AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 2002
1933 ACT FILE NO. 333-
1940 ACT FILE NO. 811-21212
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.____
[ ] POST-EFFECTIVE AMENDMENT NO.____
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
[X] AMENDMENT NO. 2
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
Exact Name of Registrant as Specified in Declaration of Trust
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
JESSICA R. DROEGER
VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
DAVID A. STURMS THOMAS S. HARMAN CYNTHIA G. COBDEN
VEDDER, PRICE, KAUFMAN & KAMMHOLZ MORGAN, LEWIS & BOCKIUS LLP SIMPSON THACHER & BARTLETT
222 N. LASALLE ST. 1800 M STREET, N.W. 425 LEXINGTON AVE.
CHICAGO, IL 60601 WASHINGTON, D.C. 20036 NEW YORK, NY 10077
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement
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If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box):
[X] when declared effective pursuant to section 8(c).
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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PROPOSED PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PRICE PER UNIT PRICE(1) REGISTRATION FEE(2)
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MuniPreferred Shares, $0.01
par value.................. 40 Shares $25,000 $1,000,000 $92
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2002
PROSPECTUS
[NUVEEN INVESTMENTS LOGO]
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("MUNIPREFERRED(R)")
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen Insured California Tax-Free Advantage Municipal Fund (the "Fund") is
a non-diversified, closed-end management investment company. The Fund's
investment objectives are to provide current income exempt from regular federal
income tax, the alternative minimum tax applicable to individuals and California
income tax and to enhance portfolio value relative to the municipal bond market
by investing in tax-exempt municipal bonds that the Fund's investment adviser
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued. Under normal circumstances, the Fund will invest
at least 80% of its net assets in a portfolio of municipal bonds that pay
interest that is exempt from regular federal income tax, the alternative minimum
tax applicable to individuals and California income tax and that are covered by
insurance guaranteeing the timely payment of principal and interest thereon.
Through November 30, 2003, the Fund may invest in municipal bonds that pay
interest that is exempt from regular federal income tax and the alternative
minimum income tax applicable to individuals but not from California income tax,
provided that no more than 10% of the Fund's investment income during that time
may be derived from investments in those bonds. The Fund may at all times invest
up to 20% of its net assets in uninsured municipal bonds 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, or other
municipal bonds that are investment grade quality. The Fund cannot assure you
that it will achieve its investment objectives.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (800) 257-8787. Investors are
advised to read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A Statement of Additional Information dated
, 2002 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference in its entirety into this prospectus. A copy of the
Statement of Additional Information, the table of contents of which appears on
page of this prospectus, may be obtained without charge by calling the Fund at
(800) 257-8787. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated by
reference, and other information filed by the Fund electronically with the SEC.
---------------------
INVESTING IN MUNIPREFERRED SHARES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
(R) Registered trademark of Nuveen Investments
PER SHARE TOTAL
--------- -----
Public Offering Price $25,000 $
Sales Load(1) $ $
Proceeds to the Fund (before expenses)(2) $ $
------------
(1) One-half of the sales load from this offering will be paid to certain
underwriters based on their participation in the Fund's offering of common
shares.
(2) Not including offering expenses payable by the Fund estimated to be
$ .
The underwriters are offering the shares of MuniPreferred subject to various
conditions. The underwriters expect to deliver shares of MuniPreferred in
book-entry form, through the facilities of The Depository Trust Company, to
purchasers on or about , 2002.
---------------------
SALOMON SMITH BARNEY NUVEEN INVESTMENTS
, 2002
The Fund is offering shares of Series MuniPreferred. The shares
are referred to in this prospectus as "MuniPreferred." The MuniPreferred have a
liquidation preference of $25,000 per share, plus any accumulated and unpaid
dividends. The MuniPreferred also have priority over the Fund's common shares as
to distribution of assets as described in this prospectus. The dividend rate for
the initial dividend rate period will be % for MuniPreferred Series . The
initial dividend rate period is from the date of issuance through ,
2002. For subsequent rate periods, MuniPreferred shares pay dividends based on a
rate set at auction, usually held weekly. Prospective purchasers should
carefully review the auction procedures described in this prospectus and should
note: (1) a buy order (called a "bid order") or sell order is a commitment to
buy or sell MuniPreferred shares based on the results of an auction; (2)
auctions will be conducted by telephone; and (3) purchases and sales will be
settled on the next business day after the auction. MuniPreferred shares are not
listed on an exchange. You may only buy or sell MuniPreferred shares through an
order placed at an auction with or through a broker-dealer that has entered into
an agreement with the auction agent and the Fund, or in a secondary market
maintained by certain broker-dealers. These broker-dealers are not required to
maintain this market, and it may not provide you with liquidity.
