154 164 173 205 235 137 149
9 weeks or less but greater than 8 weeks............. 158 169 179 209 242 138 150
</TABLE>
- ------------
* Municipal Obligations not rated by Moody's but rated BBB or BBB+ by S&P.
** Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating.
Since the Moody's Exposure Period currently applicable to the Acquiring
Fund is 56 days, the Moody's Discount Factors currently applicable to Moody's
Eligible Assets will be determined by reference to the factors set forth
opposite the line entitled "8 weeks or less but greater than 7 weeks." However,
if the Moody's Discount Factor used to discount a particular Municipal
Obligation is determined by reference to the insurance claims-paying ability of
the insurer of such Municipal Obligation, such Moody's Discount Factor will be
increased by an amount equal to 50% of the difference between (i) the percentage
set forth in the above table under the applicable rating category, and (ii) the
percentage set forth in the above table under the rating category that is one
rating category below the applicable rating category. Notwithstanding the
foregoing, (a) 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-1 or P-1 by Moody's and mature or have a demand feature at par exercisable
in 30 days or less or 125% so 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 (b) no Moody's Discount Factor will be
applied to cash or to Receivables for Municipal Obligations Sold. "Receivables
for Municipal Obligations Sold," for purposes of calculating Moody's Eligible
Assets as of any Valuation Date, means 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 (A) settled through clearing house firms with respect to which
the Acquiring Fund has received prior written authorization from Moody's or (B)
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 conditions (A) or (B).
The Moody's guidelines impose certain minimum issue size, issuer, issue
type concentration, county concentration and other requirements for purposes of
determining Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM MAXIMUM STATE OR
ISSUE SIZE UNDERLYING TERRITORY
RATING ($ MILLIONS) OBLIGOR(%) CONCENTRATION(%)
- ----------------------------------------------------------- ------------ ----------- -----------------
<S> <C> <C> <C>
Aaa........................................................ 10 100 100
Aa......................................................... 10 20 60
A.......................................................... 10 10 40
Baa........................................................ 10 6 20
Other*..................................................... 10 4 12
</TABLE>
- ------------
* Municipal Obligations not rated by Moody's but rated BBB or BBB+ by S&P.
The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. For purposes of the maximum
underlying obligor requirement described above, which requirement will apply
except with respect to general obligation Municipal Obligations, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party will be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Municipal
Obligation. For purposes of the issue type concentration requirement described
above, Municipal Obligations will be classified within one of the following
categories: health care issues, housing issues, educational facilities issues,
student loan issues, resource recovery issues, transportation issues, industrial
development bond issues, utility issues, general obligation issues, lease
obligations, escrowed bonds and other issues ("Other Issues") not falling within
one of the aforementioned
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<PAGE> 86
categories. In no event shall (a) more than 10% of Moody's Eligible Assets
consist of student loan issues, (b) more than 10% of Moody's Eligible Assets
consist of resource recovery issues or (c) more than 10% of Moody's Eligible
Assets consist of Other Issues. For purposes of applying the foregoing
requirements, Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by
Moody's, rated SP-1+ by S&P, which either do not mature or have a demand feature
at par exercisable in 30 days and which do not have a long-term rating, will be
considered to have a long-term rating of A.
Current Moody's guidelines also require that Municipal Obligations
constituting Moody's Eligible Assets pay interest in cash, be publicly rated Baa
or higher by Moody's or, if not rated by Moody's but rated by S&P, that they be
rated at least BBB by S&P, and that they not have suspended ratings. For
purposes of determining the Moody's Discount Factors applicable to such
S&P-rated Municipal Obligations, any such Municipal Obligation (excluding
short-term Municipal Obligations) will be deemed to have a Moody's rating which
is one full rating category lower than its S&P rating. For purposes of applying
the foregoing requirements, Municipal Obligations rated MIG-1, VMIG-1 or P-1,
or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, will be
considered to have a long-term rating of A.
For purposes of determining as of any Valuation Date whether the Fund has
Moody's Eligible Assets with an aggregate Discounted Value at least equal to the
MuniPreferred Basic Maintenance Amount, the Fund shall include as a liability in
the calculation of the MuniPreferred Basic Maintenance Amount an amount
calculated semi-annually equal to 150% of the estimated cost of obtaining
Permanent Insurance with respect to Moody's Eligible Assets that (i) are covered
by Portfolio Insurance policies which provide the Fund with the option to obtain
such Permanent Insurance and (ii) are discounted by a Moody's Discount Factor
determined by reference to the insurance claims-paying ability of the issuers of
such Portfolio Insurance policy.
The Acquiring Fund may enter into futures and options transactions only for
bona fide hedging purposes and not for leveraging or speculative purposes. So
long as either S&P or Moody's is rating the Acquiring Fund MuniPreferred, the
Acquiring Fund will only engage in futures or options transactions in accordance
with the then-current guidelines of such ratings agencies, and only after it has
received written confirmation from S&P or Moody's, as appropriate, that such
transactions would not impair the ratings then assigned by such rating agency to
shares of Acquiring Fund MuniPreferred.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
(a) shares of Acquiring Fund MuniPreferred of each series are redeemable,
at the option of the Acquiring 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 in accordance with the
Declaration, including the Acquiring Fund Statement and applicable law, 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 (i)
shares of a series of Acquiring Fund MuniPreferred may not be redeemed in part
if after such partial redemption fewer than 500 shares of such series remain
outstanding and (ii) subject to the next succeeding sentence, the Notice of
Special Rate Period relating to a Special Rate Period of shares of a series of
Acquiring Fund MuniPreferred, as delivered to the Auction Agent and filed with
the Secretary of the Acquiring Fund, may provide that shares of such series
shall not be redeemable during the whole or any part of such Special Rate Period
(except as provided in clause (b) below) or shall be redeemable during the whole
or any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein ("Special Redemption
Provisions"); and
(b) shares of each series of Acquiring Fund MuniPreferred are redeemable,
at the option of the Acquiring Fund, as a whole but not in part, out of funds
legally available therefor in accordance with the Declaration, including the
Acquiring Fund Statement and applicable law, on the first day following any
Dividend Period thereof included in a Rate Period of more than 364 Rate Period
Days if, on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equalled or exceeded on such
date of determination the Treasury Note Rate for such Rate Period, at a
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
A Notice of Special Rate Period relating to shares of a series of Acquiring
Fund MuniPreferred for a Special Rate Period may contain Special Redemption
Provisions only if the Acquiring Fund's Board, 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 Acquiring Fund.
S-26
<PAGE> 87
If fewer than all of the outstanding shares of a series of Acquiring Fund
MuniPreferred are to be redeemed as set forth above, the number of shares of
such series to be redeemed shall be determined by the Acquiring Fund's Board,
and such shares shall be redeemed pro rata from the holders of record of shares
of such series (initially Cede, as nominee of the Securities Depository) in
proportion to the number of shares of such series held by such holders. Since
the nominee of the Securities Depository is the only record holder of each
series of Acquiring Fund MuniPreferred, it will determine the number of shares
to be redeemed from the accounts of the Agent Members. The Agent Members, in
turn, may determine to redeem shares from some persons listed on their records
as beneficial owners (which may include an Agent Member holding shares for its
own account) without redeeming shares from the accounts of other persons listed
on their records as beneficial owners.
The Acquiring Fund may not mail a Notice of Redemption relating to an
optional redemption as described above on any date unless on such date (a) the
Acquiring Fund has available Deposit Securities (i.e., cash and Municipal
Obligations rated at least A-1+ or SP-1+ by S&P and P-1, MIG-1 or VMIG-1 by
Moody's) 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 Acquiring Fund
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 Acquiring Fund MuniPreferred) and the Discounted Value of
S&P Eligible Assets (if S&P is then rating the shares of Acquiring Fund
MuniPreferred) each at least equal the MuniPreferred Basic Maintenance Amount
and would at least equal the MuniPreferred Basic Maintenance Amount immediately
subsequent to such redemption if such redemption were to occur on such date. For
purposes of determining in clause (b) of the preceding sentence whether the
Discounted Value of Moody's Eligible Assets at least equals the MuniPreferred
Basic Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets will be determined by reference to the first Moody's Exposure
Period longer than the Moody's Exposure Period then applicable to the Acquiring
Fund.
MANDATORY REDEMPTION. The Acquiring Fund will be required to 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 Acquiring Fund's Board for redemption (such amount, together
with the redemption prices described under "Optional Redemption" above, being
herein referred to as the "Redemption Price"), certain of the shares of
Acquiring Fund MuniPreferred to the extent permitted under the 1940 Act, the
Declaration, the Acquiring Fund Statement and any applicable law, if the
Acquiring Fund fails to maintain the MuniPreferred Basic Maintenance Amount or
the 1940 Act MuniPreferred Asset Coverage in accordance with the requirements of
the rating agency or rating agencies then rating the shares of Acquiring Fund
MuniPreferred and such failure is not cured on or before the MuniPreferred Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein respectively referred to
as a "Cure Date"), as the case may be. The number of shares of Acquiring Fund
MuniPreferred to be redeemed will be equal to the lesser of (a) the minimum
number of shares of Acquiring Fund MuniPreferred, together with all other
Acquiring Fund preferred shares subject to redemption or retirement, the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the Cure Date, would have resulted in the satisfaction of the
MuniPreferred Basic Maintenance Amount or 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 Acquiring Fund MuniPreferred and
other Acquiring Fund preferred shares the redemption or retirement of which
would have had such result, all shares of Acquiring Fund MuniPreferred and
Acquiring Fund preferred shares then outstanding will be redeemed), and (b) the
maximum number of shares of Acquiring Fund MuniPreferred, together with all
other Acquiring Fund preferred shares subject to redemption or retirement, that
can be redeemed out of funds expected to be legally available therefor. In
determining the shares of Acquiring Fund MuniPreferred required to be redeemed
in accordance with the foregoing, the Acquiring Fund will 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 Acquiring Fund MuniPreferred and other Acquiring Fund preferred shares
(and, then, pro rata among each series of Acquired Fund MuniPreferred) subject
to redemption.
The Acquiring Fund is required to effect such a mandatory redemption not
earlier than 20 days and not later than 40 days after such Cure Date, except
that if the Acquiring Fund does not have funds legally available for the
redemption of all of the required number of shares of Acquiring Fund
MuniPreferred and other Acquiring Fund preferred shares which are subject to
redemption or retirement or the Acquiring Fund otherwise is unable to effect
such redemption on or prior to 40 days after such Cure Date, the Acquiring Fund
will redeem those shares of Acquiring Fund MuniPreferred or other Acquiring Fund
preferred shares which it was unable to redeem on the earliest practicable date
on which it is able to effect such redemption. If fewer than all of the
outstanding shares of a series of Acquiring Fund MuniPreferred are to be
redeemed pursuant to a mandatory redemption, the number of
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<PAGE> 88
shares of such series to be redeemed shall be redeemed pro rata from the holders
of shares of such series in proportion to the number of shares of such series
held by such holders, in the same manner as described above in respect of
optional redemptions of fewer than all outstanding shares of a series of
Acquiring Fund MuniPreferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the
same to each holder of the shares to be redeemed (initially Cede, as nominee of
the Securities Depository), not less than 20 nor more than 45 days prior to the
date fixed for redemption thereof, to the respective addresses of such holders
as the same shall appear on the record books of the Acquiring Fund ("Notice of
Redemption"). Each such notice shall state (a) the redemption date; (b) the
number of shares of Acquiring Fund MuniPreferred to be redeemed and the series
thereof; (c) the CUSIP number for shares of such series; (d) the Redemption
Price; (e) the place or places where certificate(s) for such shares (properly
endorsed or assigned for transfer, if the Acquiring Fund's Board shall so
require and the notice shall so state) are to be surrendered for payment of the
Redemption Price; (f) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date; and (g) the provisions of the Acquiring Fund
Statement under which such redemption is made. If fewer than all shares of a
series of Acquiring Fund MuniPreferred held by any holder are to be redeemed,
the notice mailed to such holder shall also specify the number of shares of such
series to be redeemed from such holder. The Acquiring Fund may provide in any
Notice of Redemption relating to an optional redemption that such redemption is
subject to one or more conditions precedent and that the Acquiring 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.
OTHER REDEMPTION PROCEDURES. 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 will be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of Acquiring Fund MuniPreferred will be deemed to exist at any time after the
date specified for redemption in a Notice of Redemption when the Acquiring Fund
shall have failed, for any reason whatsoever, to deposit with the Auction Agent
the Redemption Price with respect to any shares for which such Notice of
Redemption has been mailed. Notwithstanding the fact that the Acquiring Fund may
not have redeemed shares of Acquiring Fund MuniPreferred for which a Notice of
Redemption has been mailed, dividends may be declared and paid on shares of
Acquiring Fund MuniPreferred and will include those shares of Acquiring Fund
MuniPreferred for which Notice of Redemption has been mailed. The first two
sentences of this paragraph shall not apply in the event the Acquiring Fund
provides in any Notice of Redemption relating to an optional redemption that
such redemption 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.
Provided a Notice of Redemption has been mailed as described above, upon
the deposit with the Auction Agent (on the next Business Day 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
Acquiring Fund MuniPreferred that are the subject of such notice, dividends on
such shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the holders
thereof to receive the Redemption Price, but without any interest or other
additional amount, except as otherwise provided under "Dividends--Determination
of Dividend Rate" and "Gross-up Payments" above. 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 Acquiring Fund's Board shall
so require and the notice shall so state), the Redemption Price shall be paid by
the Auction Agent to the holders of shares of Acquiring Fund 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
Acquiring Fund will 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 (a) the aggregate Redemption Price of the shares of Acquiring Fund
MuniPreferred called for redemption on such date and (b) all other amounts to
which holders of shares of Acquiring Fund MuniPreferred called for redemption
may be entitled. Any funds so deposited that are unclaimed at the end of 90 days
from such redemption date will, to the extent permitted by law, be repaid to the
Acquiring Fund, after which time the holders of shares of Acquiring Fund
MuniPreferred so called for redemption may look only to the Acquiring Fund for
payment of the Redemption Price and all other amounts to which they may be
entitled. The Acquiring Fund will be entitled to receive, from time to time
after the date fixed for redemption, any interest on the funds so deposited.
Notwithstanding the foregoing, if any dividends on shares of a series of
Acquiring Fund 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 Acquiring 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
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<PAGE> 89
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.
Except as described above with respect to redemptions and under
"Description of the Auctions for MuniPreferred Issued by the Acquiring
Fund--Orders by Existing Holders and Potential Holders," the Declaration
including the Acquiring Fund Statement do not prohibit the Acquiring Fund or any
affiliate of the Acquiring Fund from purchasing or otherwise acquiring any
shares of Acquiring Fund MuniPreferred.
The Acquiring Fund has the right to arrange for third parties to purchase
from the holders thereof shares of Acquiring Fund MuniPreferred which are to be
redeemed as described above.
LIQUIDATION
Upon a liquidation of the Acquiring Fund, whether voluntary or involuntary,
the holders of shares of Acquiring Fund MuniPreferred then outstanding will be
entitled to receive and to be paid out of the assets of the Acquiring Fund
available for distribution to its shareholders, before any payment or
distribution shall be made on the Acquiring Fund common shares or on any other
class of shares of the Acquiring Fund ranking junior to the Acquiring Fund
MuniPreferred upon liquidation, an amount equal to the liquidation preference
with respect to such shares. The liquidation preference for shares of Acquiring
Fund MuniPreferred shall be $25,000 per share, plus an amount equal to all
dividends thereon (whether or not earned or declared) accumulated but unpaid to
(but not including) the date of final distribution in same-day funds, together
with any applicable Gross-up Payments in connection with the liquidation of the
Acquiring Fund. After the payment to the holders of the shares of Acquiring Fund
MuniPreferred of the full preferential amounts provided for as described herein,
the holders of shares of Acquiring Fund MuniPreferred as such shall have no
right or claim to any of the remaining assets of the Acquiring Fund. In the
event the assets of the Acquiring Fund available for distribution to the holders
of shares of Acquiring Fund MuniPreferred upon any liquidation of the Acquiring
Fund, whether voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled, no such distribution shall be made
on account of any other class or series of Acquiring Fund preferred shares
ranking on a parity with the shares of Acquiring Fund MuniPreferred upon such
liquidation unless proportionate distributive amounts shall be paid on account
of the shares of Acquiring Fund MuniPreferred, ratably, in proportion to the
full distributable amounts for which holders of all such parity shares are
respectively entitled upon such liquidation. Subject to the rights of the
holders of any series or class or classes of shares ranking on a parity with the
shares of Acquiring Fund MuniPreferred with respect to the distribution of
assets upon liquidation of the Acquiring Fund, after payment shall have been
made in full to the holders of the shares of Acquiring Fund MuniPreferred as
described herein, but not prior thereto, any other series or class or classes of
shares ranking junior to the shares of Acquiring Fund MuniPreferred with respect
to the distribution of assets upon liquidation 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 shares of
Acquiring Fund MuniPreferred shall not be entitled to share therein.
Neither the sale of all or substantially all the property or business of
the Acquiring Fund, nor the merger or consolidation of the Acquiring Fund into
or with any Massachusetts business trust or corporation nor the merger or
consolidation of any Massachusetts business trust or corporation into or with
the Acquiring Fund shall be a liquidation, whether voluntary or involuntary, for
the purposes of the foregoing paragraph.
DESCRIPTION OF THE AUCTIONS FOR
MUNIPREFERRED ISSUED BY THE ACQUIRING FUND
GENERAL
The Acquiring Fund Statement provides that, except as otherwise described
herein, the Applicable Rate for shares of each series of Acquiring Fund
MuniPreferred, including Acquiring Fund MuniPreferred, Series T, and Series TH,
issued pursuant to the Reorganization, for each Rate Period after the Initial
Rate Period thereof shall be equal to the rate per annum that the Auction Agent
advises has resulted on the Business Day preceding the first day of such
Subsequent Rate Period (an "Auction Date") from implementation of the auction
procedures (the "Auction Procedures") set forth in the Acquiring Fund Statement
and summarized below, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell shares of such
series. Each periodic implementation of the Auction Procedures, which are
attached as Annex B to this Statement of Additional Information, is referred to
herein as an "Auction." The following summary does not purport to be complete
and is subject to and qualified in its entirety by reference to the Auction
Procedures set forth in the Acquiring Fund Statement.
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As used herein with respect to shares of a series of Acquiring Fund
MuniPreferred, (a) "Applicable Rate" means the rate per annum at which dividends
are payable on shares of such series for any Rate Period thereof, (b)
"Beneficial Owner" 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, (c) "Business Day" means a day on which the NYSE is
open for trading and is not a Saturday, Sunday or other day on which banks in
New York City are authorized by law to close, (d) "Date of Original Issue" means
the day on which the Acquiring Fund initially issued shares of such series (in
the case of Acquiring Fund MuniPreferred, Series M, Series W and Series F) or
the day on which the Effective Time occurs (in the case of Acquiring Fund
MuniPreferred, Series T and Series TH), (e) "Dividend Payment Date" means any
date on which dividends on shares of such series are payable as provided under
"Description of MuniPreferred Issued by the Acquiring Fund--Dividends--General"
above, (f) "Dividend Period" means the period from and including the Date of
Original Issue (in the case of Acquiring Fund MuniPreferred, Series M, Series W
and Series F) or the day following the Date of Original Issue (in the case of
Acquiring Fund MuniPreferred, Series T and Series TH) 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, (g) "Existing Holder" means a Broker-Dealer (or any such other
person as may be permitted by the Acquiring Fund) that is listed on the records
of the Auction Agent as a holder of shares of such series, (h) "Initial Rate
Period" means the period from and including the Date of Original Issue to but
excluding November 23, 1993, November 18, 1993, and November 22, 1993 (in the
case of Acquiring Fund MuniPreferred, Series M, Series W and Series F,
respectively) and the period consisting of the number of days following the Date
of Original Issue that would have remained in the rate period of Acquired Fund
MuniPreferred, Series T and Series TH, in effect immediately prior to the Date
of Original Issue but for the Reorganization (in the case of Acquiring Fund
MuniPreferred, Series T and Series TH), (i) "Potential Beneficial Owner" means 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, (j) "Potential Holder" means a Broker-Dealer (or any such
other Person as may be permitted by the Acquiring 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, (k) "Rate Period" means the Initial Rate Period of shares of such series
and any Subsequent Rate Period of shares of such series, (l) "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 either (i) the shortening
or lengthening, as the case may be, of such Rate Period or Dividend Period as
set forth under "Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--General" above, because the day on which dividends would
otherwise be payable is not a Business Day or (ii) the shortening of such Rate
Period pursuant to the provisions relating to the designation of Special Rate
Periods as set forth under "Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--Designation of Special Rate Periods" above, (m) "Subsequent
Rate Period" means any period from and including the first day following the
Initial Rate Period of shares of such series to but excluding the next Dividend
Payment Date for shares of such series and any period thereafter from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof, (n)
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period Days and
(o) "Special Rate Period" means any Subsequent Rate Period commencing on the
date designated by the Acquiring Fund, as set forth under "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends-- Designation of Special
Rate Periods" above, and ending on the last day of the last Dividend Period
thereof.
AUCTION AGENCY AGREEMENT. The Acquiring 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 Acquiring Fund MuniPreferred so
long as the Applicable Rate for shares of such series is to be based on the
results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Acquiring Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of Acquiring Fund MuniPreferred. See
"Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as the
Securities Depository for the Agent Members with respect to shares of each
series of Acquiring Fund MuniPreferred. One certificate for all of the shares of
each series of Acquiring Fund MuniPreferred will be registered in the name of
Cede, as nominee of the
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Securities Depository. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
shares of Acquiring Fund MuniPreferred contained in the Acquiring Fund
Statement. The Acquiring Fund will also issue stop-transfer instructions to the
transfer agent for shares of each series of Acquiring Fund MuniPreferred. Prior
to the commencement of the right of holders of preferred shares to elect a
majority of the Acquiring Fund's trustees, as described under "Description of
MuniPreferred Issued by the Acquiring Fund--Voting Rights" above, Cede will be
the holder of record of all shares of each series of Acquiring Fund
MuniPreferred and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such participant (the
"Agent Member") in shares of Acquiring Fund MuniPreferred, whether for its own
account or as a nominee for another person.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Acquiring Fund MuniPreferred, Series T and
Series TH, as the case may be, issued pursuant to the Reorganization will be the
first Tuesday and Thursday, respectively, that is a Business Day preceding the
initial Dividend Payment Date for shares of such series. See "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends--General." Thereafter,
Auctions for shares of such series will normally be held every Tuesday and
Thursday (in the case of Acquiring Fund MuniPreferred, Series T and Series TH,
respectively) and Monday, Wednesday and Friday (in the case of Acquiring Fund
MuniPreferred, Series M Series W and Series F, respectively), and each
Subsequent Rate Period of shares of such series will normally begin on the
following Wednesday and Friday (in the case of Acquiring Fund MuniPreferred,
Series T and Series TH, respectively) and Tuesday, Thursday and Monday (in the
case of Acquiring Fund MuniPreferred, Series M, Series W and Series F,
respectively), unless the then-current Rate Period of shares of such series is a
Special Rate Period or, in certain circumstances, the day that would normally be
the Auction Date or the first day of such Subsequent Rate Period is not a
Business Day. The Auction Date and the first day of the related Rate Period
(also a Dividend Payment Date) must be Business Days but need not be consecutive
days. See "Description of MuniPreferred Issued by the Acquiring
Fund--Dividends--General" for information concerning the circumstances under
which the first day of a Rate Period or the Auction Date, or both, may be moved
to a date other than such specified days.
Whenever the Acquiring Fund intends to include any net capital gains or
other income taxable for Federal income tax purposes in any dividend on shares
of Acquiring Fund MuniPreferred, the Acquiring Fund shall, in the case of
Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the
Acquiring Fund, it will be required in turn to notify each Broker-Dealer, who,
on or prior to such Auction Date, in accordance with its Broker-Dealer
Agreement, will be required to notify its customers who are Beneficial Owners
and Potential Beneficial Owners believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date. See also "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends--Gross-Up Payments" above.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
Prior to the Submission Deadline on each Auction Date for shares of a
series of Acquiring Fund MuniPreferred:
(a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order"--indicating the number of outstanding shares, if any,
of such series that such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for shares of such series for the
next Rate Period thereof;
(ii) "Bid"--indicating the number of outstanding shares, if any, of
such series that such Beneficial Owner offers to sell if the Applicable
Rate for shares of such series for the next Rate Period thereof shall be
less than the rate per annum specified by such Beneficial Owner; and/or
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(iii) "Sell Order"--indicating the number of outstanding shares, if
any, of such series that such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof; and
(b) Broker-Dealers shall contact customers who are Potential Beneficial
Owners by telephone or otherwise to determine whether such customers desire to
submit Bids, in which they will indicate the number of shares of such series
that they offer to purchase if the Applicable Rate for shares of such series for
the next Rate Period thereof is not less than the rate per annum specified in
such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Acquiring Fund MuniPreferred
then held by such Beneficial Owner. A Bid placed by a Beneficial Owner with
respect to shares of such series specifying a rate higher than the Applicable
Rate for shares of such series determined in the Auction therefor shall
constitute an irrevocable offer to sell the shares subject thereto. A Beneficial
Owner of shares of such series that submits a Bid with respect to shares of such
series to its Broker-Dealer having a rate higher than the Maximum Rate for
shares of such series on the Auction Date therefor will be treated as having
submitted a Sell Order with respect to such shares to its Broker-Dealer. A
Beneficial Owner of shares of such series that fails to submit to its
Broker-Dealer prior to the Submission Deadline an Order or Orders covering all
the outstanding shares of such series held by such Beneficial Owner will be
deemed to have submitted a Hold Order to its Broker-Dealer covering the number
of outstanding shares of such series held by such Beneficial Owner and not
subject to Orders with respect to shares of such series submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner of shares of such
series fails to submit to its Broker-Dealer prior to the Submission Deadline an
Order or Orders covering all of the outstanding shares of such series held by
such Beneficial Owner for an Auction relating to a Special Rate Period
consisting of more than 28 Rate Period Days, such Beneficial Owner will be
deemed to have submitted a Sell Order to its Broker-Dealer covering the number
of outstanding shares of such series held by such Beneficial Owner and not
subject to Orders submitted to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell the shares of Acquiring Fund MuniPreferred subject
thereto. A Beneficial Owner that offers to become the Beneficial Owner of
additional shares of Acquiring Fund MuniPreferred is, for purposes of such
offer, a Potential Beneficial Owner.
A Potential Beneficial Owner may submit to its Broker-Dealer Bids in which
it offers to purchase shares of a series of Acquiring Fund MuniPreferred if the
Applicable Rate for shares of such series for the next Rate Period thereof is
not less than the rate specified in such Bid. A Bid placed by a Potential
Beneficial Owner of shares of such series specifying a rate not higher than the
Maximum Rate for shares of such series shall constitute an irrevocable offer to
purchase the number of shares of such series specified in such Bid if the rate
determined in the Auction for shares of such series is equal to or greater than
the rate specified in such Bid.
As described more fully under "Submission of Orders by Broker-Dealers to
Auction Agent" below, the Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial Owners
to the Auction Agent, designating themselves (unless otherwise permitted by the
Acquiring Fund) as Existing Holders in respect of shares subject to Orders
submitted or deemed submitted to them by Beneficial Owners and as Potential
Holders in respect of shares subject to Orders submitted to them by Potential
Beneficial Owners. However, neither the Acquiring Fund nor the Auction Agent
will be responsible for a Broker-Dealer's failure to comply with the foregoing.
Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
Existing Holder or a Potential Holder will be treated in the same manner as an
Order placed with a Broker-Dealer by a Beneficial Owner or a Potential
Beneficial Owner, as described in the preceding paragraph. Similarly, any
failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of
any shares of Acquiring Fund MuniPreferred held by it or its customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Acquiring Fund MuniPreferred held by it, as described in the second preceding
paragraph. For information concerning the priority given to different types of
Orders placed by Existing Holders, see "Submission of Orders by Broker-Dealers
to Auction Agent," below.
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Neither the Acquiring Fund nor an affiliate may submit an Order in any
Auction, except that any Broker-Dealer that is an affiliate of the Acquiring
Fund may submit Orders in an Auction, but only if such Orders are not for its
own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Acquiring Fund
MuniPreferred that is fewer than the number of shares of Acquiring Fund
MuniPreferred specified in its Order. See "Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and Allocation of Shares," below. To the extent
the allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers. Each purchase or sale shall be made for settlement on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement," below.
As described above, any Bid specifying a rate higher than the Maximum Rate
will (a) be treated as a Sell Order if submitted by Beneficial Owner or an
Existing Holder and (b) not be accepted if submitted by a Potential Beneficial
Owner or a Potential Holder. Accordingly, the Auction Procedures establish the
Maximum Rate as a maximum rate per annum that can result from an Auction. See
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares" below.
As used herein, "Maximum Rate," for shares of a series of Acquiring Fund
MuniPreferred on any Auction Date for shares of such series, means:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate Period
of shares of such series and (ii) the Rate Multiple on such Auction Date, unless
shares of such series have or had a Special Rate Period (other than a Special
Rate Period of 28 Rate Period Days or fewer) and an Auction at which Sufficient
Clearing Bids existed has not yet occurred for a Minimum Rate Period of shares
of such series after such Special Rate Period, in which case the higher of:
(A) the dividend rate on shares of such series for the then-ending
Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was more than 364 Rate
Period Days, and (II) the Reference Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period of shares of such
series, if such Special Rate Period was 364 Rate Period Days or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was more
than 364 Rate Period Days and (y) the Rate Multiple on such Auction Date;
or
(b) in the case of any Auction Date which is the Auction Date immediately
prior to the first day of any proposed Special Rate Period, the product of (i)
the highest of (x) the Reference Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the then-ending
Rate Period of shares of such series, if such then-ending Rate Period was more
than 364 Rate Period Days, (y) the Reference Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special Rate
Period is 364 Rate Period Days or fewer or the Treasury Note Rate on such
Auction Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days, and (z) the
Reference Rate on such Auction Date for Minimum Rate Periods and (ii) the Rate
Multiple on such Auction Date.
As used herein, "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.
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As used herein, "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 Acquiring Fund MuniPreferred) and S&P (if S&P is then rating the
shares of Acquiring Fund 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 (i) 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 (ii) 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.
As used herein, "AA" Composite Commercial Paper Rate," on any date for any
Rate Period of shares of a series of Acquiring Fund MuniPreferred, means:
(a) (i) 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 (ii) in the case of any Special Rate Period of (A) 49 or
more but fewer than 70 Rate Period Days, the interest equivalent of the 60-day
rate; (B) 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; (C) 85 or more but
fewer than 99 Rate Period Days, the interest equivalent of the 90-day rate; (D)
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; (E) 120 or more but fewer
than 141 Rate Period Days, the interest equivalent of the 120-day rate; (F) 141
or more but fewer than 162 Rate Period Days, the arithmetic average of the
120-day and 180-day rates; and (G) 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 immediately preceding such date; or
(b) in the event that the Federal Reserve Bank of New York does not make
available any such rate, then the arithmetic average of such rates, as quoted on
a discount basis or otherwise, by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day next preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine
the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper
Rate shall be determined on the basis of the quotation or quotations furnished
by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Acquiring 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 Acquiring 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 (i) 1.00 and (ii) 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. As used herein, "Commercial Paper Dealers" means 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. As used
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herein, "Substitute Commercial Paper Dealer" means The First Boston Company and
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a commercial paper dealer, provided that none of such entities
shall be a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period of shares
of a series of Acquiring Fund MuniPreferred, means:
(a) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recent 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
(b) 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.
As used herein, "Treasury Note Rate," on any date for any Rate Period of
shares of a series of Acquiring Fund MuniPreferred, means:
(a) 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
(b) in the event that any such rate is not published in The Wall Street
Journal, then the yield as calculated by reference to the arithmetic average of
the bid price quotations of the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as determined by
bid price quotations as of the close of business on the Business Day immediately
preceding such date obtained from the U.S. Government Securities Dealers to the
Auction Agent.
For purposes of the foregoing, "Treasury Bill" means a direct obligation of
the U.S. government having a maturity at the time of issuance of 364 days or
less, and "Treasury Note" means 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. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate or the Treasury Note Rate, such
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 Dealer or Substitute U.S.
Government Securities Dealers selected by the Acquiring 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 Acquiring
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. As used herein, "U.S.
Government Securities Dealer" means 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. As used herein, "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 that
none of such entities shall be a U.S. Government Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of
the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple," for shares of a series of Acquiring Fund MuniPreferred
on any Auction Date for shares of such series, will be a percentage, determined
as set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date;
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
------------------------------------------------ ----------
<S> <C>
"aa3"/AA- or higher............................. 110%
"a3"/A-......................................... 125%
"baa3"/BBB-..................................... 150%
"ba3"/BB-....................................... 200%
Below "ba3"/BB-................................. 250%
</TABLE>
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provided, however, that in the event the Acquiring 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
income tax rate, if any, applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater. If the shares of Acquiring Fund MuniPreferred are rated by
only one rating agency, such rating will be the prevailing rating.
For purposes of this determination, the "prevailing rating" of shares of a
series of Acquiring Fund MuniPreferred shall be (a) "aa3"/AA- or higher if
shares of such series 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, (b) if
not "aa3"/AA- or higher, then "a3"/A- if shares of such series 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, (c) if not "aa3"/AA- or higher or "a3"/A-,
then "baa3"/BBB- if shares of such series 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, (d) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then
"ba3"/BB- if shares of such series 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 (e) if not "aa3"/AA-, "baa3"/BBB-, or "ba3"/BB-, then Below
"ba3"/BB-; provided, however, that if shares of such series are rated by only
one rating agency, the prevailing rating shall be determined without reference
to the rating of any other rating agency. The Acquiring Fund will take all
reasonable action necessary to enable either Moody's or S&P to provide a rating
for shares of each series of Acquiring Fund MuniPreferred. If neither Moody's
nor S&P shall make such a rating available, Merrill Lynch, Pierce, Fenner &
Smith Incorporated or its successor (in the case of Series T and Series F
MuniPreferred), Kidder, Peabody & Co. Incorporated or its successor (in the case
of Series M MuniPreferred) and Smith Barney Sherson or its successor (in the
case of Series W and Series TH MuniPreferred) shall select at least one
nationally recognized statistical rating organization (as that term is used in
the rules and regulations of the Commission under the Exchange Act) to act as a
substitute rating agency in respect of the shares of such series of Acquiring
Fund MuniPreferred, and the Acquiring Fund shall take all reasonable action to
enable such rating agency to provide a rating for such shares.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Acquiring Fund) as the
Existing Holder or Potential Holder in respect of the shares of Acquiring Fund
MuniPreferred subject to such Orders. 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.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one thousandth (.001) of 1%.
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
Acquiring Fund MuniPreferred of a series subject to an Auction held by such
Existing Holder, such Orders will be considered valid in the following order of
priority:
(a) all Hold Orders for shares of such series will be considered valid, but
only up to and including in the aggregate the number of shares of such series
held by such Existing Holder;
(b) (i) any Bid for shares of such series will be considered valid up to
and including the excess of the number of 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 (a) above;
(ii) subject to subclause (i), 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 shares of such series subject to such Bids is
greater than such excess, such Bids will 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 will be reduced pro rata to
cover the number of shares of such series equal to such excess;
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<PAGE> 97
(iii) subject to subclauses (i) and (ii), 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
(iv) in any such event, the number, if any, of shares of such series
subject to Bids not valid under this clause (b) will be treated as the
subject of a Bid for shares of such series by or on behalf of a Potential
Holder at the rate specified therein; and
(c) all Sell Orders for shares of such series will 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 (a) above and valid Bids referred to in
clause (b) above.
If more than one Bid for a Potential Holder is submitted to the Auction
Agent, each Bid submitted will be a separate Bid with the rate and number of
shares therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for shares of
a series of Acquiring Fund MuniPreferred, the Auction Agent will assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Hold Order, Bid or Sell Order as
submitted or deemed submitted by a Broker-Dealer being herein referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine 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
referred to as the "Available MuniPreferred" of such series) and whether
Sufficient Clearing Bids for shares of such series have been made in the
Auction. "Sufficient Clearing Bids" for shares of such series will have been
made if the number of outstanding shares of such series that are the subject of
Submitted Bids of Potential Holders specifying rates not higher than the Maximum
Rate for shares of such series equals or exceeds the number of outstanding
shares of such series that are the subject of Submitted Sell Orders (including
the number of shares of such series subject to Bids of Existing Holders
specifying rates higher than the Maximum Rate for shares of such series).
If Sufficient Clearing Bids for shares of such series have been made, the
Auction Agent will determine the lowest rate specified in the Submitted Bids
(the "Winning Bid Rate") which, taking into account the rates in the Submitted
Bids of Existing Holders, would result in Existing Holders 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 Potential
Holders, based on the rates in their Submitted Bids, would equal not less than
the Available MuniPreferred of such series. In such event, the Winning Bid Rate
will be the Applicable Rate for the next Rate Period for all shares of such
series.
If Sufficient Clearing Bids for shares of such series have not been made
(other than because all of the outstanding shares of such series are subject to
Submitted Hold Orders), the Applicable Rate for all shares of such series for
the next Rate Period thereof will be equal to the Maximum Rate for shares of
such series. If Sufficient Clearing Bids for shares of such series have not been
made, Beneficial Owners that have submitted or that are deemed to have submitted
Sell Orders may not be able to sell in the Auction all shares of such series
subject to such Sell Orders but will continue to own shares of such series for
the next Rate Period, dividends for which may include income taxable to such
Beneficial Owners. See "Auction Dates; Advance Notice of Allocation of Taxable
Income" above and "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below.
If all of the outstanding shares of Acquiring Fund MuniPreferred of such
series are subject to Submitted Hold Orders, the Applicable Rate for all shares
of such series for the next Rate Period thereof will be the All Hold Order
Rate--i.e., 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 the 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 income tax rate, if any, applicable
to ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income, whichever is greater; provided, however,
that if the Acquiring 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
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<PAGE> 98
income tax purposes ("Taxable Income"), the Applicable Rate for shares of such
series for such Rate Period will be (A) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (B) 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 income tax rate, if any,
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate 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 (1) dividing the amount of Taxable Income available
for distribution per such share of Acquiring Fund MuniPreferred by the number of
days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (2) multiplying the amount determined in (1)
above by 365 (in the case of the Dividend Period of 7 Rate Period Days) or 360
(in the case of any other Dividend Period), and (3) dividing the amount
determined in (2) above by $25,000. In calculating the "AA" Composite Commercial
Paper Rate, the Treasury Bill Rate and the Treasury Note Rate for such purpose,
the rates used will be the rates or yields specified in the applicable
definitions of "AA" Composite Commercial Paper Rate, Treasury Bill Rate and
Treasury Note Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders in respect of shares
of a series of Acquiring Fund MuniPreferred will be accepted or rejected in the
order of priority set forth in the Auction Procedures, with the result that
Existing Holders and Potential Holders of shares of such series will sell,
continue to hold and/or purchase shares of such series as set forth below.
Existing Holders of shares of such series that submitted or were deemed to have
submitted Hold Orders (or on whose behalf Hold Orders were submitted or deemed
to have been submitted) will continue to hold the shares of such series subject
to such Hold Orders.
If Sufficient Clearing Bids for shares of a series of Acquiring Fund
MuniPreferred have been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than the
Winning Bid Rate for shares of such series will sell the outstanding shares of
such series subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate for shares of
such series will continue to hold the outstanding shares of such series subject
to such Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate for shares of
such series will purchase the number of outstanding shares of such series
subject to such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate for shares of such
series will continue to hold the shares of such series subject to such Submitted
Bid, unless the number of outstanding shares of such series subject to all such
Submitted Bids is greater than the number of shares of such series in excess of
the Available MuniPreferred of such series over the number of shares of such
series accounted for in clauses (b) and (c) above, in which event each Existing
Holder with such a Submitted Bid will continue to hold a number of outstanding
shares of such series subject to such Submitted Bid determined on a pro rata
basis based on the number of outstanding shares of such series subject to all
such Submitted Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate for shares of such
series will purchase any shares of Available MuniPreferred of such series not
accounted for in clauses (b) through (d) above on a pro rata basis based on the
outstanding shares of such series subject to all such Submitted Bids.
If Sufficient Clearing Bids for shares of a series of Acquiring Fund
MuniPreferred have not been made (unless this results because all outstanding
shares of such series are subject to Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate for
shares of such series will continue to hold the outstanding shares of such
series subject to such Submitted Bid;
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<PAGE> 99
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate for
shares of such series will purchase the number of outstanding shares of such
series subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate for shares of such
series or a Submitted Sell Order will sell a number of shares of such series
determined on a pro rata basis based on the number of outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
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
Acquiring Fund MuniPreferred, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of shares of Acquiring Fund MuniPreferred being sold or purchased on
such Auction Date so that the number of shares sold or purchased by each
Existing Holder or Potential Holder will be whole shares of Acquiring Fund
MuniPreferred. If as a result of the pro rata allocation described in clause (e)
of the second preceding paragraph, any Potential Holder would be entitled or
required to purchase less than a whole share of Acquiring Fund MuniPreferred,
the Auction Agent will, in such manner as, in its sole discretion, it will
determine, allocate shares of Acquiring Fund MuniPreferred for purchase among
Potential Holders so that only whole shares of Acquiring Fund MuniPreferred are
purchased by any such Potential Holder, even if such allocation results in one
or more of such Potential Holders not purchasing shares of Acquiring Fund
MuniPreferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise 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 such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 p.m., New York
City time, on each Auction Date. Each Broker-Dealer that submitted an Order for
the account of a customer will then be required to advise such customer of the
Applicable Rate for the next Rate Period and, if such Order was a Bid or Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of Acquiring Fund MuniPreferred as a result of the
Auction and will be required to advise each customer purchasing or selling
shares of Acquiring Fund MuniPreferred as a result of the Auction to give
instructions to its Agent Member of the Securities Depository to pay the
purchase price against delivery of such shares or to deliver such shares against
payment therefor, as appropriate. The Auction Agent will be required to record
each transfer of shares of Acquiring Fund MuniPreferred on the registry of
Existing Holders to be maintained by the Auction Agent.
In accordance with the Security Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Security Depository will be debited and credited and shares
delivered as necessary to effect the purchases and sales of shares of Acquiring
Fund MuniPreferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Acquiring Fund MuniPreferred are set forth in Annex C to this Statement of
Additional Information.
If any Existing Holder selling shares of Acquiring Fund MuniPreferred in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased shares of Acquiring Fund MuniPreferred in such Auction may
deliver to such person a number of whole shares of Acquiring Fund MuniPreferred
that is less than the number of shares that otherwise was to be purchased by
such person. In such event, the number of shares of Acquiring Fund MuniPreferred
to be so delivered shall be determined by such Broker-Dealer. Delivery of such
lesser number of shares shall constitute good delivery.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Acquiring Fund in connection
with Auctions. In the absence of bad faith or negligence on its part, the
Auction Agent will not be liable for any action taken, suffered, or omitted or
for any error of judgment made by it in the performance of its duties under the
Auction Agency Agreement and will not be liable for any error of judgment made
in good faith unless the Auction Agent will have been negligent in ascertaining
the pertinent facts.
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<PAGE> 100
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Acquiring Fund MuniPreferred, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other Person, if permitted by the Acquiring Fund) with respect
to transfers described in the Joint Proxy Statement--Prospectus under "Proposal
No. 1--The Reorganization--Description of MuniPreferred Issued by the Acquiring
Fund--The Auction--Secondary Market Trading and Transfer of Acquiring Fund
MuniPreferred." The Auction Agent is not required to accept any such notice for
an Auction unless it is received by the Auction Agent by 3:00 p.m., New York
City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Acquiring Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Acquiring 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 Acquiring
Fund may remove the Auction Agent provided that prior to such removal the
Acquiring Fund shall have entered into such an agreement with a successor
Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Acquiring Fund
MuniPreferred will pay to each Broker-Dealer, from funds provided by the
Acquiring Fund, a service charge at the annual rate of 1/4 of 1% in the case of
any Auction immediately preceding a Rate Period of less than one year, or a
percentage agreed to by the Acquiring Fund and the Broker-Dealers in the case of
any Auction immediately preceding a Rate Period of one year or longer, of the
purchase price of shares of Acquiring Fund MuniPreferred placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of Acquiring Fund MuniPreferred will be placed by a Broker-Dealer if such
shares were (a) the subject of Hold Orders deemed to have been submitted to the
Auction Agent by the Broker Dealer and were acquired by such Broker-Dealer for
its own account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Acquiring Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreements provides that a Broker-Dealer (other than an
affiliate of the Acquiring Fund) may submit Orders in Auctions for its own
account, unless the Acquiring Fund notifies all Broker-Dealers that they may no
longer do so, in which case Broker-Dealers may continue to submit Hold Orders
and Sell Orders for their own accounts. Any Broker-Dealer that is an affiliate
of the Acquiring Fund may submit Orders in Auctions, but only if such Orders are
not for its own account. If a Broker-Dealer submits an Order for its own account
in any Auction, it might have an advantage over other Bidders because it would
have knowledge of all Orders submitted by it in that Auction; such
Broker-Dealer, however, would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
TAX MATTERS ASSOCIATED WITH
INVESTMENT IN THE FUNDS
The following is based upon the advice of Vedder, Price, Kaufman &
Kammholz, counsel to the Funds.
The Federal income tax implications for Acquired Fund shareholders who will
own Acquiring Fund Shares after the Reorganization will be substantially the
same as the Federal income tax implications currently applicable to such
shareholders with respect to their ownership of Acquired Fund Shares. The
Acquiring Fund and the Acquired Fund qualify under Subchapter M of the Code as
regulated investment companies and satisfy conditions which enable dividends on
common shares or shares of MuniPreferred which are attributable to interest on
Municipal Obligations to be exempt from Federal income tax in the hands of
owners of such shares, subject to the possible application of the alternative
minimum tax.
To qualify under Subchapter M for tax treatment as a regulated investment
company, each Fund must, among other things: (a) distribute to its shareholders
at least 90% of the sum of (i) its investment company taxable income (as that
term is defined in the Code determined without regard to the deduction for
dividends paid) and (ii) its net tax-exempt income; (b) derive less than 30% of
its annual gross income from the sale or other disposition of stock, securities,
options, futures, or forward contracts held for less than three months; and (c)
diversify its holdings so that, at the end of each fiscal quarter of such Fund
(i) at least 50% of the market value of such Fund's assets is
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<PAGE> 101
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 such 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 such Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies). In meeting these requirements of Subchapter M of the
Code, each Fund may be restricted in the selling of portfolio securities held
for less than three months and in the utilization of certain of the investment
techniques described under "Investment Objectives and Policies of the
Funds--Investment Restrictions" above. If in any year a Fund should fail to
qualify under Subchapter M for tax treatment as a regulated investment company,
that Fund would incur a regular Federal corporate income tax upon its taxable
income for that year, and distributions to its shareholders would be taxable to
such holders as ordinary income to the extent of the earnings and profits of
such Fund. A regulated investment company that fails to distribute, by the close
of each calendar year, an amount equal to the sum of 98% of its ordinary taxable
income for such year and 98% of its capital gain net income for the one year
period ending October 31 in such year, plus any shortfalls from the prior year's
required distribution, is liable for a 4% excise tax on the portion of the
undistributed amount of such income that is less than the required amount for
such distributions. To avoid the imposition of this excise tax, each 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.
Each Fund intends to qualify to pay "exempt-interest" dividends on its
common shares and shares of MuniPreferred as defined under the Code. Under the
Code, at the close of each quarter of its taxable year, if at least 50% of the
value of its total assets consists of Municipal Obligations, each 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)
paid by each Fund which are attributable to interest on Municipal Obligations
and are so designated by the Fund. Exempt-interest dividends will be exempt from
Federal income tax, subject to the possible application of the Federal
alternative minimum tax. Insurance proceeds received by each Fund under any
insurance policies in respect of scheduled interest payments on defaulted
Municipal Obligations, as described herein, will be excludable from Federal
gross income under Section 103(a) of the Code. In the case of non-appropriation
by a political subdivision, however, there can be no assurance that payments
made by the issuer representing interest on such "non-appropriation" Municipal
Lease Obligations will be excludable from gross income for Federal income tax
purposes. See "Investment Objectives and Policies of the Funds--Municipal
Obligations" above. Gains of a Fund that are attributable to market discount on
certain Municipal Obligations acquired after April 30, 1993 are treated as
ordinary income. Distributions to shareholders by each Fund of net income
received, if any, from taxable temporary investments and net short-term capital
gains, if any, realized by such Fund will be taxable to its shareholders as
ordinary income. Distributions by each Fund of net capital gains, if any, are
taxable as long-term capital gains, regardless of the length of time the
shareholder has owned common shares or shares of MuniPreferred of such Fund and
regardless of whether the distribution is received in additional common shares
or shares of MuniPreferred or in cash. As long as a 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 allocate 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. Accordingly, so long as the
IRS maintains this position, each Fund intends each year to allocate, to the
fullest extent practicable, net tax-exempt interest, net capital gains (i.e.,
the excess of net long-term capital gain over net short-term capital loss) and
other taxable income, if any, between its common shares and shares of
MuniPreferred in proportion to the total dividends paid to each class with
respect to such year. To the extent permitted under applicable law, each Fund
reserves the right to make special allocations of income within a class,
consistent with the objectives of such Fund. If, (a) in the case of any Minimum
Rate Period or any Special Rate Period of 28 Rate Period Days or fewer, such
Fund retroactively allocates any net capital gains or other income taxable for
Federal income tax purposes to shares of its MuniPreferred as a result of the
redemption of all or a portion of the outstanding shares of its MuniPreferred or
the liquidation of the Fund without having given advance notice thereof as
required by such Fund's preferred share designation statement or (b) in the case
of any Special Rate Period of more than 28 Rate Period Days, such Fund allocates
any net capital gains or other income taxable for Federal income tax purposes to
shares of its MuniPreferred without having given advance notice thereof as
described above, such Fund will arrange to make certain payments to owners of
shares of its MuniPreferred to which such allocation was made to offset the tax
effect thereof as described under "Description of MuniPreferred Issued by the
Acquiring Fund--Dividends--Gross-up Payments" above.
S-41
<PAGE> 102
In general, dividends on a Fund's shares of MuniPreferred will be exempt
from Federal income tax in the hands of owners of such shares subject to the
possible application of the alternative minimum tax. Each Fund is required to
allocate net capital gains and other taxable income, if any, proportionately
between its common shares and shares of MuniPreferred in accordance with the
current position of the IRS. Each Fund shall, in the case of a Minimum Rate
Period or a Special Rate Period of 28 Rate Period Days, and may, in the case of
any other Special Rate Period, notify the Auction Agent of the amount of any net
capital gains or other income taxable for Federal income tax purposes to be
included in any dividend on shares of its MuniPreferred prior to the Auction
establishing the Applicable Rate for such dividend. The amount of taxable income
allocable to a Fund's shares of MuniPreferred will depend upon the amount of
such income realized by such Fund, but is not generally expected to be
significant. Except for dividends paid on shares of a Fund's MuniPreferred which
include an allocated portion of any net capital gains or other taxable income,
each Fund anticipates that all other dividends paid on shares of its
MuniPreferred will constitute exempt-interest dividends for Federal income tax
purposes.
The Funds have received an opinion of counsel to the effect that the manner
in which each Fund intends to allocate items of tax-exempt income, net capital
gains and other taxable income, if any, between its common shares and shares of
MuniPreferred 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 a 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 a Fund's
allocation, it either could assert the need to reallocate that Fund's net
capital gains or other taxable income or it could disallow a portion of that
Fund's dividends paid deduction. In the event of a reallocation, some of the
dividends identified by that Fund as tax-exempt to owners of its shares of
MuniPreferred may be recharacterized as additional capital gain or other taxable
income. Under these circumstances, that Fund would not be required to make
payments to such owners to offset the tax effect of such reallocation. In
addition, a reallocation or a disallowance of part of that Fund's dividends paid
deduction would likely cause that Fund to be liable for income tax on any
reallocated taxable income and possibly an excise tax. Counsel has advised the
Funds that, in its opinion, if the IRS were to challenge in court a Fund's
allocations of income and gain, the IRS should not prevail.
Allocations to a Fund's shares of MuniPreferred of any net income received
from taxable temporary investments and any net short-term capital gains realized
by such Fund will be taxable to owners of such shares as ordinary income.
Allocations of any net capital gains realized by each Fund will be taxable to
owners of that Fund's shares of MuniPreferred as long-term capital gains
regardless of the length of time such owners have owned such shares. As long as
a Fund qualifies as a regulated investment company under the Code, no part of
the distributions to owners of its shares of MuniPreferred will qualify for the
dividends-received deduction for corporations.
In order for any distributions to owners of a Fund's shares of
MuniPreferred to be eligible to be treated as exempt-interest dividends, such
shares of MuniPreferred must be treated as stock for Federal income tax
purposes. Each Fund has received an opinion of counsel to the effect that its
shares of MuniPreferred will constitute stock of such Fund for Federal income
tax purposes and, therefore, distributions declared and paid at the Applicable
Rate as dividends with respect to such Fund's shares of MuniPreferred, to the
extent paid out of current or accumulated earnings and profits of such Fund,
will constitute dividends for Federal income tax purposes. This opinion of
counsel is based, among other things, on (a) a revenue ruling published by the
IRS in 1990, which holds that a preferred stock that has its dividend rate
periodically set pursuant to an auction process substantially similar to the
auction process to be established for each Fund's shares of MuniPreferred is
treated as stock for Federal income tax purposes and (b) each Fund's
representation to counsel that there is no express or implied agreement between
or among a Broker-Dealer or any other party and such Fund, Nuveen or any owner
of such 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 a Fund's shares of MuniPreferred are outstanding such
Fund fails to meet the MuniPreferred Basic Maintenance Amount or the 1940 Act
MuniPreferred Asset Coverage, such Fund will be required to suspend
distributions to holders of its common shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
MuniPreferred Issued by the Acquiring Fund--Dividends-- Restrictions on
Dividends and Other Payments" above. This may prevent such Fund from
distributing at least 90% of its investment company taxable income and net
tax-exempt income, and may therefore jeopardize such Fund's qualification for
taxation as a regulated investment company or cause such Fund to incur a tax
liability or a non-deductible 4% excise tax on the undistributed taxable income
(including gain), or both. Upon failure to meet the MuniPreferred Basic
Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, a Fund will be
required
S-42
<PAGE> 103
to redeem its shares of MuniPreferred in order to maintain or restore such
maintenance amount or asset coverage and avoid the adverse consequences to such
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. See "Description of MuniPreferred Issued by the
Acquiring Fund--Redemption--Mandatory Redemption" above.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry a Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.
The interest on private activity bonds in most instances is not Federally
tax-exempt to a person who is a "substantial user" of a facility financed by
such bonds or a "related person" of such "substantial user." As a result, a 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."
Each Fund may, at its option, redeem shares of its MuniPreferred in whole
or in part, and is required to redeem shares of its MuniPreferred to the extent
required to maintain the MuniPreferred Basic Maintenance Amount and the 1940 Act
MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a redemption
of the shares of MuniPreferred will be taxed as gain or loss from the sale or
exchange of the shares of MuniPreferred under Section 302 of the Code rather
than as a dividend, but only if the redemption distribution (a) is deemed not to
be essentially equivalent to a dividend, (b) is in complete redemption of an
owner's interest in such Fund, (c) is substantially disproportionate with
respect to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of such Fund. For purposes of (a), (b) and (c) above, an owner's
common shares ownership of such Fund will be taken into account.
Nonresident alien individuals and certain foreign corporations and other
entities ("foreign investors") generally are subject to U.S. withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on distributions of taxable net investment income and net short-term capital
gains. To the extent received by foreign investors, exempt-interest dividends,
distributions of net long-term capital gains and any gain from the sale or other
disposition of a Fund's shares of MuniPreferred generally are exempt from U.S.
taxation. Different tax consequences may result if the owner is engaged in a
trade or business in the United States or 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 each Fund (and received by
the shareholders) on December 31 of the year declared.
The sale or other disposition of common shares or shares of MuniPreferred
of a Fund will normally result in capital gain or loss to shareholders.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Present law taxes both long-term
and short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, under current law net capital
gains will be taxed at a maximum rate of 28%, while short-term capital gains and
other ordinary income will be taxed at a maximum rate of 39.6%. However, because
of the limitations on itemized deductions and the deduction for personal
exemptions applicable to higher income taxpayers, the effective rate of tax may
be higher in certain circumstances. Losses realized by a shareholder on the sale
or exchange of shares of a Fund held for six months or less are disallowed to
the extent of any distribution of exempt-interest dividends received with
respect to such shares, and, if not disallowed, such losses are treated as
long-term capital losses to the extent of any distribution of long-term capital
gain received with respect to such shares.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax
S-43
<PAGE> 104
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent that a Fund receives income from Municipal Obligations
subject to the Federal alternative minimum tax, a portion of the dividends paid
by it, although otherwise exempt from Federal income tax, will be taxable to its
shareholders to the extent that their tax liability is determined under the
alternative minimum tax. Each Fund will annually supply a report indicating the
percentage of that Fund's income attributable to Municipal Obligations subject
to the Federal alternative minimum tax.
In addition, for certain corporations, alternative minimum taxable income
is increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by each Fund that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.
For taxable years beginning before 1996, the Code imposes a separate tax on
corporations (other than regulated investment companies such as the Funds) at a
rate of 0.12% on the excess of such corporation's "modified alternative minimum
taxable income" over $2,000,000. A portion of the tax-exempt interest, including
exempt-interest dividends from the Funds, is includable in modified alternative
minimum taxable income. This tax will be imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability.
Tax-exempt income, including exempt-interest dividends paid by each Fund,
is taken into account in calculating the amount of social security and railroad
retirement benefits that may be subject to Federal income tax.
Each Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments paid to non-corporate holders of that
Fund's shares who do not furnish to that Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
The Code provides that every shareholder required to file a tax return must
include for information purposes on such return the amount of tax-exempt
interest received during the taxable year, including any exempt-interest
dividends received from each Fund.
The value of common shares acquired pursuant to a Fund's Dividend
Reinvestment Plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income.
The foregoing is a general, abbreviated summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of each Fund and its shareholders. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to each 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.
S-44
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors of the Funds............................................... F-2
Audited Statements of Net Assets of the Funds............................................. F-3
Audited Statements of Operations of the Funds............................................. F-4
Audited Statements of Changes in Net Assets of the Funds.................................. F-5
Notes to Audited Financial Statements of the Funds........................................ F-6
Audited Portfolio of Investments of the Acquired Fund..................................... F-11
Audited Portfolio of Investments of the Acquiring Fund.................................... F-14
Audited Financial Highlights of the Funds................................................. F-18
</TABLE>
F-1
<PAGE> 106
REPORT OF INDEPENDENT AUDITORS
The Board of Directors, Trustees and Shareholders
Nuveen Insured Premium Income Municipal Fund, Inc.
Nuveen Insured Premium Income Municipal Fund 2
We have audited the accompanying statements of net assets, including the
portfolios of investments, of Nuveen Insured Premium Income Municipal Fund, Inc.
and Nuveen Insured Premium Income Municipal Fund 2 as of October 31, 1995, and
the related statements of operations and 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, 1995, 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 Insured Premium Income Municipal Fund, Inc. and Nuveen Insured Premium
Income Municipal Fund 2 at October 31, 1995, 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 15, 1995
F-2
<PAGE> 107
NUVEEN EXCHANGE-TRADED FUNDS
STATEMENT OF NET ASSETS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NPE NPX
------------ ------------
<S> <C> <C>
ASSETS
Investments in municipal securities, at market value (note 1)......... $322,875,073 $419,431,785
Temporary investments in short-term municipal securities, at amortized
cost (note 1)....................................................... 1,300,000 2,500,000
Cash.................................................................. 72,882 60,127
Receivables:
Interest......................................................... 5,893,216 8,251,307
Investments sold................................................. -- 5,801,615
Other assets.......................................................... 23,857 13,755
------------ ------------
Total assets................................................ 330,165,028 436,058,589
------------ ------------
LIABILITIES
Payable for investments purchased..................................... -- 6,450,920
Accrued expenses:
Management fees (note 6)......................................... 178,350 230,265
Other............................................................ 60,677 153,070
Preferred share dividends payable..................................... 68,452 46,488
Common share dividends payable........................................ 1,013,607 1,269,487
------------ ------------
Total liabilities........................................... 1,321,086 8,150,230
------------ ------------
Net assets (note 7)................................................... $328,843,942 $427,908,359
============ ============
Preferred shares, at liquidation value................................ $110,000,000 $158,900,000
============ ============
Preferred shares outstanding.......................................... 4,400 6,356
============ ============
Common shares outstanding............................................. 15,128,458 20,642,068
============ ============
Net asset value per Common share outstanding (net assets less
Preferred shares at liquidation value, divided by Common shares
outstanding)........................................................ $ 14.47 $ 13.03
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 108
NUVEEN EXCHANGE-TRADED FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
NPE NPX
----------- ------------
<S> <C> <C>
INVESTMENT INCOME
Tax-exempt interest income (note 1).................................... $18,828,179 $ 24,078,207
----------- -----------
Expenses:
Management fees (note 6).......................................... 2,026,982 2,595,700
Preferred shares--auction fees.................................... 275,000 397,250
Preferred shares--dividend disbursing agent fees.................. 30,000 45,000
Shareholders' servicing agent fees and expenses................... 37,963 45,910
Custodian's fees and expenses..................................... 62,127 69,765
Directors'/Trustees' fees and expenses (note 6)................... 1,586 2,039
Professional fees................................................. 19,001 23,404
Shareholders' reports--printing and mailing expenses.............. 72,305 80,812
Stock exchange listing fees....................................... 24,529 15,903
Portfolio insurance expense....................................... 12,281 60,598
Investor relations expense........................................ 15,517 24,488
Other expenses.................................................... 26,603 44,152
----------- -----------
Total expenses............................................... 2,603,894 3,405,021
----------- -----------
Net investment income................................... 16,224,285 20,673,186
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions, net of taxes, if
applicable (notes 1 and 3)........................................... (1,944,767) (12,029,555)
Net change in unrealized appreciation or depreciation of investments... 31,478,880 55,044,396
----------- -----------
Net gain from investments............................... 29,534,113 43,014,841
----------- -----------
Net increase in net assets from operations............................. $45,758,398 $ 63,688,027
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 109
NUVEEN EXCHANGE-TRADED FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NPE NPX
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
10/31/95 10/31/94 10/31/95 10/31/94
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income...................... $ 16,224,285 $ 16,634,025 $ 20,673,186 $ 20,193,798
Net realized gain (loss) from investment
transactions, net of taxes, if
applicable............................... (1,944,767) (961,639) (12,029,555) (10,409,736)
Net change in unrealized appreciation or
depreciation of investments.............. 31,478,880 (41,716,448) 55,044,396 (55,190,281)
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets from operations......... 45,758,398 (26,044,062) 63,688,027 (45,406,219)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (note 1)
From undistributed net investment income:
Common shareholders................... (12,707,908) (14,311,525) (15,419,632) (15,997,611)
Preferred shareholders................ (4,215,008) (2,876,081) (6,051,636) (4,047,134)
------------ ------------ ------------ ------------
Decrease in net assets from
distributions to
shareholders................... (16,922,916) (17,187,606) (21,471,268) (20,044,745)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS (note 2)
Preferred shares, net proceeds from sale
of shares................................ -- -- -- 156,068,392
------------ ------------ ------------ ------------
Net increase in net assets derived
from capital share transactions..... -- -- -- 156,068,392
------------ ------------ ------------ ------------
Net increase (decrease) in net
assets......................... 28,835,482 (43,231,668) 42,216,759 90,617,428
Net assets at beginning of year............ 300,008,460 343,240,128 385,691,600 295,074,172
------------ ------------ ------------ ------------
Net assets at end of year.................. $328,843,942 $300,008,460 $427,908,359 $385,691,600
============ ============ ============ ============
Balance of undistributed net investment
income at end of year.................... $ 265,613 $ 964,245 $ 398,674 $ 1,196,756
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 110
NUVEEN EXCHANGE-TRADED FUNDS
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
At October 31, 1995, the National Funds (the "Funds") covered in this
report and their corresponding New York Stock Exchange symbols are Nuveen
Insured Premium Income Municipal Fund, Inc. (NPE) and Nuveen Insured Premium
Income Municipal Fund 2 (NPX).
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
Portfolio securities for which market quotations are readily available are
valued at the mean between the quoted bid and asked prices or the yield
equivalent. Portfolio securities for which market quotations are not readily
available are valued at fair value by consistent application of methods
determined in good faith by the Board of Directors/Trustees. Temporary
investments in securities that have variable rate and demand features qualifying
them as short-term securities are traded and valued at amortized cost.
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 be settled a month or more after the transaction date. 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 their purchase commitments. At
October 31, 1995, NPX had outstanding purchase commitments of $6,450,920. There
were no such purchase commitments in NPE.
Interest 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
The Funds intend to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies by distributing all of their
net investment income, in addition to any significant amounts of net realized
gains from investments, to shareholders. The Funds currently consider
significant net realized gains as amounts in excess of $.01 per Common 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
income dividends paid during the year ended October 31, 1995, have been
designated Exempt Interest Dividends.
Dividends and Distributions to Shareholders
Net investment income is declared as a dividend monthly and payment is made
or reinvestment is credited to shareholder accounts after month-end. Net
realized gains from securities transactions are distributed to shareholders not
less frequently than annually only to the extent they exceed available capital
loss carryovers.
Distributions to shareholders of net investment income and net realized
capital gains are recorded on the ex-dividend date. The amount and timing of
such 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
result and will be classified as either distributions in excess of net
investment income or distributions in excess of net realized capital gains, if
applicable.
F-6
<PAGE> 111
NUVEEN EXCHANGE-TRADED FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Shares
The following 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, at
October 31, 1995, for each Fund is as follows:
<TABLE>
<CAPTION>
NPE NPX
----- -----
<S> <C> <C>
Number of shares:
Series M.................................................. -- 2,080
Series T.................................................. 2,200 --
Series W.................................................. -- 2,080
Series Th................................................. 2,200 --
Series F.................................................. -- 2,196
----- -----
Total................................................ 4,400 6,356
===== =====
</TABLE>
Insurance
The Funds invest in municipal securities which are covered by insurance
guaranteeing the timely payment of principal and interest thereon or backed by
an escrow or trust account containing sufficient U.S. Government or U.S.
Government agency securities to ensure the timely payment of principal and
interest. Each insured municipal security is covered by Original Issue
Insurance, Secondary Market Insurance or Portfolio Insurance. Such insurance
does not guarantee the market value of the municipal securities or the value of
the Funds' shares. Original Issue Insurance and Secondary Market Insurance
remain in effect as long as the municipal securities covered thereby remain
outstanding and the insurer remains in business, regardless of whether the Funds
ultimately dispose of such municipal securities. Consequently, the market value
of the municipal securities covered by Original Issue Insurance or Secondary
Market Insurance may reflect value attributable to the insurance. Portfolio
Insurance is effective only while the municipal securities are held by the
Funds. Accordingly, neither the prices used in determining the market value of
the underlying municipal securities nor the net asset value of the Funds' shares
include value, if any, attributable to the Portfolio Insurance. Each policy of
the Portfolio Insurance does, however, give the Funds the right to obtain
permanent insurance with respect to the municipal security covered by the
Portfolio Insurance policy at the time of its sale.
Derivative Financial Instruments
In October 1994, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 119 Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments which prescribes
disclosure requirements for 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 year ended October 31, 1995,
other than occasional purchases of high quality synthetic money market
securities which were held temporarily pending the re-investment in long-term
portfolio securities.
2. FUND SHARES
There were no share transactions during the year ended October 31, 1995, in
either of the Funds. There were no share transactions during the year ended
October 31, 1994, in either of the Funds, except for 6,356 Preferred shares
issued by NPX.
F-7
<PAGE> 112
NUVEEN EXCHANGE-TRADED FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SECURITIES TRANSACTIONS
Purchase and sales (including maturities) of investments in municipal
securities and temporary municipal investments during the year ended October 31,
1995, were as follows:
<TABLE>
<CAPTION>
NPE NPX
------------ ------------
<S> <C> <C>
PURCHASES
Investments in municipal securities............... $ 86,398,533 $116,844,877
Temporary municipal investments................... 137,600,000 99,110,000
SALES AND MATURITIES
Investments in municipal securities............... 85,261,457 118,444,279
Temporary municipal investments................... 138,500,000 96,710,000
============ ============
</TABLE>
At October 31, 1995, 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, 1995, the Funds had unused capital loss carryovers available
for federal income tax purposes to be applied against future capital gains, if
any. If not applied, the carryovers will expire as follows:
<TABLE>
<CAPTION>
NPE NPX
---------- -----------
<S> <C> <C>
Expiration year:
2001............................................ $ 289,342 $ --
2002............................................ 961,639 10,409,736
2003............................................ 1,944,767 12,029,555
---------- -----------
Total................................................ $3,195,748 $22,439,291
========== ===========
</TABLE>
4. DISTRIBUTIONS TO COMMON SHAREHOLDERS
On November 1, 1995, the Funds declared dividend distributions from their
ordinary income which were paid December 1, 1995, to shareholders of record on
November 15, 1995, as follows:
<TABLE>
<CAPTION>
NPE NPX
------ ------
<S> <C> <C>
Dividend per share........................................... $.0670 $.0595
====== ======
</TABLE>
5. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of
investments at October 31, 1995, were as follows:
<TABLE>
<CAPTION>
NPE NPX
----------- -----------
<S> <C> <C>
Gross unrealized:
Appreciation................................... $11,989,342 $ 7,770,566
Depreciation................................... (75,551) (3,136,037)
----------- -----------
Net unrealized appreciation......................... $11,913,791 $ 4,634,529
=========== ===========
</TABLE>
F-8
<PAGE> 113
NUVEEN EXCHANGE-TRADED FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 to the Adviser 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:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET VALUE MANAGEMENT FEE
<S> <C>
--------------------------------------------------------------------------------
For the first $125,000,000..................................... .65 of%1
For the next $125,000,000...................................... .6375 of 1
For the next $250,000,000...................................... .625 of 1
For the next $500,000,000...................................... .6125 of 1
For the next $1,000,000,000.................................... .6 of 1
For net assets over $2,000,000,000............................. .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 Directors/Trustees who are affiliated with the
Adviser or to their officers, all of whom receive remuneration for their
services to the Funds from the Adviser.
7. COMPOSITION OF NET ASSETS
At October 31, 1995, net assets consisted of:
<TABLE>
<CAPTION>
NPE NPX
------------ ------------
<S> <C> <C>
Preferred shares, $25,000 stated value per share,
at liquidation value............................ $110,000,000 $158,900,000
Common shares, $.01 par value per share........... 151,285 206,421
Paid-in surplus................................... 209,709,001 286,208,026
Balance of undistributed net investment income.... 265,613 398,674
Accumulated net realized gain (loss) from
investment transactions......................... (3,195,748) (22,439,291)
Net unrealized appreciation or depreciation of
investments..................................... 11,913,791 4,634,529
------------ ------------
Net assets.............................. $328,843,942 $427,908,359
============ ============
Authorized shares:
Common.................................. 200,000,000 Unlimited
Preferred............................... 1,000,000 Unlimited
============ ============
</TABLE>
F-9
<PAGE> 114
NUVEEN EXCHANGE-TRADED FUNDS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. INVESTMENT COMPOSITION
Each Fund invests in municipal securities which include general obligation,
escrowed and revenue bonds. At October 31, 1995, the revenue sources by
municipal purpose for these investments, expressed as a percent of total
investments, were as follows:
<TABLE>
<CAPTION>
NPE NPX
--- ---
<S> <C> <C>
Revenue Bonds:
Housing Facilities......................................... 9 % 14 %
Health Care Facilities..................................... 14 10
Pollution Control Facilities............................... 18 9
Transportation............................................. 12 11
Electric Utilities......................................... 5 9
Water/Sewer Facilities..................................... 4 9
Lease Rental Facilities.................................... 7 1
Educational Facilities..................................... 3 4
Other...................................................... 4 6
General Obligation Bonds........................................ 15 23
Escrowed Bonds.................................................. 9 4
--- ---
100% 100%
=== ===
</TABLE>
All of the long-term and intermediate-term investments owned by the Funds
are 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,
either of which ensure the timely payment of principal and interest in the event
of default. 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 of the 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.
F-10
<PAGE> 115
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND, INC. (NPE)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALASKA--1.6%
Anchorage General Obligation:
$ 2,020,000 5.900%, 2/01/06..................................................... No Opt. Call Aaa $ 2,166,753
3,000,000 6.250%, 6/01/23..................................................... 6/99 at 100 Aaa 3,061,860
CALIFORNIA--7.9%
6,590,000 California Housing Finance Agency, Multi-Unit Rental, Alternative
Minimum Tax, 6.625%, 2/01/24...................................... 2/03 at 102 A1 6,756,134
3,000,000 M-S-R Public Power Agency, San Juan Project, 6.000%, 7/01/20........ 7/03 at 102 Aaa 3,044,760
7,000,000 Palmdale Community Redevelopment Agency, 8.000%, 4/01/16............ No Opt. Call Aaa 8,828,330
San Leandro Housing Finance Corporation (Ashland Village
Apartments):
2,005,000 6.550%, 1/01/12..................................................... 1/02 at 102 Aaa 2,094,884
5,100,000 6.650%, 1/01/25..................................................... 1/02 at 102 Aaa 5,311,038
DISTRICT OF COLUMBIA--4.4%
5,000,000 District of Columbia (Children's Hospital), 6.250%, 7/15/19......... 7/02 at 102 Aaa 5,078,150
3,910,000 District of Columbia Housing Finance Agency, Single Family Mortgage,
Alternative Minimum Tax, 6.350%, 12/01/24......................... 6/03 at 102 AAA 3,951,642
5,250,000 District of Columbia (The Catholic University of America), 6.450%,
10/01/23.......................................................... 10/03 at 102 AAA 5,450,130
ILLINOIS--17.2%
8,000,000 Illinois Development Finance Authority, Pollution Control
(Illinois Power Company), 8.300%, 4/01/17......................... 4/98 at 102 Aaa 8,858,320
3,635,000 Illinois Development Finance Authority (Indian Prairie Community
Unit School District No. 204), 7.750%, 12/30/03................... No Opt. Call Aaa 4,345,315
Illinois Health Facilities Authority (Lutheran General Health
System):
4,355,000 6.125%, 4/01/12..................................................... 4/03 at 102 Aaa 4,486,565
5,000,000 6.250%, 4/01/18..................................................... 4/03 at 102 Aaa 5,122,950
1,770,000 Illinois Health Facilities Authority (Elmhurst Memorial Hospital),
6.625%, 1/01/22................................................... 1/02 at 102 Aaa 1,867,863
Illinois State Toll Highway Authority:
4,000,000 6.200%, 1/01/16..................................................... 1/03 at 102 Aaa 4,105,000
4,250,000 5.750%, 1/01/17..................................................... 1/03 at 102 Aaa 4,216,213
2,750,000 Chicago Midway Airport, Alternative Minimum Tax,
6.250%, 1/01/14................................................... 1/04 at 102 Aaa 2,844,848
9,000,000 Chicago O'Hare International Airport, International Terminal,
6.750%, 1/01/18................................................... 1/02 at 102 Aaa 9,492,120
3,000,000 Cook County Community College, District No. 508,
8.750%, 1/01/06................................................... No Opt. Call Aaa 3,869,670
6,500,000 Metropolitan Pier & Exposition Authority (McCormick Place Expansion
Project), 6.500%, 6/15/22......................................... 6/03 at 102 Aaa 6,942,585
INDIANA--1.0%
2,220,000 Indiana Municipal Power Agency, Power Supply System, 6.125%,
1/01/19........................................................... 1/03 at 102 Aaa 2,269,728
1,000,000 Fort Wayne South Side School Building Corporation,
6.125%, 1/15/12................................................... 1/04 at 102 Aaa 1,037,540
KANSAS--0.4%
Kansas Development Finance Authority:
515,000 5.700%, 6/01/11..................................................... 6/03 at 102 Aaa 522,375
750,000 5.875%, 6/01/21..................................................... 6/03 at 102 Aaa 759,878
LOUISIANA--0.8%
2,500,000 Louisiana Public Facilities Authority (Louisiana Department of
Health and Hospitals Medical Center), 6.250%, 10/15/10............ 10/02 at 100 AAA 2,590,300
MICHIGAN--5.7%
8,300,000 Michigan Hospital Finance Authority (Henry Ford Health System),
5.750%, 9/01/17................................................... 9/02 at 102 Aaa 8,182,555
10,000,000 Monroe County Pollution Control (Detroit Edison), Alternative
Minimum Tax, 6.550%, 9/01/24...................................... 9/03 at 103 Aaa 10,535,900
MONTANA--0.8%
2,500,000 Forsyth Pollution Control (Puget Sound Power and Light Company),
5.875%, 4/01/20................................................... 4/03 at 102 Aaa 2,501,650
</TABLE>
F-11
<PAGE> 116
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NEVADA--5.3%
$ 2,905,000 Clark County General Obligation (Limited Tax), 10.000%, 6/01/01..... No Opt. Call Aaa $ 3,663,786
5,000,000 Clark County (Nevada Power Company), Alternative Minimum Tax,
6.700%, 6/01/22................................................... 6/02 at 102 Aaa 5,257,450
7,295,000 Clark County School District, General Obligation, 7.250%, 6/15/03... No Opt. Call Aaa 8,461,981
NEW JERSEY--16.4%
15,495,000 New Jersey Economic Development Authority (Elizabethtown Gas
Company), Alternative Minimum Tax, 6.750%, 10/01/21............... 10/96 at 102 Aaa 16,056,539
5,000,000 New Jersey Economic Development Authority (Hackensack Water
Company), 7.000%, 1/01/19......................................... 1/97 at 102 Aaa 5,245,900
New Jersey Economic Development Authority:
750,000 7.000%, 7/01/03..................................................... No Opt. Call Aaa 860,685
4,000,000 7.000%, 7/01/04..................................................... No Opt. Call Aaa 4,631,440
5,000,000 New Jersey Housing and Mortgage Finance Agency,
5.350%, 10/01/15.................................................. 10/03 at 102 Aaa 4,747,350
15,000,000 New Jersey Transportation Trust Fund Authority, 6.500%, 6/15/05..... No Opt. Call Aaa 16,902,600
New Jersey Turnpike Authority:
3,000,000 6.500%, 1/01/08..................................................... No Opt. Call Aaa 3,355,290
2,000,000 6.500%, 1/01/16..................................................... No Opt. Call Aaa 2,253,520
NEW YORK--5.1%
Metropolitan Transportation Authority, Transit Facilities:
5,000,000 6.300%, 7/01/06..................................................... No Opt. Call Aaa 5,582,350
4,985,000 8.000%, 7/01/07..................................................... No Opt. Call Aaa 6,271,579
4,000,000 New York City General Obligation, 8.000%, 8/01/05................... No Opt. Call Aaa 4,939,360
OHIO--2.7%
5,500,000 Ohio Air Quality Development Authority, Pollution Control (Cleveland
Electric Illuminating Company), 8.000%, 12/01/13.................. 6/02 at 103 Aaa 6,515,905
2,250,000 Hamilton County Sewer System, 5.450%, 12/01/09...................... No Opt. Call Aaa 2,293,178
OKLAHOMA--2.7%
8,425,000 McGee Creek Authority, Water System, 6.000%, 1/01/23................ No Opt. Call Aaa 8,996,131
PENNSYLVANIA--10.6%
2,000,000 Pennsylvania Industrial Development Authority, 7.000%, 1/01/06...... No Opt. Call Aaa 2,309,540
8,275,000 Bethlehem Authority, Water System, 6.250%, 11/15/21 (Pre-refunded to
11/15/01)......................................................... 11/01 at 100 Aaa 9,065,180
10,140,000 Erie County Prison Authority, 6.250%, 11/01/11 (Pre-refunded to
11/01/01)......................................................... 11/01 at 100 Aaa 11,103,097
1,000,000 Luzerne County Industrial Development Authority (Pennsylvania Gas
and Water Company Project), Alternative Minimum Tax, 7.000%,
12/01/17.......................................................... 12/04 at 102 Aaa 1,105,750
7,000,000 Philadelphia School District, General Obligation, 5.300%, 7/01/04... No Opt. Call Aaa 7,217,770
4,000,000 University of Pittsburgh, 6.125%, 6/01/21........................... 6/02 at 102 Aaa 4,098,920
SOUTH CAROLINA--2.0%
6,500,000 Piedmont Municipal Power Agency, 6.300%, 1/01/22.................... 1/03 at 102 Aaa 6,720,935
TEXAS--5.2%
9,590,000 Texas Veterans Housing, General Obligation, Alternative Minimum Tax,
6.800%, 12/01/23.................................................. 12/03 at 102 Aaa 10,052,622
7,075,000 Houston Housing Finance Corporation, Single Family Mortgage, 5.950%,
12/01/10.......................................................... 6/03 at 102 Aaa 7,198,600
WASHINGTON--6.1%
6,130,000 Washington Health Care Facilities Authority (Swedish Hospital
Medical Center of Seattle), 6.300%, 11/15/22...................... 11/02 at 102 Aaa 6,310,528
8,100,000 Washington Health Care Facilities Authority (Virginia Mason),
6.300%, 2/15/17................................................... 2/03 at 102 Aaa 8,307, 926
5,535,000 Washington Public Power Supply System, Nuclear Project No. 3,
6.000%, 7/01/18................................................... 7/99 at 100 Aaa 5,537,158
WISCONSIN--1.2%
4,000,000 Wisconsin Health and Educational Facilities Authority (Wheaton
Franciscan Services), 5.750%, 8/15/22............................. 8/03 at 102 Aaa 3,927,240
PUERTO RICO--1.1%
3,270,000 Puerto Rico Public Buildings Authority, 6.250%, 7/01/12............. No Opt. Call Aaa 3,589,707
- -------------------------------------------------------------------------------------------------------------------------------
$301,140,000 Total Investments--(cost $310,961,282)--98.2%....................... 322,875,073
============ ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE> 117
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--0.4%
$ 1,300,000 Port Authority of New York and New Jersey, Versatile Structure
Obligations, Variable Rate Demand Bonds, 3.600%, 5/01/19+......... A-1+ $ 1,300,000
------------
Other Assets Less Liabilities--1.4%................................. 4,668,869
------------
Net Assets--100%.................................................... $328,843,942
============
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 59 $316,118,939 98%
PORTFOLIO OF INVESTMENTS A+ A1 1 6,756,134 2
(EXCLUDING TEMPORARY
INVESTMENTS):
- --------------------------------------------------------------------------------------------------------------------------------
Total 60 $322,875,073 100%
========================================================================================================================
</TABLE>
All of the bonds in the portfolio, excluding temporary investments in short-term
municipal securities, are either covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio Insurance, or are backed by an escrow or trust
containing sufficient U.S. Government or U.S. Government agency securities to
ensure the timely payment of principal and interest.
* 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.
+ 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.
See accompanying notes to financial statements.
F-13
<PAGE> 118
NUVEEN INSURED PREMIUM INCOME MUNICIPAL FUND 2 (NPX)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ALASKA--0.9%
$ 2,000,000 Alaska International Airports, Alternative Minimum Tax, 5.500%,
10/01/15...................................................... 10/03 at 102 Aaa $ 1,965,480
2,000,000 Anchorage General Obligation, 5.600%, 1/01/14................... 1/04 at 100 Aaa 1,991,940
ARIZONA--1.5%
3,700,000 Glendale Union High School District No. 205 General Obligation,
5.700%, 7/01/14............................................... 7/05 at 101 Aaa 3,754,834
2,750,000 Phoenix Civic Improvement Corporation, Water System, 5.500%,
7/01/21....................................................... 7/04 at 102 Aaa 2,725,498
ARKANSAS--0.3%
1,500,000 Pulaski County, Special School District, Limited Tax, 5.250%,
2/01/19....................................................... 2/99 at 100 Aaa 1,442,430
CALIFORNIA--15.2%
10,355,000 California General Obligation, 11.000%, 8/01/03................. No Opt. Call Aaa 14,463,553
15,325,000 California Pollution Control Finance Authority (Pacific Gas and
Electric Company), 5.850%, 12/01/23........................... 12/03 at 102 A2 14,772,381
20,000,000 Los Angeles Community, Redevelopment Agency (Bunker Hill
Project), 5.625%, 12/01/18.................................... 12/03 at 102 Aaa 19,544,200
3,500,000 Northern California Power Agency Hydroelectric,
5.500%, 7/01/16............................................... 7/03 at 102 Aaa 3,438,260
5,000,000 Oakland Pension Financing, 7.600%, 8/01/21...................... 8/98 at 102 Aaa 5,503,200
8,000,000 University of California, 5.000%, 9/01/14....................... 9/03 at 102 Aaa 7,379,520
DISTRICT OF COLUMBIA--3.3%
District of Columbia General Obligation:
5,000,000 6.500%, 6/01/09................................................. No Opt. Call Aaa 5,537,050
5,000,000 5.500%, 6/01/12................................................. No Opt. Call Aaa 4,739,350
4,030,000 District of Columbia Housing Finance Agency (Southview
Apartments), 6.000%, 1/01/25.................................. 7/03 at 102 Aaa 3,969,590
FLORIDA--5.2%
5,250,000 Florida Department of General Services, Bond Finance Division,
4.750%, 7/01/12............................................... 7/04 at 101 Aaa 4,794,090
5,500,000 Florida Municipal Power Agency, 6.500%, 10/01/20 (Pre-refunded
to 10/01/02).................................................. 10/02 at 102 Aaa 6,242,280
9,000,000 Dade County, Water and Sewer System, 5.000%, 10/01/13........... 10/03 at 102 Aaa 8,456,760
3,000,000 Orlando and Orange County Expressway Authority, 5.500%,
7/01/18....................................................... 7/03 at 102 Aaa 2,948,280
GEORGIA--0.7%
3,000,000 Georgia Municipal Electric Authority, 6.000%, 1/01/22........... 1/04 at 102 Aaa 3,034,980
ILLINOIS--10.7%
4,340,000 Illinois Development Finance Authority (Indian Prairie Community
Unit School District No. 204), 7.750%, 12/30/04............... No Opt. Call Aaa 5,235,255
1,950,000 Illinois Health Facilities Authority, 6.550%, 6/01/14........... No Opt. Call Aaa 2,130,083
500,000 Illinois Health Facilities Authority (Rush-Presbyterian-St.
Luke's Medical Center), 5.500%, 11/15/25...................... 11/03 at 102 Aaa 473,005
4,000,000 Illinois Housing Development Authority, 6.000%, 7/01/18......... 1/04 at 102 A1 3,970,240
3,000,000 Illinois Sales Tax, 7.000%, 6/15/20 (Pre-refunded to 6/15/01)... 6/01 at 102 AAA 3,426,690
1,500,000 Chicago General Obligation, 6.125%, 1/01/16..................... 7/05 at 102 Aaa 1,537,575
1,100,000 Chicago Midway Airport, Alternative Minimum Tax, 6.100%,
1/01/08....................................................... 1/04 at 102 Aaa 1,152,525
5,660,000 Chicago O'Hare International Airport, 6.375%, 1/01/15........... 1/05 at 102 Aaa 5,983,865
4,000,000 Chicago Public Building Commission (Board of Education), 5.750%,
12/01/18...................................................... 12/03 at 102 Aaa 3,951,960
2,000,000 Chicago Wastewater Transmission, 5.125%, 1/01/20................ 1/03 at 100 Aaa 1,836,460
520,000 Cook County General Obligation, 5.500%, 11/15/22................ 11/02 at 102 Aaa 498,477
5,825,000 Franklin Park General Obligation, 5.500%, 7/01/13............... 7/04 at 102 Aaa 5,701,568
4,500,000 Northlake General Obligation, 5.600%, 12/01/14.................. 12/05 at 102 Aaa 4,420,620
5,000,000 Peoria, Moline and Freeport Single Family Mortgage,
Alternative Minimum Tax, 7.600%, 4/01/27...................... 10/05 at 105 AAA 5,509,750
INDIANA--2.2%
9,770,000 Northwest Allen Building Corporation, 5.500%, 6/01/15........... 6/05 at 102 Aaa 9,434,596
</TABLE>
F-14
<PAGE> 119
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
KANSAS--1.5%
$ 3,460,000 Olathe/Labette County, Single Family Mortgage,
Alternative Minimum Tax, 8.100%, 8/01/23...................... 2/05 at 105 Aaa $ 3,904,195
2,330,000 Sedgwick County and Shawnee County, Single Family Mortgage,
Alternative Minimum Tax, 8.050%, 5/01/24...................... 11/04 at 105 Aaa 2,618,058
KENTUCKY--3.5%
Louisville-Jefferson County Regional Airport Authority,
Alternative Minimum Tax:
1,570,000 5.500%, 7/01/13................................................. 7/03 at 102 Aaa 1,485,063
13,745,000 5.500%, 7/01/23................................................. 7/03 at 102 Aaa 13,447,558
LOUISIANA--1.8%
4,105,000 Louisiana Housing Finance Agency, Multi-Family Housing (GNMA),
6.200%, 6/20/28............................................... 12/02 at 103 Aaa 4,110,747
3,750,000 Jefferson Parish Hospital Service District No. 1,
5.250%, 1/01/13............................................... 1/04 at 102 Aaa 3,576,300
MAINE--0.5%
1,745,000 Maine Turnpike Authority, 7.500%, 7/01/09....................... No Opt. Call Aaa 2,113,823
MARYLAND--2.4%
9,770,000 Maryland Transportation Authority (Baltimore/Washington
International Airport), Alternative Minimum Tax, 6.400%,
7/01/19....................................................... 7/04 at 102 Aaa 10,294,063
MICHIGAN--0.9%
3,250,000 Wayne County (Detroit Metropolitan Airport),
5.250%, 12/01/21.............................................. 12/03 at 102 Aaa 3,021,298
1,000,000 Wayne County (Detroit Metropolitan Airport), Alternative Minimum
Tax, 5.500%, 12/01/21......................................... 12/03 at 102 Aaa 974,950
MISSOURI--2.7%
2,600,000 Missouri Third State Building, General Obligation, 7.050%,
8/01/05
(Pre-refunded to 8/01/96)..................................... 8/96 at 102 Aaa 2,713,828
3,415,000 Missouri Health and Educational Facilities, 6.250%, 2/15/22..... 2/02 at 102 Aaa 3,520,284
5,000,000 Kansas City Land Clearance Redevelopment Authority, 5.900%,
12/01/18...................................................... 12/05 at 102 Aaa 5,045,000
NEVADA--5.9%
8,320,000 Clark County, School District, General Obligation, 7.250%,
6/15/04....................................................... No Opt. Call Aaa 9,728,826
Reno (St. Mary's Regional Medical Center):
3,100,000 5.625%, 5/15/18................................................. 5/03 at 102 Aaa 3,037,876
10,000,000 5.625%, 5/15/23................................................. 5/03 at 102 Aaa 9,780,600
2,490,000 University of Nevada, Community College System, 5.600%,
7/01/13....................................................... 7/03 at 101 Aaa 2,490,896
NEW JERSEY--0.6%
2,500,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family,
6.000%, 11/01/14.............................................. 11/05 at 102 Aaa 2,526,900
NEW YORK--4.2%
New York State Medical Care Facilities Finance Agency,
FHA-Insured (New York Hospital):
3,000,000 6.750%, 8/15/14................................................. 2/05 at 102 Aaa 3,306,990
2,500,000 6.800%, 8/15/24................................................. 2/05 at 102 Aaa 2,730,350
3,000,000 New York State Medical Care Facilities Finance Agency
(Mental Health Facilities), 6.000%, 8/15/15................... 2/05 at 102 Aaa 3,080,160
4,090,000 Metropolitan Transportation Authority, Commuter Facilities,
8.000%, 7/01/07............................................... No Opt. Call Aaa 5,145,588
2,500,000 New York City General Obligation, 5.750%, 8/01/10............... 8/02 at 101 1/2 Aaa 2,552,275
1,070,000 Niagara Falls General Obligation, 7.500%, 3/01/09............... No Opt. Call Aaa 1,294,636
OHIO--4.8%
8,320,000 Ohio Housing Finance Agency, Single Family Mortgage (GNMA),
Alternative Minimum Tax, 7.650%, 3/01/29...................... 9/99 at 102 AAA 8,707,546
2,000,000 Cleveland Waterworks System, 6.250%, 1/01/15.................... 1/02 at 102 Aaa 2,084,760
3,000,000 Fairfield City School District, General Obligation, 6.000%,
12/01/20...................................................... 12/05 at 100 Aaa 3,073,920
6,450,000 Hamilton Electric System, 6.000%, 10/15/23...................... 10/02 at 102 Aaa 6,581,774
OKLAHOMA--1.5%
6,000,000 Norman Regional Hospital Authority, 6.900%, 9/01/21............. 9/01 at 102 Aaa 6,527,880
PENNSYLVANIA--5.0%
Philadelphia School District, General Obligation:
2,680,000 6.250%, 9/01/08 (WI)............................................ No Opt. Call Aaa 2,942,211
2,000,000 5.500%, 9/01/15 (WI)............................................ 9/05 at 102 Aaa 1,972,520
</TABLE>
F-15
<PAGE> 120
<TABLE>
<CAPTION>
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(CONTINUED)Philadelphia Water and Wastewater System:
$ 3,700,000 5.500%, 6/15/14................................................. 6/03 at 102 Aaa $ 3,568,243
4,000,000 5.500%, 6/15/15................................................. 6/03 at 102 Aaa 3,908,240
10,000,000 5.000%, 6/15/16................................................. 6/03 at 100 Aaa 9,151,000
TENNESSEE--0.9%
2,000,000 Knoxville Community Development Corporation, Multi-Family
Mortgage (GNMA), 6.200%, 7/20/28.............................. 7/03 at 101 AAA 2,017,200
2,000,000 Madison Suburban Utility Water District, 5.000%, 2/01/19........ 2/08 at 100 Aaa 1,833,940
TEXAS--3.7%
4,000,000 Texas Southern University, 5.750%, 8/01/18...................... 8/03 at 101 Aaa 4,007,000
1,915,000 Texas Veterans Housing General Obligation, Alternative
Minimum Tax, 6.800%, 12/01/23................................. 12/03 at 102 Aa 1,975,437
2,845,000 Austin Combined Utility System, 11.125%, 11/15/09
(Pre-refunded to 11/15/99).................................... 11/99 at 100 Aaa 3,555,397
6,370,000 Brazos River Authority, Pollution Control (Texas Utilities
Electric Company), 5.500%, 5/01/22............................ 11/03 at 102 Aaa 6,175,715
UTAH--1.5%
3,600,000 Utah State Board of Regents, Student Loan, Alternative
Minimum Tax, 5.900%, 11/01/13................................. 11/03 at 102 Aaa 3,594,060
2,720,000 Salt Lake County Water Conservancy District, 5.350%, 10/01/18... 10/03 at 100 Aaa 2,563,110
WASHINGTON--6.7%
Washington Public Power Supply System, Nuclear Project No. 1:
3,750,000 5.600%, 7/01/15................................................. 7/03 at 102 AAA 3,664,500
11,000,000 5.700%, 7/01/17................................................. 7/03 at 102 AAA 10,764,820
6,295,000 Washington Public Power Supply System, Nuclear Project No. 3,
5.600%, 7/01/17............................................... 7/03 at 102 Aaa 6,174,514
4,000,000 Snohomish County Public Utility District No. 1, Electric System,
5.800%, 1/01/24............................................... 1/04 at 102 A1 3,888,880
2,500,000 Tacoma Department of Public Utilities,
6.375%, 12/01/15.............................................. 12/05 at 100 Aaa 2,632,825
1,465,000 Yakima County School District No. 7, General Obligation, 6.250%,
12/01/07 (WI)................................................. No Opt. Call Aaa 1,597,054
WEST VIRGINIA--2.3%
10,000,000 Mason County Pollution Control (Ohio Power Company), 5.450%,
12/01/16...................................................... 12/03 at 102 Aaa 9,700,900
WISCONSIN--7.6%
2,000,000 Wisconsin Health and Educational Facilities Authority
(Children's Hospital of Wisconsin), 6.500%, 8/15/10........... 8/02 at 102 Aaa 2,132,680
3,750,000 Wisconsin Health and Educational Facilities Authority (Sisters
of the Sorrowful Mother Ministry), 5.400%, 8/15/13............ 8/03 at 102 Aaa 3,608,700
5,000,000 Wisconsin Health and Educational Facilities Authority, 6.125%,
8/15/13....................................................... 8/05 at 102 Aaa 5,184,450
14,500,000 Wisconsin Housing and Economic Development Authority, 5.800%,
11/01/13...................................................... 12/03 at 102 A1 14,388,060
6,000,000 Superior Limited Obligation (Detroit Edison Company), 6.900%,
8/01/21....................................................... No Opt. Call Aaa 6,987,840
- -------------------------------------------------------------------------------------------------------------------------------
$409,745,000 Total Investments--(cost $414,797,256)--98.0%................... 419,431,785
============ ---------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--0.6%
$ 1,700,000 Gulf Coast Waste Disposal Authority Pollution Control Revenue
Refunding (Amoco Oil Company Project), Series 1992, Variable
Rate Demand Bonds, 3.900%, 10/01/17+.......................... VMIG-1 1,700,000
500,000 Missouri Health and Educational Facilities Authority (Washington
University), Variable Rate Demand Bonds, 4.100%, 3/01/17+..... VMIG-1 500,000
300,000 North Carolina Medical Care Commission Hospital Pooled Financing
(Duke University Hospital), Variable Rate Demand Bonds,
3.950%, 10/01/20+............................................. VMIG-1 300,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 2,500,000 Total Temporary Investments--0.6%............................... 2,500,000
============ ---------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.4%............................. 5,976,574
---------------------------------------------------------------------------------------------------------------
Net Assets--100%................................................ $427,908,359
===============================================================================================================
</TABLE>
F-16
<PAGE> 121
<TABLE>
<CAPTION>
NUMBER MARKET MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS** AAA Aaa 83 $380,436,787 91%
PORTFOLIO OF INVESTMENTS AA+, AA, AA- Aa1, Aa, Aa2, Aa3 1 1,975,437 1
(EXCLUDING TEMPORARY INVESTMENTS): A+ A1 3 22,247,180 5
A, A- A, A2, A3 1 14,772,381 3
- ---------------------------------------------------------------------------------------------------------------------------------
Total 88 $419,431,785 100%
=================================================================================================================================
</TABLE>
All of the bonds in the portfolio, excluding temporary investments in short-term
municipal securities, are either covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio Insurance, or are backed by an escrow or trust
containing sufficient U.S. Government or U.S. Government agency securities to
ensure the timely payment of principal and interest.
* 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.
+ 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.
(WI) Security purchased on a when-issued basis (note 1).
See accompanying notes to financial statements.
F-17
<PAGE> 122
NUVEEN EXCHANGE-TRADED FUNDS
FINANCIAL HIGHLIGHTS
Selected data for a Common share outstanding throughout each period is as
follows:
<TABLE>
<CAPTION>
OPERATING PERFORMANCE
-------------------------- DIVIDENDS FROM NET
NET REALIZED ORGANIZATION
AND INVESTMENT INCOME AND OFFERING
NET ASSET UNREALIZED ---------------------------- COSTS AND
VALUE NET GAIN(LOSS) TO PREFERRED SHARE
BEGINNING INVESTMENT FROM TO COMMON PREFERRED UNDERWRITING
OF PERIOD INCOME INVESTMENTS++ SHAREHOLDERS SHAREHOLDERS+ DISCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NPE
- ----------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 $12.560 $1.073 $ 1.956 $(.840) $ (.279) $ --
1994 15.420 1.100 (2.824) (.946) (.190) --
12/17/92 to 10/31/93 14.050 .779 1.453 (.584) (.095) (.183)
- ----------------------------------------------------------------------------------------------------------------------------
NPX
- ----------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 10.990 1.001 2.079 (.747) (.293) --
1994 14.290 .978 (3.170) (.775) (.196) (.137)
7/22/93 to 10/31/93 14.050 .114 .228 (.064) -- (.038)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
PER ------------------------------------------
COMMON TOTAL TOTAL RATIO OF NET
SHARE INVESTMENT RETURN NET ASSETS RATIO OF INVESTMENT
NET ASSET MARKET RETURN ON ON NET END OF EXPENSES TO INCOME TO
VALUE END VALUE END MARKET ASSET PERIOD (IN AVERAGE NET AVERAGE NET
OF PERIOD OF PERIOD VALUE** VALUE** THOUSANDS) ASSETS+++ ASSETS+++
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NPE
- -------------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 $14.470 $12.750 22.67% 22.56% $328,844 .82% 5.12%
1994 12.560 11.125 (20.42) (12.88) 300,008 .82 5.14
12/17/92 to 10/31/93 15.420 15.000 4.01 14.13 343,240 .81* 4.75*
- -------------------------------------------------------------------------------------------------------------------------------
NPX
- -------------------------------------------------------------------------------------------------------------------------------
Year ended 10/31,
1995 13.030 11.375 23.46 26.20 427,908 .83 5.07
1994 10.990 9.875 (23.99) (18.24) 385,692 .83 4.83
7/22/93 to 10/31/93 14.290 13.875 (7.08) 2.16 295,074 .86* 3.16*
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PORTFOLIO
TURNOVER
RATE
- -------------------------------------------------
<S> <C>
NPE
- -------------------------------------------------
Year ended 10/31,
1995 28%
1994 16
12/17/92 to 10/31/93 10
- -------------------------------------------------
NPX
- -------------------------------------------------
Year ended 10/31,
1995 30
1994 25
7/22/93 to 10/31/93 --
- -------------------------------------------------
</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 distributions, if
any, and changes in net asset value per share.
+ The amounts shown are based on Common share equivalents.
++ Net of taxes, if applicable.
+++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders.
F-18
<PAGE> 123
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Pro Forma Portfolio of Investments (Unaudited).............................................. P-2
Pro Forma Financial Information (Unaudited)................................................. P-7
Pro Forma Capitalization (Unaudited)...................................................... P-7
Pro Forma Condensed Balance Sheet (Unaudited)............................................. P-7
Pro Forma Condensed Income Statement (Unaudited).......................................... P-8
</TABLE>
P-1
<PAGE> 124
PRO FORMA PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 1995
<TABLE>
<CAPTION>
ACQUIRING FUND (AS ADJUSTED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALASKA--1.2%
$ 2,000,000 Alaska International Airports, Alternative Minimum Tax,
5.500%, 10/01/15....................................................... 10/03 at 102 Aaa $ 1,965,480
Anchorage General Obligation:
2,020,000 5.900%, 2/01/06........................................................ No Opt. Call Aaa 2,166,753
2,000,000 5.600%, 1/01/14........................................................ 1/04 at 100 Aaa 1,991,940
3,000,000 6.250%, 6/01/23........................................................ 6/99 at 100 Aaa 3,061,860
ARIZONA--0.9%
3,700,000 Glendale Union High School District No. 205 General Obligation, 5.700%,
7/01/14.............................................................. 7/05 at 101 Aaa 3,754,834
2,750,000 Phoenix Civic Improvement Corporation, Water System, 5.500%, 7/01/21... 7/04 at 102 Aaa 2,725,498
ARKANSAS--0.2%
1,500,000 Pulaski County Special School District, Limited Tax, 5.250%, 2/01/19... 2/99 at 100 Aaa 1,442,430
CALIFORNIA--12.1%
10,355,000 California General Obligation, 11.000%, 8/01/03........................ No Opt. Call Aaa 14,463,553
6,590,000 California Housing Finance Agency, Multi-Unit Rental, Alternative
Minimum Tax, 6.625%, 2/01/24......................................... 2/03 at 102 A1 6,756,134
15,325,000 California Pollution Control Finance Authority (Pacific Gas and
Electric Company), 5.850%, 12/01/23.................................. 12/03 at 102 A2 14,772,381
20,000,000 Los Angeles Community Redevelopment Agency (Bunker Hill Project),
5.625%, 12/01/18..................................................... 12/03 at 102 Aaa 19,544,200
3,000,000 M-S-R Public Power Agency, San Juan Project Revenue, 6.000%, 7/01/20... 7/03 at 102 Aaa 3,044,760
3,500,000 Northern California Power Agency Hydroelectric, 5.500%, 7/01/16........ 7/03 at 102 Aaa 3,438,260
5,000,000 Oakland Pension Financing, 7.600%, 8/01/21............................. 8/98 at 102 Aaa 5,503,200
7,000,000 Palmdale Community Redevelopment Agency, 8.000%, 4/01/16............... No Opt. Call Aaa 8,828,330
San Leandro Housing Finance Corporation (Ashland Village Apartments):
2,005,000 6.550%, 1/01/12........................................................ 1/02 at 102 Aaa 2,094,884
5,100,000 6.650%, 1/01/25........................................................ 1/02 at 102 Aaa 5,311,038
8,000,000 University of California, 5.000%, 9/01/14.............................. 9/03 at 102 Aaa 7,379,520
DISTRICT OF COLUMBIA--3.8%
District of Columbia General Obligation:
5,000,000 6.500%, 6/01/09...................................................... No Opt. Call Aaa 5,537,050
5,000,000 5.500%, 6/01/12...................................................... No Opt. Call Aaa 4,739,350
5,000,000 District of Columbia (Children's Hospital), 6.250%, 7/15/19............ 7/02 at 102 Aaa 5,078,150
3,910,000 District of Columbia Housing Finance Agency, Single Family Mortgage,
Alternative Minimum Tax, 6.350%, 12/01/24............................ 6/03 at 102 AAA 3,951,642
4,030,000 District of Columbia Housing Finance Agency, (Southview Apartments),
6.000%, 1/01/25...................................................... 7/03 at 102 Aaa 3,969,590
5,250,000 District of Columbia (The Catholic University of America), 6.450%,
10/01/23............................................................. 10/03 at 102 AAA 5,450,130
FLORIDA--3.0%
5,250,000 Florida Department of General Services, Bond Finance Division, 4.750%,
7/01/12.............................................................. 7/04 at 101 Aaa 4,794,090
5,500,000 Florida Municipal Power Agency, 6.500%, 10/01/20 (Pre-refunded to
10/01/02)............................................................ 10/02 at 102 Aaa 6,242,280
9,000,000 Dade County Water and Sewer System, 5.000%, 10/01/13................... 10/03 at 102 Aaa 8,456,760
3,000,000 Orlando and Orange County Expressway Authority, 5.500%, 7/01/18........ 7/03 at 102 Aaa 2,948,280
GEORGIA--0.4%
3,000,000 Georgia Municipal Electric Authority, 6.000%, 1/01/22.................. 1/04 at 102 Aaa 3,034,980
ILLINOIS--13.5%
8,000,000 Illinois Development Finance Authority, Pollution Control (Illinois
Power Company), 8.300%, 4/01/17...................................... 4/98 at 102 Aaa 8,858,320
Illinois Development Finance Authority (Indian Prairie Community Unit
School District No. 204):
3,635,000 7.750%, 12/30/03..................................................... No Opt. Call Aaa 4,345,315
4,340,000 7.750%, 12/30/04..................................................... No Opt. Call Aaa 5,235,255
1,950,000 Illinois Health Facilities Authority, 6.550%, 06/01/14................. No Opt. Call Aaa 2,130,083
Illinois Health Facilities Authority (Lutheran General Health System):
4,355,000 6.125%, 4/01/12........................................................ 4/03 at 102 Aaa 4,486,565
5,000,000 6.250%, 4/01/18........................................................ 4/03 at 102 Aaa 5,122,950
500,000 Illinois Health Facilities Authority (Rush-Presbyterian-St. Luke's
Medical Center, 5.500%, 11/15/25..................................... 11/03 at 102 Aaa 473,005
</TABLE>
P-2
<PAGE> 125
<TABLE>
<CAPTION>
ACQUIRING FUND (AS ADJUSTED) (UNAUDITED) (Continued)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,770,000 Illinois Health Facilities Authority, (Elmhurst Memorial Hospital),
6.625%, 1/01/22...................................................... 1/02 at 102 Aaa $ 1,867,863
4,000,000 Illinois Housing Development Authority, 6.000%, 7/01/18................ 1/04 at 102 A1 3,970,240
Illinois State Toll Highway Authority, Priority Revenue:
4,000,000 6.200%, 1/01/16........................................................ 1/03 at 102 Aaa 4,105,000
4,250,000 5.750%, 1/01/17........................................................ 1/03 at 102 Aaa 4,216,213
3,000,000 Illinois Sales Tax, 7.000%, 6/15/20 (Pre-refunded to 6/15/01).......... 6/01 at 102 AAA 3,426,690
1,500,000 Chicago General Obligation, 6.125%, 1/01/16............................ 7/05 at 102 Aaa 1,537,575
Chicago Midway Airport, Alternative Minimum Tax:
1,100,000 6.100%, 1/01/08........................................................ 1/04 at 102 Aaa 1,152,525
2,750,000 6.250%, 1/01/14........................................................ 1/04 at 102 Aaa 2,844,848
9,000,000 Chicago O'Hare International Airport, International Terminal, 6.750%,
1/01/18.............................................................. 1/02 at 102 Aaa 9,492,120
5,660,000 Chicago O'Hare International Airport, 6.375%, 1/01/15.................. 1/05 at 102 Aaa 5,983,865
4,000,000 Chicago Public Building Commission (Board of Education), 5.750%,
12/01/18............................................................. 12/03 at 102 Aaa 3,951,960
2,000,000 Chicago Wastewater Transmission, 5.125%, 1/01/20....................... 1/03 at 100 Aaa 1,836,460
520,000 Cook County General Obligation, 5.500%, 11/15/22....................... 11/02 at 102 Aaa 498,477
3,000,000 Cook County Community College, District No. 508, 8.750%, 1/01/06....... No Opt. Call Aaa 3,869,670
5,825,000 Franklin Park General Obligation, 5.500%, 7/01/13...................... 7/04 at 102 Aaa 5,701,568
6,500,000 Metropolitan Pier & Exposition Authority (McCormick Place Expansion
Project), 6.500%, 6/15/22............................................ 6/03 at 102 Aaa 6,942,585
4,500,000 Northlake General Obligation, 5.600%, 12/01/14......................... 12/05 at 102 Aaa 4,420,620
5,000,000 Peoria, Moline and Freeport Single Family Mortgage Alternative Minimum
Tax, 7.600%, 4/01/27................................................. 10/05 at 105 AAA 5,509,750
INDIANA--1.7%
2,220,000 Indiana Municipal Power Agency, Power Supply System, 6.125%, 1/01/19... 1/03 at 102 Aaa 2,269,728
1,000,000 Fort Wayne South Side School Building Corporation, 6.125%, 1/15/12..... 1/04 at 102 Aaa 1,037,540
9,770,000 Northwest Allen Building Corporation, 5.500%, 6/01/15.................. 6/05 at 102 Aaa 9,434,596
KANSAS--1.0%
Kansas Development Finance Authority:
515,000 5.700%, 6/01/11........................................................ 6/03 at 102 Aaa 522,375
750,000 5.875%, 6/01/21........................................................ 6/03 at 102 Aaa 759,878
3,460,000 Olathe/Labette County Single Family Mortgage, Alternative Minimum Tax,
8.100%, 8/01/23...................................................... 2/05 at 105 Aaa 3,904,195
2,330,000 Sedgwick County and Shawnee County, Single Family Mortgage, Alternative
Minimum Tax, 8.050%, 5/01/24......................................... 11/04 at 105 Aaa 2,618,058
KENTUCKY--2.0%
Louisville-Jefferson County Regional Airport Authority, Alternative
Minimum Tax:
1,570,000 5.500%, 7/01/13........................................................ 7/03 at 102 Aaa 1,485,063
13,745,000 5.500%, 7/01/23........................................................ 7/03 at 102 Aaa 13,447,558
LOUISIANA--1.4%
4,105,000 Louisiana Housing Finance Agency, Multi-Family Housing (GNMA), 6.200%,
6/20/28.............................................................. 12/02 at 103 Aaa 4,110,747
2,500,000 Louisiana Public Facilities Authority (Louisiana Department of Health
and Hospitals Medical Center), 6.250%, 10/15/10...................... 10/02 at 100 AAA 2,590,300
3,750,000 Jefferson Parish Hospital Service District No. 1, 5.250%, 1/01/13...... 1/04 at 102 Aaa 3,576,300
MAINE--0.3%
1,745,000 Maine State Turnpike Authority, 7.500%, 7/01/09........................ No Opt. Call Aaa 2,113,823
MARYLAND--1.3%
9,770,000 Maryland Transportation Authority (Baltimore/Washington International
Airport), Alternative Minimum Tax, 6.400%, 7/01/19................... 7/04 at 102 Aaa 10,294,063
MICHIGAN--3.0%
8,300,000 Michigan State Hospital Finance Authority (Henry Ford Health System),
5.750%, 9/01/17...................................................... 9/02 at 102 Aaa 8,182,555
10,000,000 Monroe County Pollution Control (Detroit Edison), Alternative Minimum
Tax, 6.550%, 9/01/24................................................. 9/03 at 103 Aaa 10,535,900
3,250,000 Wayne County (Detroit Metropolitan Wayne County Airport), 5.250%,
12/01/21............................................................. 12/03 at 102 Aaa 3,021,298
1,000,000 Wayne County (Detroit Metropolitan Airport), Alternative Minimum Tax,
5.500%, 12/01/21..................................................... 12/03 at 102 Aaa 974,950
</TABLE>
P-3
<PAGE> 126
<TABLE>
<CAPTION>
ACQUIRING FUND (AS ADJUSTED) (UNAUDITED) (Continued)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MISSOURI--1.5%
$ 2,600,000 Missouri Third State Building, General Obligation, 7.050%, 8/01/05
(Pre-refunded to 8/01/96)............................................ 8/96 at 102 Aaa $ 2,713,828
3,415,000 Missouri Health and Educational Facilities, 6.250%, 2/15/22............ 2/02 at 102 Aaa 3,520,284
5,000,000 Kansas City Land Clearance Redevelopment Authority, 5.900%, 12/01/18... 12/05 at 102 Aaa 5,045,000
MONTANA--0.3%
2,500,000 Forsyth Pollution Control (Puget Sound Power and Light Company),
5.875%, 4/01/20...................................................... 4/03 at 102 Aaa 2,501,650
NEVADA--5.6%
2,905,000 Clark County General Obligation (Limited Tax), 10.000%, 6/01/01........ No Opt. Call Aaa 3,663,786
5,000,000 Clark County (Nevada Power Company), Alternative Minimum Tax, 6.700%,
6/01/22.............................................................. 6/02 at 102 Aaa 5,257,450
Clark County School District General Obligation:
7,295,000 7.250%, 6/15/03........................................................ No Opt. Call Aaa 8,461,981
8,320,000 7.250%, 6/15/04........................................................ No Opt. Call Aaa 9,728,826
Reno (St. Mary's Regional Medical Center):
3,100,000 5.625%, 5/15/18........................................................ 5/03 at 102 Aaa 3,037,876
10,000,000 5.625%, 5/15/23........................................................ 5/03 at 102 Aaa 9,780,600
2,490,000 University of Nevada, Community College System, 5.600%, 7/01/13........ 7/03 at 101 Aaa 2,490,896
NEW JERSEY--7.5%
15,495,000 New Jersey Economic Development Authority (Elizabethtown Gas Company)
Alternative Minimum Tax, 6.750%, 10/01/21............................ 10/96 at 102 Aaa 16,056,539
5,000,000 New Jersey Economic Development Authority (Hackensack Water Company),
7.000%, 1/01/19...................................................... 1/97 at 102 Aaa 5,245,900
New Jersey Economic Development Authority:
750,000 7.000%, 7/01/03........................................................ No Opt. Call Aaa 860,685
4,000,000 7.000%, 7/01/04........................................................ No Opt. Call Aaa 4,631,440
2,500,000 New Jersey Housing and Mortgage Finance Agency, Multi-Family, 6.000%,
11/01/14............................................................. 11/05 at 102 Aaa 2,526,900
5,000,000 New Jersey Housing and Mortgage Finance Agency, 5.350%, 10/01/15....... 10/03 at 102 Aaa 4,747,350
15,000,000 New Jersey Transportation Trust Fund Authority, 6.500%, 6/15/05........ No Opt. Call Aaa 16,902,600
New Jersey Turnpike Authority:
3,000,000 6.500%, 1/01/08........................................................ No Opt. Call Aaa 3,355,290
2,000,000 6.500%, 1/01/16........................................................ No Opt. Call Aaa 2,253,520
NEW YORK--4.4%
New York State Medical Care Facilities Finance Agency, FHA-Insured
(New York Hospital):
3,000,000 6.750%, 8/15/14........................................................ 2/05 at 102 Aaa 3,306,990
2,500,000 6.800%, 8/15/24........................................................ 2/05 at 102 Aaa 2,730,350
3,000,000 New York State Medical Care Facilities Finance Agency (Mental Health
Facilities), 6.000%, 8/15/15......................................... 2/05 at 102 Aaa 3,080,160
4,090,000 Metropolitan Transportation Authority, Commuter Facilities, 8.000%,
7/01/07.............................................................. No Opt. Call Aaa 5,145,588
Metropolitan Transportation Authority, Transit Facilities:
5,000,000 6.300%, 7/01/06........................................................ No Opt. Call Aaa 5,582,350
4,985,000 8.000%, 7/01/07........................................................ No Opt. Call Aaa 6,271,579
New York City General Obligation:
4,000,000 8.000%, 8/01/05........................................................ No Opt. Call Aaa 4,939,360
2,500,000 5.750%, 8/01/10........................................................ 8/02 at Aaa 2,552,275
101 1/2
1,070,000 Niagara Falls General Obligation, 7.500%, 3/01/09...................... No Opt. Call Aaa 1,294,636
OHIO--3.9%
5,500,000 Ohio Air Quality Development Authority, Pollution Control (Cleveland
Electric Illuminating Company), 8.000%, 12/01/13..................... 6/02 at 103 Aaa 6,515,905
8,320,000 Ohio Housing Finance Agency, Single Family Mortgage (GNMA), Alternative
Minimum Tax, 7.650%, 3/01/29......................................... 9/99 at 102 AAA 8,707,546
2,000,000 Cleveland Waterworks System, 6.250%, 1/01/15........................... 1/02 at 102 Aaa 2,084,760
3,000,000 Fairfield City School District, General Obligation, 6.000%, 12/01/20... 12/05 at 100 Aaa 3,073,920
6,450,000 Hamilton Electric System, 6.000%, 10/15/23............................. 10/02 at 102 Aaa 6,581,774
2,250,000 Hamilton County Sewer System, 5.450%, 12/01/09......................... No Opt. Call Aaa 2,293,178
OKLAHOMA--2.1%
8,425,000 McGee Creek Authority Water System, 6.000%, 1/01/23.................... No Opt. Call Aaa 8,996,131
6,000,000 Norman Regional Hospital Authority, 6.900%, 9/01/21.................... 9/01 at 102 Aaa 6,527,880
</TABLE>
P-4
<PAGE> 127
<TABLE>
<CAPTION>
ACQUIRING FUND (AS ADJUSTED) (UNAUDITED) (Continued)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PENNSYLVANIA--7.5%
$ 2,000,000 Pennsylvania Industrial Development Authority, 7.000%, 1/01/06......... No Opt. Call Aaa $ 2,309,540
8,275,000 Bethlehem Authority Water System, 6.250%, 11/15/21 (Pre-refunded to
11/15/01)............................................................ 11/01 at 100 Aaa 9,065,180
10,140,000 Erie County Prison Authority, 6.250%, 11/01/11 (Pre-refunded to
11/01/01)............................................................ 11/01 at 100 Aaa 11,103,097
1,000,000 Luzerne County Industrial Development Authority (Pennsylvania Gas and
Water Company Project) Alternative Minimum Tax, 7.000%, 12/01/17..... 12/04 at 102 Aaa 1,105,750
Philadelphia School District General Obligation:
7,000,000 5.300%, 7/01/04........................................................ No Opt. Call Aaa 7,217,770
2,680,000 6.250%, 9/01/08 (WI)................................................... No Opt. Call Aaa 2,942,211
2,000,000 5.500%, 9/01/15 (WI)................................................... 9/05 at 102 Aaa 1,972,520
Philadelphia Water and Wastewater System:
3,700,000 5.500%, 6/15/14........................................................ 6/03 at 102 Aaa 3,568,243
4,000,000 5.500%, 6/15/15........................................................ 6/03 at 102 Aaa 3,908,240
10,000,000 5.000%, 6/15/16........................................................ 6/03 at 100 Aaa 9,151,000
4,000,000 University of Pittsburgh, 6.125%, 6/01/21.............................. 6/02 at 102 Aaa 4,098,920
SOUTH CAROLINA--0.9%
6,500,000 Piedmont Municipal Power Agency, 6.300%, 1/01/22....................... 1/03 at 102 Aaa 6,720,935
TENNESSEE--0.5%
2,000,000 Knoxville Community Development Corporation, Multi-Family Mortgage
(GNMA), 6.200%, 7/20/28.............................................. 7/03 at 101 AAA 2,017,200
2,000,000 Madison Suburban Utility Water District, 5.000%, 2/01/19............... 2/08 at 100 Aaa 1,833,940
TEXAS--4.4%
4,000,000 Texas Southern University, 5.750%, 8/01/18............................. 8/03 at 101 Aaa 4,007,000
Texas Veterans Housing General Obligation, Alternative Minimum Tax:
9,590,000 6.800%, 12/01/23....................................................... 12/03 at 102 Aaa 10,052,622
1,915,000 6.800%, 12/01/23....................................................... 12/03 at 102 Aa 1,975,437
2,845,000 Austin Combined Utility System, 11.125%, 11/15/09 (Pre-refunded to
11/15/99)............................................................ 11/99 at 100 Aaa 3,555,397
6,370,000 Brazos River Authority, Pollution Control (Texas Utilities Electric
Company), 5.500%, 5/01/22............................................ 11/03 at 102 Aaa 6,175,715
7,075,000 Houston Housing Finance Corporation, Single Family Mortgage, 5.950%,
12/01/10............................................................. 6/03 at 102 Aaa 7,198,600
UTAH--0.8%
3,600,000 Utah State Board of Regents, Student Loan, Alternative Minimum Tax,
5.900%, 11/01/13..................................................... 11/03 at 102 Aaa 3,594,060
2,720,000 Salt Lake County Conservancy District, 5.350%, 10/01/18................ 10/03 at 100 Aaa 2,563,110
WASHINGTON--6.5%
6,130,000 Washington Health Care Facilities Authority (Swedish Hospital Medical
Center of Seattle), 6.300%, 11/15/22................................. 11/02 at 102 Aaa 6,310,529
8,100,000 Washington Health Care Facilities Authority (Virginia Mason), 6.300%,
2/15/17.............................................................. 2/03 at 102 Aaa 8,307,927
Washington Public Power Supply System, Nuclear Project No. 1:
3,750,000 5.600%, 7/01/15...................................................... 7/03 at 102 Aaa 3,664,500
11,000,000 5.700%, 7/01/17...................................................... 7/03 at 102 Aaa 10,764,820
Washington Public Power Supply System, Nuclear Project No. 3:
6,295,000 5.600%, 7/01/17...................................................... 7/03 at 102 Aaa 6,174,513
5,535,000 6.000%, 7/01/18...................................................... 7/99 at 100 Aaa 5,537,158
4,000,000 Snohomish County Public Utility District No. 1, Electric System,
5.800%, 1/01/24........................................................ 1/04 at 100 A1 3,888,880
2,500,000 Tacoma Department of Public Utilities, 6.375%, 12/01/15................ 12/05 at 100 Aaa 2,632,824
1,465,000 Yakima County School District No. 7, General Obligation, 6.250%,
12/01/07 (WI).......................................................... No Opt. Call Aaa 1,597,054
WEST VIRGINIA--1.3%
10,000,000 Mason County Pollution Control (Ohio Power Company), 5.450%,
12/01/16............................................................. 12/03 at 102 Aaa 9,700,900
</TABLE>
P-5
<PAGE> 128
<TABLE>
<CAPTION>
ACQUIRING FUND (AS ADJUSTED) (UNAUDITED) (Continued)
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OPT. CALL MARKET
AMOUNT DESCRIPTION PROVISIONS* RATINGS** VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
WISCONSIN--4.7%
$ 2,000,000 Wisconsin Health and Educational Facilities Authority (Children's
Hospital of Wisconsin), 6.500%, 8/15/10.............................. 8/02 at 102 Aaa $ 2,132,680
4,000,000 Wisconsin Health and Educational Facilities Authority (Wheaton
Franciscan Services), 5.750%, 8/15/22................................ 8/03 at 102 Aaa 3,927,240
3,750,000 Wisconsin Health and Educational Facilities Authority (Sisters of the
Sorrowful Mother Ministry), 5.400%, 8/15/13.......................... 8/03 at 102 Aaa 3,608,700
5,000,000 Wisconsin Health and Educational Facilities Authority, 6.125%,
8/15/13.............................................................. 8/05 at 102 Aaa 5,184,450
14,500,000 Wisconsin Housing and Economic Development Authority, 5.800%,
11/01/13............................................................. 12/03 at 102 A1 14,388,060
6,000,000 Superior Limited Obligation (Detroit Edison Company), 6.900%,
8/01/21.............................................................. No Opt. Call Aaa 6,987,840
PUERTO RICO--0.5%
3,270,000 Puerto Rico Public Buildings Authority, 6.250%, 7/01/12................ No Opt. Call Aaa 3,589,707
- -------------------------------------------------------------------------------------------------------------------------------
$710,885,000 Total Investments (cost $725,758,538)--98.2%........................... 742,306,858
============ ----------------------------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS IN SHORT-TERM MUNICIPAL SECURITIES--0.5%
$ 1,530,000 Gulf Coast Waste Disposal Authority Pollution Control Revenue.......... VMIG-1 1,530,000
Refunding (Amoco Oil Company Project), Series 1992 Variable Rate Demand
Bonds, 3.900%, 10/01/17+
500,000 Missouri Health and Educational Facilities Authority (Washington
University), Variable Rate Demand Bonds, 4.100%, 3/01/17+............ VMIG-1 500,000
300,000 North Carolina Medical Care Commission Hospital Pooled Financing (Duke
University Hospital), Variable Rate Demand Bonds, 3.950%,
10/01/20+............................................................ VMIG-1 300,000
1,000,000 Port Authority of New York and New Jersey, Versatile Structure
Obligations, 3.600%, 5/01/19+........................................ A-1+ 1,000,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 3,330,000 Total Temporary Investments--0.4%...................................... 3,330,000
============ ----------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities--1.4%.................................... 10,529,407
----------------------------------------------------------------------------------------------------------------
Net Assets--100%....................................................... $756,166,265
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NUMBER MARKET
STANDARD & POOR'S MOODY'S OF ISSUES VALUE PERCENT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF RATINGS* AAA Aaa 142 $696,555,726 93%
PORTFOLIO OF INVESTMENTS AA+, AA, AA- Aa1, Aa, Aa2, Aa3 1 1,975,437 1
(EXCLUDING TEMPORARY A+ A1 4 29,003,314 4
INVESTMENTS): A, A- A, A2, A3 1 14,772,381 2
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 148 $742,306,858 100%
==================================================================================================================================
</TABLE>
All of the bonds in the portfolio, excluding temporary investments in short-term
municipal securities, are either covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio Insurance, or are backed by an escrow or trust
containing sufficient U.S. Government or U.S. Government agency securities to
ensure the timely payment of principal and interest.
* Optional Call Provisions: Dates (month and year) and prices of the earliest
optional call or redemption. There may be other call provisions at varying
prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
+ 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.
(WI) Security purchased on a when-issued basis (note 1).
See accompanying notes to financial statements.
P-6
<PAGE> 129
PRO FORMA FINANCIAL INFORMATION
The following tables set forth the unaudited capitalization, net asset
value per share and income of the Funds as of October 31, 1995 and for the
period then ended and as adjusted to give effect to the Reorganization. The
relevant financial statements for the Acquiring Fund and the Acquired Fund are
set forth below.
PRO FORMA CAPITALIZATION AS OF OCTOBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRING ACQUIRED ACQUIRING
FUND FUND FUND
(ACTUAL) (ACTUAL) (AS ADJUSTED)(1)
------------ ------------ ----------------
<S> <C> <C> <C>
Shareholders' Equity:
Common Shares, $.01 par value per share; 20,642,068 shares outstanding
for NPX (Actual); 15,128,458 shares outstanding for NPE (Actual);
37,421,145 shares outstanding for NPX (Adjusted).................... $ 206,421 $ 151,285 $ 374,212 (2)
Preferred shares, $25,000 stated value per share, at liquidation
value............................................................... 158,900,000 110,000,000 268,900,000
Paid-in surplus....................................................... 286,208,026 209,709,001 495,580,098 (3)
Undistributed net investment income................................... 398,674 265,613 398,674 (4)
Net realized gain (loss) from investment transactions................. (22,439,291) (3,195,748) (25,635,039)(5)
Net unrealized appreciation of investments............................ 4,634,529 11,913,791 16,548,320
------------ ------------ ------------
Net Assets........................................................ $427,908,359 $328,843,942 $756,166,265
============ ============ ============
</TABLE>
- ------------
(1) The adjusted balances are presented as if the Reorganization were effective
as of October 31, 1995 for information purposes only. The actual Effective
Time of the Reorganization is expected to be September 9, 1996, at which
time the results would be reflective of the actual composition of
shareholders' equity at that date.
(2) Assumes the issuance of 16,779,077 Acquiring Fund Common shares in exchange
for the net assets of the Acquired Fund, which number is based on the net
asset value of the Acquiring Fund Common shares, and the net asset value of
the Acquired Fund, as of October 31, 1995, after adjustment for the
distributions referred to in (4) below. The issuance of such number of
Acquiring Fund Common shares would result in the distribution of 1.1091069
Acquiring Fund Common shares for each Common share of the Acquired Fund upon
liquidation of the Acquired Fund.
(3) Includes the impact of estimated Reorganization costs of $320,423.
(4) Assumes the Acquired Fund distributes all of its undistributed net
investment income ($265,613) to its shareholders.
(5) Assumes the Acquired Fund carries forward all of its net realized losses
from investment transactions ($3,195,748) to the Acquiring Fund, as
permitted under applicable tax regulations.
PRO FORMA CONDENSED BALANCE SHEET AS OF OCTOBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRING FUND ACQUIRED FUND PRO FORMA ACQUIRING FUND
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Investments in municipal securities, at market value..... $419,431,785 $322,875,073 $ -- $742,306,858
Temporary investments in short-term municipal securities,
at amortized cost...................................... 2,500,000 1,300,000 (470,000)(1) 3,330,000
Cash..................................................... 60,127 72,882 (116,036)(2) 16,973
Other assets less liabilities............................ 5,916,447 4,595,987 -- 10,512,434
------------ ------------ ---------- ------------
Net assets............................................... $427,908,359 $328,843,942 $ (586,036) $756,166,265
============ ============ ========== ============
Preferred Shares, at liquidation value................... $158,900,000 $110,000,000 $ -- $268,900,000
============ ============ ========== ============
Preferred Shares outstanding............................. 6,356 4,400 -- 10,756
============ ============ ========== ============
Common Shares outstanding................................ 20,642,068 15,128,458 1,650,619 (3) 37,421,145
============ ============ ========== ============
Net asset value per Common Share:
As of October 31, 1995............................... $ 13.03 $ 14.47
============ ============
After distribution of ordinary income and capital
gains, if applicable............................... $ 13.03 $ 14.45
============ ============
After Reorganization related expenses................ $ 13.02 $ 14.44 $ 13.02
============ ============ ============
</TABLE>
- ------------
(1) See note (1) to Pro Forma Capitalization table above as to time of
Reorganization. Assumes sales of temporary investments in short-term
municipal securities to provide additional cash needed to make distributions
of ordinary income and to pay estimated Reorganization related expenses.
(2) Net effect on cash after sales of temporary investments in short-term
municipal securities and payment of Reorganization related expenses.
(3) See note (1) to Pro Forma Capitalization table above as to time of
Reorganization. Based on the issuance of 16,779,077 additional Acquiring
Fund Common shares and the cancellation of 15,128,458 Acquired Fund Common
shares.
P-7
<PAGE> 130
PRO FORMA CONDENSED INCOME STATEMENT YEAR ENDED OCTOBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
ACQUIRING FUND ACQUIRED FUND PRO FORMA ACQUIRING FUND
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
-------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income......................................... $ 24,078,207 $18,828,179 $ -- $ 42,906,386
----------- ----------- -------- ------------
Expenses:
Management fees....................................... 2,595,700 2,026,982 (72,781)(1) 4,549,901
All other expenses.................................... 809,321 576,912 (103,927)(2) 1,282,306
----------- ----------- -------- ------------
Total expenses...................................... 3,405,021 2,603,894 (176,708) 5,832,207
----------- ----------- -------- ------------
Net investment income..................................... 20,673,186 16,224,285 176,708 37,074,179
----------- ----------- -------- ------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) from investment transactions... (12,029,555) (1,944,767) -- (13,974,322)
Net change in unrealized appreciation or depreciation of
investments........................................... 55,044,396 31,478,880 -- 86,523,276
----------- ----------- -------- ------------
Net gain on investments............................. 43,014,841 29,534,113 -- 72,548,954
----------- ----------- -------- ------------
Net increase in net assets from operations................ $ 63,688,027 $45,758,398 $ 176,708 $109,623,133
=========== =========== ======== ============
</TABLE>
- ------------
(1) Reflects the management fee of .65% of net assets for the first $125
million, .6375% of net assets for the next $125 million, .625% for net
assets of the next $250 million and .6125% for net assets over $500 million.
(2) Represents estimated reduction in operating expenses, including audit,
legal, custodian, stock exchange and report printing. The Acquiring Fund (As
Adjusted) would have a much larger asset base than either Fund currently
has. Certain operating expenses would have been reduced had they been
applied to the larger asset base for one Fund, rather than to two smaller
separate Funds.
P-8
<PAGE> 131
ANNEX A
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION--A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees. The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. The ratings are based, in varying degrees, on the
following considerations:
1. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the 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.
A-1
<PAGE> 132
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
The 'CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' debt rating.
C The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter 'L' indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured 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:
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-2
<PAGE> 133
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 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 which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
BAA Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great
A-3
<PAGE> 134
length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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 broadbased 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.
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
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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.
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ANNEX B
AUCTION PROCEDURES
The following procedures will be set forth as Sections 1 through 8 of Part
II of the Acquiring Fund Statement. Capitalized terms used but not defined in
this Annex B have the meanings given them in Annex D to this Statement of
Additional Information.
1. ORDERS. (a) Prior to the Submission Deadline on each Auction Date for
shares of a series of MuniPreferred:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner desires to continue
to hold without regard to the Applicable Rate for shares of such series
for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell if
the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series shall be less than the rate per
annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held
by such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for shares of such series for the
next succeeding Rate Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall not be less than the
rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to
the Auction Agent, of information referred to in clause (i)(A), (i)(B),
(i)(C) or (ii) of this paragraph (a) is hereinafter referred to as an
"Order" and collectively as "Orders" and each Beneficial Owner and each
Potential Beneficial Owner placing an Order with a Broker-Dealer, and
such Broker-Dealer placing an Order with the Auction Agent, is
hereinafter referred to as a "Bidder" and collectively as "Bidders"; an
Order containing the information referred to in clause (i)(A) of this
paragraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the information
referred to in clause (i)(B) or (ii) of this paragraph (a) is
hereinafter referred to as a "Bid" and collectively as "Bids"; and an
Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and
collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
a series of MuniPreferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in
such Bid if the Applicable Rate for shares of such series determined on
such Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iv) of paragraph (a) of
Section 4 of this Part II if the Applicable Rate for shares of such
series determined on such Auction Date shall be equal to the rate
specified therein; or
(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.
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(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.
(iii) A Bid by a Potential Beneficial Owner 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 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
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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:
(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
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(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 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 income tax rate, if any, applicable to
ordinary income or the maximum marginal regular Federal corporate income
tax rate applicable to ordinary income, whichever is greater; provided,
however, that if the Fund has notified the Auction Agent of its intent
to allocate to shares of such series in such Rate Period any net capital
gains or other income taxable for Federal income tax purposes ("Taxable
Income"), the Applicable Rate for shares of such series for such Rate
Period will be (i) if the Taxable Yield Rate (as defined below) is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate
Period consists of fewer than 183 Rate Period Days) or the 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
income tax rate, if any, applicable to ordinary income (taking into
account the Federal income tax deductibility of state taxes paid or
incurred) or the maximum marginal regular Federal corporate income tax
applicable to ordinary income, whichever is greater, multiplied by the
Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate
means the rate determined by (a) dividing the amount of Taxable Income
available for distribution per such share of MuniPreferred by the number
of days in the Dividend Period in respect of which such Taxable Income
is contemplated to be distributed, (b) multiplying the amount determined
in (a) above by 365 (in the case of a Dividend Period of 7 Rate Period
Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000.
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
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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 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 fraction, the numerator of
which shall be the number of Outstanding shares of MuniPreferred held by
such Existing Holder subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding shares of MuniPreferred
subject to such Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate for shares of such series;
and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the
excess of the Available MuniPreferred of such series over the number of
shares of MuniPreferred subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator of which
shall be the number of Outstanding shares of MuniPreferred subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding shares of MuniPreferred subject to such Submitted Bids made by
all such Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of MuniPreferred
have not been made (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the shares of MuniPreferred subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each
Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of such series subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an amount
equal to the number of shares of such series obtained by multiplying the
number of shares of such series subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
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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.
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 or 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.
7. Transfer of Share 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 in the case of all transfers other than pursuant to Auctions, (i) any such
Beneficial Owner or any such Existing Holder that is not a Broker-Dealer shall
advise its Broker-Dealer of such transfer who in turn shall advise the Auction
Agent of such transfer and (ii) any such Existing Holder that is a Broker-Dealer
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.
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ANNEX C
SETTLEMENT PROCEDURES
Capitalized terms used but not defined in this Annex C have the meanings
given them in Annex B or D to this Statement of Additional Information.
(a) On each Auction Date for shares of a series of MuniPreferred, the
Auction Agent shall notify by telephone the Broker-Dealers that participated in
the Auction for shares of such series held on such Auction Date and submitted an
Order to the Auction Agent for shares of such series as or on behalf of an
Existing Holder or Potential Holder of:
(i) the Applicable Rate for shares of such series fixed for the next
succeeding Rate Period of such shares;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate for shares of such series;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order to the
Auction Agent for shares of such series as or on behalf of an Existing
Holder, whether such Bid or Sell Order was accepted of rejected, in whole
or in part, and the number of shares, if any, of such series then
outstanding to be sold by such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid to the Auction Agent for
shares of such series as or on behalf of a Potential Holder, whether such
Bid was accepted or rejected, in whole or in part, and the number of
shares, if any, of such series to be purchased by such Potential Holder;
(v) if the aggregate number of shares of such series to be sold by all
Existing Holders with respect to whom such Broker-Dealer submitted Bids or
Sell Orders to the Auction Agent for shares of such series is different
than the aggregate number of shares of such series to be purchased by all
Potential Holders with respect to whom such Broker-Dealer submitted Bids to
the Auction Agent for shares of such series, the name or names of one or
more other Broker-Dealers (and the Agent Member, if any, of each such
Broker-Dealer) and the number of shares of such series to be (x) purchased
from one or more Existing Holders with respect to whom such other
Broker-Dealers submitted Bids or Sell Orders to the Auction Agent for
shares of such series, or (y) sold to one or more Potential Holders with
respect to whom such Broker-Dealers submitted Bids to the Auction Agent for
shares of such series; and
(vi) the scheduled Auction Date of the next succeeding Auction for
shares of such series.
(b) On each Auction Date for shares of a series of MuniPreferred, each
Broker-Dealer that submitted an Order to the Auction Agent for shares of such
series as or on behalf of any Existing Holder or Potential Holder shall:
(i) advise each Existing Holder and Potential Holder (and each
Beneficial Owner and Potential Beneficial Owner) with respect to whom such
Broker-Dealer submitted a Bid or Sell Order to the Auction Agent for shares
of such series whether such Bid or Sell Order was accepted or rejected, in
whole or in part;
(ii) instruct each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent for shares of such series that was accepted, in whole or in
part, to instruct such Bidder's Agent Member to pay to such Broker-Dealer
(or its Agent Member) through the Securities Depository the amount
necessary to purchase the number of shares of such series to be purchased
pursuant to such Bid against receipt of shares of such series;
(iii) instruct each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted a Bid to the Auction Agent for
shares of such series that was accepted, in whole or in part, or a Sell
Order for shares of such series that was accepted, in whole or in part, to
instruct such Bidder's Agent Member to deliver to such Broker-Dealer (or
its Agent Member) through the Securities Depository the number of shares of
such series to be sold pursuant to such Bid or Sell Order against payment
therefor;
(iv) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
for shares of such series and each Potential Holder (and each Potential
Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid
to the Auction Agent for shares of such series of the Applicable Rate for
shares of such series for the next succeeding Rate Period of shares of such
series;
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(v) advise each Existing Holder (and each Beneficial Owner) with
respect to whom such Broker-Dealer submitted an Order to the Auction Agent
for shares of such series of the Auction Date of the next succeeding
Auction for shares of such series; and
(vi) advise each Potential Holder (and each Potential Beneficial
Owner) with respect to whom such Broker-Dealer submitted a Bid to the
Auction Agent for shares of such series that was accepted, in whole or in
part, of the Auction Date of the next succeeding Auction for shares of such
series.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order to the Auction
Agent for any shares of a series of MuniPreferred shall allocate any funds
received by it (or its Agent Member) in respect of shares of such series
pursuant to paragraph (b)(ii) above and any shares of such series received by it
(or its Agent Member) pursuant to paragraph (b)(iii) above among the Potential
Holders and Potential Beneficial Owners, if any, with respect to whom such
Broker-Dealer submitted Bids to the Auction Agent for shares of such series, the
Existing Holders and Beneficial Owners, if any, with respect to whom such
Broker-Dealer submitted Bids or Sell Orders to the Auction Agent for shares of
such series, and any Broker-Dealer identified to it by the Auction Agent
pursuant to paragraph (a)(v) above.
(d) On the Business Day after the Auction Date, the Securities Depository
shall execute the transactions described above, debiting and crediting the
accounts of the respective Agent Members as necessary to effect the purchases
and sale of shares of a series of MuniPreferred as determined in the Auction for
shares of such series.
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ANNEX D
GLOSSARY OF TERMS
Capitalized terms used but not defined in this Annex D have the meanings
given them in the text of this Statement of Additional Information
Statement--Prospectus.
" 'AA' COMPOSITE COMMERCIAL PAPER RATE" shall have the meaning set forth on
page S-34 of this Statement of Additional Information.
"ACQUIRED FUND" shall have the meaning set forth on page S-1 of this
Statement of Additional Information.
"ACQUIRING FUND" shall have the meaning set forth on page S-1 of this
Statement of Additional Information.
"ACQUIRING FUND SHARES" shall have the meaning set forth on page S-1 of
this Statement of Additional Information.
"ACQUIRING FUND STATEMENT" shall have the meaning set forth on page S-13 of
this Statement of Additional Information.
"ADVISER" shall mean Nuveen Advisory Corp.
"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 trustee of the Fund be
deemed to be an Affiliate solely because such director, trustee or executive
officer is also a trustee of the Fund.
"AGENT MEMBER" shall have the meaning set forth on page S-31 of this
Statement of Additional Information.
"AGREEMENT" shall have the meaning set forth on page S-1 of this Statement
of Additional Information.
"ALL HOLD ORDER RATE" shall have the meaning set forth on page S-37 of this
Statement of Additional Information.
"ANTICIPATION NOTES" shall mean the following obligations: 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.
"APPLICABLE RATE" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"AUCTION" shall have the meaning set forth on page S-29 of this Statement
of Additional Information.
"AUCTION AGENCY AGREEMENT" shall have the meaning set forth on page S-30 of
this Statement of Additional Information.
"AUCTION AGENT" shall mean the entity appointed as such by a resolution of
the Board.
"AUCTION DATE" shall have the meaning set forth on page S-29 of this
Statement of Additional Information.
"AUCTION PROCEDURES" shall have the meaning set forth on page S-29 of this
Statement of Additional Information.
"AVAILABLE MUNIPREFERRED" shall have the meaning set forth on page S-37 of
this Statement of Additional Information.
"BENCHMARK RATE" shall have the meaning set forth on page S-37 of this
Statement of Additional Information.
"BENEFICIAL OWNER" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"BID" shall have the meaning set forth on page S-31 of this Statement of
Additional Information.
"BIDDER" or "BIDDERS" shall have the respective meanings set forth on page
S-32 of this Statement of Additional Information.
"BOARD OF DIRECTORS" or "BOARD," with respect to the Acquired Fund, shall
mean the Board of Directors of that Fund or any duly authorized committee
thereof.
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<PAGE> 145
"BOARD OF TRUSTEES" or "BOARD," with respect to the Acquiring Fund, shall
mean the Board of Trustees of that Fund or any duly authorized committee
thereof.
"BROKER-DEALER" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer,
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 Acquiring Fund
and has entered into a Broker-Dealer Agreement that remains effective.
"BROKER-DEALER AGREEMENT" shall have the meaning set forth on page S-30 of
this Statement of Additional Information.
"BUSINESS DAY" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"CEDE" shall mean Cede & Co.
"CFTC" shall have the meaning set forth on page S-10 of this Statement of
Additional Information.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COLLATERALIZED OBLIGATIONS" shall have the meaning set forth on page S-3
of this Statement of Additional Information.
"COMMERCIAL PAPER DEALERS" shall have the meaning set forth on page S-34 of
this Statement of Additional Information.
"COMMISSION" shall have the meaning set forth on page S-9 of this Statement
of Additional Information.
"CURE DATE" shall have the meaning set forth on page S-27 of this Statement
of Additional Information.
"DATE OF ORIGINAL ISSUE" shall have the meaning set forth on page S-30 of
this Statement of Additional Information.
"DECLARATION" shall have the same meaning set forth on page S-13 of this
Statement of Additional Information.
"DEPOSIT SECURITIES" shall have the meaning set forth on pages S-27 of this
Statement of Additional Information.
"DISCOUNT FACTOR" shall mean a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"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.
"DIVIDEND PAYMENT DATE" shall have the meaning set forth on page S-30 of
this Statement of Additional Information.
"DIVIDEND PERIOD" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"DTC" shall have the meaning set forth on page S-30 of this Statement of
Additional Information.
"EFFECTIVE TIME" shall mean the time as of which the Reorganization is
consummated.
"ELIGIBLE ASSETS" shall mean Moody's Eligible Assets or S&P Eligible
Assets, as the case may be.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"EXISTING HOLDER" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"FAILURE TO DEPOSIT," with respect to shares of a series of Acquiring Fund
MuniPreferred, shall mean a failure by the Acquiring 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
D-2
<PAGE> 146
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 as set
forth in the Joint Proxy Statement Prospectus, including this Statement of
Additional Information; 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 Acquiring Fund 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.
"FISCAL AGENT" shall have the meaning set forth on page S-4 of this
Statement of Additional Information.
"FUND" shall mean the Acquiring Fund or, where the context requires, the
Acquired Fund.
"GROSS-UP PAYMENT" shall have the meaning set forth on page S-16 of this
Statement of Additional Information.
"HOLD ORDER" shall have the meaning set forth on page S-31 of this
Statement of Additional Information.
"HOLDER," with respect to shares of a series of Acquiring Fund
MuniPreferred, shall mean the registered holder of such shares as the same
appears on the record books of the Fund.
"INITIAL RATE PERIOD" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"IRS" shall mean the Internal Revenue Service.
"KENNY INDEX" has the meaning set forth on page S-34 of this Statement of
Additional Information.
"LATE CHARGE" shall have the meaning set forth on page S-15 of this
Statement of Additional Information.
"LIQUIDATION PREFERENCE," with respect to a given number of shares of
Acquiring Fund MuniPreferred, shall mean $25,000 times that number.
"MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY" shall have the meaning set
forth on page S-22 of this Statement of Additional Information.
"MAXIMUM RATE" shall have the meaning set forth on page S-33 of this
Statement of Additional Information.
"MINIMUM RATE PERIOD" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"MOODY'S DISCOUNT FACTORS" shall have the meaning set forth on page S-24 of
this Statement of Additional Information.
"MOODY'S ELIGIBLE ASSETS" shall have the meaning set forth on page S-24 of
this Statement of Additional Information.
"MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 56 days thereafter.
"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
D-3
<PAGE> 147
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:
<TABLE>
<CAPTION>
FEDERAL
TAX RATE VOLATILITY
INCREASE FACTOR
- -------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"MUNICIPAL LEASE OBLIGATION" shall have the meaning set forth on page S-6
of this Statement of Additional Information.
"MUNICIPAL OBLIGATION" shall mean "Municipal Obligation" as defined in the
Joint Proxy Statement-- Prospectus, including this Statement of Additional
Information.
"MUNIPREFERRED" shall mean the Municipal Auction Rate Cumulative Preferred
Shares of the Acquiring Fund or, when the context requires, the Municipal
Auction Rate Cumulative Preferred Shares of the Acquired Fund.
"MUNIPREFERRED BASIC MAINTENANCE AMOUNT," shall have the meaning set forth
on page S-22 of this Statement of Additional Information.
"MUNIPREFERRED BASIC MAINTENANCE CURE DATE" shall have the meaning set
forth on page S-22 of this Statement of Additional Information.
"MUNIPREFERRED BASIC MAINTENANCE REPORT" shall have the meaning set forth
on page S-23 of this Statement of Additional Information.
"1940 ACT" shall mean the Investment Company Act of 1940, as amended.
"1940 ACT CURE DATE" shall have the meaning set forth on page S-21 of this
Statement of Additional Information.
"1940 ACT MUNIPREFERRED ASSET COVERAGE" shall have the meaning set forth on
page S-21 of this Statement of Additional Information.
"NOTICE OF REDEMPTION" shall have the meaning set forth on page S-28 of
this Statement of Additional Information.
"NOTICE OF SPECIAL RATE PERIOD" shall have the meaning set forth on page
S-19 of this Statement of Additional Information.
"NUVEEN" shall mean John Nuveen & Co. Incorporated.
"NYSE" shall mean the New York Stock Exchange.
"ORDER" and "ORDERS" shall have the respective meanings set forth on page
S-32 of this Statement of Additional Information.
"ORIGINAL ISSUE INSURANCE" shall have the meaning set forth on pages S-2 of
this Statement of Additional Information.
"OTHER ISSUES" shall have the meaning set forth on page S-25 of this
Statement of Additional Information.
"OUTSTANDING" shall mean, as of any Auction Date with respect to shares of
a series of Acquiring Fund MuniPreferred, the number of shares of such series
theretofore issued by the Acquiring Fund except, without duplication, (i) any
shares of such series theretofore cancelled or delivered to the Auction Agent
for cancellation or redeemed by the Acquiring Fund, (ii) any shares of such
series as to which the Acquiring 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 Acquiring Fund.
"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.
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<PAGE> 148
"PORTFOLIO INSURANCE" shall have the same meaning set forth on pages S-2
and S-3 of this Statement of Additional Information.
"POTENTIAL BENEFICIAL OWNER" shall have the meaning set forth on page S-30
of this Statement of Additional Information.
"POTENTIAL HOLDER" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"RATE MULTIPLE" shall have the meaning set forth on page S-35 of this
Statement of Additional Information.
"RATE PERIOD" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"RATE PERIOD DAYS" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD," for purposes of calculating
Moody's Eligible Assets or S&P Eligible Assets, as the case may be, shall have
the meaning set forth on pages S-25 and S-24 of this Statement of Additional
Information, respectively.
"REDEMPTION PRICE" shall have the meaning set forth on page S-27 of this
Statement of Additional Information.
"REFERENCE RATE" shall have the meaning set forth on page S-33 of this
Statement of Additional Information.
"REORGANIZATION" shall have the meaning set forth on page 1 of this
Statement of Additional Information.
"S&P" shall mean Standard & Poor's, a division of McGraw Hill Companies,
and its successors.
"S&P DISCOUNT FACTORS" shall have the meaning set forth on page S-23 of
this Statement of Additional Information.
"S&P ELIGIBLE ASSETS" shall have the meaning set forth on page S-23 of this
Statement of Additional Information.
"S&P EXPOSURE PERIOD" shall have the meaning set forth on page S-23 of this
Statement of Additional Information.
"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.
"SECONDARY MARKET INSURANCE" shall have the same meaning set forth on page
S-2 of this Statement of Additional Information.
"SECURITIES DEPOSITORY" shall mean DTC and its successors and assigns or
any other securities depository selected by the Acquiring Fund which agrees to
follow the procedures required to be followed by such securities depository in
connection with shares of Acquiring Fund MuniPreferred.
"SELL ORDER" shall have the meaning set forth on page S-31 of this
Statement of Additional Information.
"SPECIAL RATE PERIOD" shall have the meaning set forth on page S-30 of this
Statement of Additional Information.
"SPECIAL REDEMPTION PROVISIONS" has the meaning set forth on page S-26 of
this Statement of Additional Information.
"SUBMISSION DEADLINE" shall have the meaning set forth on page S-36 of this
Statement of Additional Information.
"SUBMITTED BID" AND "SUBMITTED BIDS" shall have the respective meanings set
forth on page S-37 of this Statement of Additional Information.
"SUBMITTED HOLD ORDER" AND "SUBMITTED HOLD ORDERS" shall have the
respective meanings set forth on page S-37 of this Statement of Additional
Information.
"SUBMITTED ORDER" AND "SUBMITTED ORDERS" shall have the respective meanings
set forth on page S-37 of this Statement of Additional Information.
D-5
<PAGE> 149
"SUBMITTED SELL ORDER" AND "SUBMITTED SELL ORDERS" shall have the
respective meanings set forth on page S-37 of this Statement of Additional
Information.
"SUBSEQUENT RATE PERIOD" shall have the meaning set forth on page S-30 of
this Statement of Additional Information.
"SUBSTITUTE COMMERCIAL PAPER DEALER" shall have the meaning set forth on
page S-35 of this Statement of Additional Information.
"SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall have the meaning set
forth on page S-35 of this Statement of Additional Information.
"SUFFICIENT CLEARING BIDS" shall have the meaning set forth on page S-37 of
this Statement of Additional Information.
"TAXABLE ALLOCATION" shall have the meaning set forth on page S-16 of this
Statement of Additional Information.
"TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE" have the meaning
set forth on page S-34 of this Statement of Additional Information.
"TAXABLE INCOME" shall have the meaning set forth on pages S-37 and S-38 of
this Statement of Additional Information.
"TAXABLE YIELD RATE" shall have the meaning set forth on page S-38 of this
Statement of Additional Information.
"TREASURY BILL" shall have the meaning set forth on page S-35 of this
Statement of Additional Information.
"TREASURY BILL RATE," shall have the meaning set forth on page S-35 of this
Statement of Additional Information.
"TREASURY NOTE" shall have the meaning set forth on page S-35 of this
Statement of Additional Information.
"TREASURY NOTE RATE," shall have the meaning set forth on page S-35 of this
Statement of Additional Information.
"U.S. GOVERNMENT SECURITIES DEALER" shall have the meaning set forth on
page S-35 of this Statement of Additional Information.
"VALUATION DATE" shall have the meaning set forth on page S-22 of this
Statement of Additional Information.
"VOLATILITY FACTOR" shall mean, as of any Valuation Date, the greater of
the Moody's Volatility Factor and the S&P Volatility Factor.
"WINNING BID RATE" shall have the meaning set forth on page S-37 of this
Statement of Additional Information.
D-6
<PAGE> 150
ANNEX E
PORTFOLIO INSURANCE
Set forth below is a brief description of the following municipal bond
insurers with whom each Fund may obtain municipal insurance policies covering
each Fund's Municipal Obligations: AMBAC Indemnity Corporation ("AMBAC
Indemnity"), Financial Security Assurance Inc. ("Financial Security"), MBIA
Insurance Corporation ("MBIA") and Financial Guaranty Insurance Company
("Financial Guaranty").
The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from Standard & Poor's Rating Group, a division of McGraw Hill
("S&P") and Aaa from Moody's Investors Service, Inc. ("Moody's"). In addition,
each Fund may purchase municipal insurance policies from other municipal bond
insurers not described in this Annex E, but only if such other insurers have
total admitted assets of at least $75 million, capital and surplus of at least
$50 million and claims-paying ability ratings of both AAA from S&P and Aaa from
Moody's. Each Fund currently intends to obtain insurance policies only from
mono-line insurers specializing in insuring municipal debt.
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of AAA has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of Aaa is adjudged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of Aaa carry the smallest degree of credit risk and, while the financial
strength of these companies is likely to change, such changes as can be
visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
be rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment, nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are fully
or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
S&P's and Moody's ratings are not recommendations to buy, sell or hold the
Municipal Obligations insured by policies issued by AMBAC Indemnity, Financial
Security, MBIA or Financial Guaranty and such ratings may be subject to revision
or withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of either or both ratings may have an adverse effect on the market
price of the Municipal Obligations insured by policies issued by AMBAC
Indemnity, Financial Security, MBIA or Financial Guaranty.
S&P's ratings of AMBAC Indemnity, Financial Security, MBIA and Financial
Guaranty should be evaluated independently of Moody's ratings. Any further
explanation as to the significance of the ratings may be obtained only from the
applicable rating agency.
The following information has been furnished by AMBAC Indemnity, Financial
Security, MBIA and Financial Guaranty, respectively, for use in this Statement
of Additional Information.
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia and
the Commonwealth of Puerto Rico, with admitted assets of approximately
$2,440,000,000 (unaudited) and statutory capital of approximately $1,387,000,000
(unaudited) as of March 31, 1996. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory contingency reserve. AMBAC
Indemnity is a wholly-owned subsidiary of AMBAC Inc., a 100% publicly-held
company. Moody's Investors Service, Inc., Standard & Poor's Corporation and
Fitch Investors Service, Inc. have each assigned a triple-A claims-paying
ability rating to AMBAC Indemnity.
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<PAGE> 151
Copies of AMBAC Indemnity's financial statements prepared in accordance
with statutory accounting standards are available from AMBAC Indemnity. The
address of AMBAC Indemnity's administrative offices and its telephone number are
One State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
FINANCIAL SECURITY ASSURANCE INC.
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities, thereby enhancing the credit rating of those securities, in
consideration for payment of premiums to the insurer. Financial Security and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments.
Financial Security insures both newly issued securities sold in the primary
market and outstanding securities sold in the secondary market that satisfy
Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
U S WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any insurance policy issued by Financial Security or to make any
additional contribution to the capital of Financial Security.
As of March 31, 1996, the total policyholders' surplus and contingency
reserves and the total unearned premium reserve, respectively, of Financial
Security and its consolidated subsidiaries were, in accordance with statutory
accounting principles, approximately $650,052,000 (unaudited) and $387,239,000
(unaudited), and the total shareholders' equity and the total unearned premium
reserve, respectively, of Financial Security and its consolidated subsidiaries
were, in accordance with generally accepted accounting principles, approximately
$779,177,000 (unaudited) and $340,226,000 (unaudited). Copies of Financial
Security's financial statements may be obtained by writing to Financial Security
at 350 Park Avenue, New York, New York 10022, Attention: Communications
Department, Financial Security's telephone number is (212) 826-0100. Pursuant to
an intercompany agreement, liabilities on financial guaranty insurance written
by Financial Security of any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsurers under various quota
share treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
certain statutory and rating agency requirements. It does not alter or limit
Financial Security's obligations under any financial guaranty insurance policy.
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
MBIA, formerly known as Municipal Bond Investors Assurance Corporation, is
the principal operating subsidiary of MBIA, Inc., a New York Stock Exchange
listed company. MBIA, Inc. is not obligated to pay the debts of or claims
against MBIA. MBIA is a limited liability corporation rather than a several
liability association. MBIA is domiciled in the State of New York and licensed
to do business to all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Insurer has one
European branch in the Republic of France.
As of December 31, 1995, MBIA had admitted assets of $3.8 billion
(audited), total liabilities of $2.5 billion (audited), and total capital and
surplus of $1.3 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of March 31, 1996, MBIA had admitted assets of $4.0 billion
(unaudited), total liabilities of $2.7 billion (unaudited), and total capital
and surplus of $1.3 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of MBIA's year end financial statements prepared in
accordance with
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statutory accounting practices are available from MBIA. The address of MBIA is
113 King Street, Armonk, New York 10504.
MBIA's policy unconditionally and irrevocably guarantees to each Fund the
full and complete payment required to be made by or on behalf of the issuer to
the applicable paying agent or its successor of an amount equal to (i) the
principal of (either at the stated maturity or by advancement of maturity
pursuant to a mandatory sinking fund payment) and interest on, the Municipal
Obligations as such payments shall become due but shall not be so paid (except
that in the event of any acceleration of the due date of such principal by
reason of mandatory or optional redemption or acceleration resulting from
default or otherwise, other than any advancement of maturity pursuant to a
mandatory sinking fund payment, the payments guaranteed by MBIA's policy shall
be made in such amounts and at such times as such payments of principal would
have been due had there not been any such acceleration) and (ii) the
reimbursement of any such payment which is subsequently recovered from the Fund
of the Municipal Obligations pursuant to a final judgment by a court of
competent jurisdiction that such payment constitutes an avoidable preference to
the Fund within the meaning of any applicable bankruptcy law (a "Preference").
MBIA's policy does not insure against loss of any prepayment premium which
may at any time by payable with respect to any Municipal Obligation. MBIA's
policy does not, under any circumstance, insure against loss relating to: (i)
optional or mandatory redemptions (other than mandatory sinking fund
redemptions); (ii) any payments to be made on an accelerated basis; (iii)
payments of the purchase price of Municipal Obligations upon tender thereof; or
(iv) any Preference relating to (i) through (iii) above. MBIA's policy also does
not insure against nonpayment of principal of or interest on the Municipal
Obligations resulting from the insolvency, negligence or any other act or
omission of any paying agent for the Municipal Obligations.
With respect to small issue industrial development bonds and pollution
control revenue bonds covered by the policy, MBIA guarantees the full and
complete payments required to be made by or on behalf of an issuer of such bonds
if there occurs pursuant to the terms of the bonds an event which results in the
loss of the tax-exempt status of interest on such bonds, including principal,
interest or premium payments payable thereon, if any, as and when required to be
made by or on behalf of the issuer pursuant to the terms of such bonds.
Upon receipt of telephonic or telegraphic notice, such notice subsequently
confirmed in writing by registered or certified mail, or upon receipt of written
notice by registered or certified mail, by MBIA from the paying agent or a Fund
that a required payment of any insured amount which is then due, that such
required payment has not been made, MBIA on the due date of such payment or
within one business day after receipt of notice of such nonpayment, whichever is
later, will make a deposit of funds, in an account with Citibank, N.A., in New
York, New York, or its successor, sufficient for the payment of any such insured
amounts which are then due. Upon presentment and surrender of such Municipal
Obligations or presentment of such other proof of ownership of the Municipal
Obligations, together with any appropriate instruments of assignment to evidence
the assignment of the insured amounts due on the Municipal Obligations as are
paid by MBIA, and appropriate instruments to effect the appointment of MBIA as
agent for a Fund in any legal proceeding related to payment of insured amounts
on Municipal Obligations, such instruments being in a form satisfactory to
Citibank, N.A., Citibank, N.A. shall disburse to the Fund or the paying agent
payment of the insured amounts due on such Municipal Obligations, less any
amount held by paying agent for the payment of such insured amounts and legally
available therefor.
FINANCIAL GUARANTY INSURANCE COMPANY
Set forth below is a brief description of Financial Guaranty, from whom
each Fund may purchase a mutual fund insurance policy (the "Portfolio Insurance
Policy") securing certain municipal securities (the "Insured Bonds") held in a
Fund.
The Portfolio Insurance Policy is non-cancellable except for failure to pay
premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by a Fund and are adjusted for purchases,
sales and payments prior to maturity of Insured Bonds during the month. In the
event of a sale of any Insured Bond by a Fund or payment thereof prior to
maturity, the Portfolio Insurance policy terminates as to such Insured Bond.
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to Citibank, N.A., or its
successor, as its agent (the "Fiscal Agent"), that portion of the principal of
and interest on the Insured Bonds which shall become due for payment but shall
be unpaid by reason of nonpayment by the issuer of the Insured Bonds. The term
"due for payment" means, when referring to the principal of an Insured Bond, its
stated maturity date or the date on which it shall have been called for
mandatory sinking fund
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redemption and does not refer to any earlier date on which payment is due by
reason of call for redemption (other than by mandatory sinking fund redemption),
acceleration or other advancement of maturity and means, when referring to
interest on an Insured Bond, the stated date for payment of interest. In
addition, the Portfolio Insurance Policy covers nonpayment by the issuer that
results from any payment of principal or interest made by such issuer on the
Insured Bond to a Fund which has been recovered from the Fund or its
shareholders pursuant to the United States Bankruptcy Code by a trustee in
bankruptcy in accordance with a final, nonappealable order of a court having
competent jurisdiction.
Financial Guaranty will make such payments to the Fiscal Agent on the date
such principal or interest becomes due for payment or on the business day next
following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse to the Trustee
the face amount of principal and interest which is then due for payment but is
unpaid by reason or nonpayment by the issuer but only upon receipt by the Fiscal
Agent of (i) evidence of the Trustee's right to receive payment of the principal
or interest due for payment and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights to payment of such principal
or interest due for payment thereupon shall vest in Financial Guaranty. Upon
such disbursement, Financial Guaranty shall become the owner of the Insured
Bond, appurtenant coupon or right to payment of principal or interest on such
Insured Bond and shall be fully subrogated to all of the Trustee's rights
thereunder, including the right to payment thereof.
In determining whether to insure municipal securities held in each Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by a Fund's
Board of Directors or Trustees, as the case may be.
Certain of the municipal securities insured under the Portfolio Insurance
Policy may also be insured under an insurance policy obtained by the issuer of
such municipal securities. The premium for any insurance policy or policies
obtained by an issuer of Insured Bonds has been paid in advance by such issuer
and any such policy or policies are non-cancellable and will continue in force
so long as the Insured Bonds so insured are outstanding. Financial Guaranty has
also agreed, if requested by the Board of Directors on or before the fifth day
preceding the 1st day of any month, to insure to maturity Insured Bonds sold by
the Trustee during the month immediately following such request of the Board of
Directors. The premium for any such insurance to maturity provided by Financial
Guaranty is paid by the Fund and any such insurance is non-cancellable and will
continue in force so long as the Bonds so insured are outstanding.
Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly-owned subsidiary of FGIC Corporation ("Corporation"), a Delaware holding
company. The Corporation is a wholly-owned subsidiary of General Electric
Capital Corporation ("GECC"). Neither the Corporation nor GECC is obligated to
pay the debts of or the claims against Financial Guaranty. Financial Guaranty is
domiciled in the State of New York and is subject to regulation by the State of
New York Insurance Department. As of December 31, 1995, the total capital and
surplus of Financial Guaranty was approximately $1,032,675,000. Copies of
Financial Guaranty's financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial statements, prepared on
the basis of generally accepted accounting principles, may be obtained by
writing to Financial Guaranty at 115 Broadway, New York, New York 10006,
Attention: Communications Department [telephone number is (212) 312-3000] or to
the New York State Insurance Department at 160 West Broadway, 18th Floor, New
York, New York 10013. Attention: Property Companies Bureau [telephone number:
(212) 621-0389].
In addition, Financial Guaranty is currently licensed to write insurance in
all 50 states and the District of Columbia.
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NUVEEN INSURED PREMIUM
INCOME MUNICIPAL FUND 2
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STATEMENT OF ADDITIONAL INFORMATION
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JUNE 17, 1996
NPX 7/96