The MuniPreferred shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
-------------------------
TABLE OF CONTENTS
Prospectus Summary.......................................... 1
Financial Highlights........................................ 6
The Fund.................................................... 7
Use of Proceeds............................................. 7
Capitalization.............................................. 8
Portfolio Composition....................................... 8
The Fund's Investments...................................... 9
Risk Factors................................................ 17
How the Fund Manages Risk................................... 19
Management of the Fund...................................... 20
Description of MuniPreferred Shares......................... 21
The Auction................................................. 30
Description of Common Shares................................ 33
Certain Provisions in the Declaration of Trust.............. 33
Repurchase of Common Shares; Conversion to Open-End Fund.... 34
Tax Matters................................................. 34
Other Matters............................................... 36
Custodian, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent.......................................... 37
Underwriting................................................ 38
Legal Opinions.............................................. 39
Available Information....................................... 39
Table of Contents for the Statement of Additional
Information............................................... 40
Taxable Equivalent Yield Table.............................. A-1
-------------------------
i
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this prospectus and the Fund's
Statement Establishing and Fixing the Rights and Preferences of Municipal
Auction Rate Cumulative Preferred Shares (the "Statement") attached as Appendix
A to the Statement of Additional Information. Capitalized terms used but not
defined in this prospectus shall have the meanings given to such terms in the
Statement.
The Fund...................... Nuveen Insured California Tax-Free Advantage
Municipal Fund (the "Fund") is a recently
organized, non-diversified, closed-end
management investment company. The Fund is
designed to provide tax benefits to investors
who are residents of California. See "The
Fund." The Fund's common shares, $.01 par value
("common shares"), are traded on the American
Stock Exchange (the "Exchange") under the
symbol "NKX." See "Description of Common
Shares." As of , 2002, the Fund had
common shares outstanding and net assets
of $ .
Investment Objectives......... The Fund's investment objectives are to provide
current income exempt from regular federal
income tax, the alternative minimum tax
applicable to individuals and California income
tax and enhance portfolio value relative to the
municipal bond market by investing in
tax-exempt municipal bonds that the Fund's
investment adviser believes are underrated or
undervalued or that represent municipal market
sectors that are undervalued. Under normal
circumstances, the Fund will invest at least
80% of its net assets in a portfolio of
municipal bonds that:
- pay interest that is exempt from regular
federal and California income taxes and from
the federal alternative minimum tax
applicable to individuals; and
- are covered by insurance guaranteeing the
timely payment of principal and interest
thereon.
This insurance does not protect the market
value of portfolio holdings or the net asset
value of the Fund.
Under normal circumstances, the Fund (i)
expects to be fully invested (at least 95% of
its assets) in municipal bonds that pay
interest that is exempt from regular federal
and California income taxes, and (ii) will not
invest in bonds that pay interest subject to
the federal alternative minimum tax applicable
to individuals ("AMT Bonds"). Through November
30, 2003, (the "Invest-up Period"), the Fund
may invest in municipal bonds that pay interest
that is exempt from regular federal income tax
and the alternative minimum tax applicable to
individuals but not from California income tax
("Out of State Bonds"), provided that no more
than 10% of the Fund's investment income during
that time may be derived from investments in
Out of State Bonds.
The Fund may at all times invest up to 20% of
its net assets in (i) uninsured municipal bonds
that are 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, or (ii)
other municipal bonds, that at the time of
investment, are investment grade quality. The
Fund will
1
not invest in bonds whether or not insured
that, at the time of investment, are below
investment grade quality. An investment grade
quality bond is a bond rated within the four
highest grades (Baa or BBB or better by Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation, a division of The
McGraw-Hill Companies ("S&P") or Fitch Ratings
("Fitch")) by all nationally recognized
statistical rating organizations (each an
"NRSRO") that rate the bond or a bond that is
unrated but judged to be of comparable quality
by the Fund's investment adviser. The Fund will
primarily invest in municipal bonds with
long-term maturities in order to maintain a
weighted average maturity of 15-30 years, but
the weighted average maturity of obligations
held by the Fund may be shortened, depending on
market conditions. The Fund cannot assure you
that it will attain its investment objectives.
See "The Fund's Investments."
Investment Adviser............ Nuveen Advisory Corp. ("Nuveen Advisory") acts
as the Fund's investment adviser. Nuveen
Advisory is a wholly owned subsidiary of The
John Nuveen Company. For more information on
fees and expenses, see "Management of the
Fund."
The Offering.................. The Fund is offering shares of Series
MuniPreferred at a purchase price of
$25,000 per share. Shares of MuniPreferred are
being offered by the underwriters listed under
"Underwriting."
Risk Factors Summary.......... Risk is inherent in all investing. Therefore,
before investing in the Fund you should
consider certain risks carefully. The primary
risks of investing in MuniPreferred shares are:
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
MuniPreferred shares, you may receive less
than the price you paid for your shares if
you sell them outside of the auction,
especially when market interest rates are
rising;
- a rating agency could downgrade MuniPreferred
shares, which could affect liquidity;
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances;
- in extraordinary circumstances the Fund may
not earn sufficient income from its
investments to pay dividends;
- if long-term interest rates rise, the value
of the Fund's investment portfolio will
decline, reducing the asset coverage for the
MuniPreferred shares;
- if an issuer of a municipal bond in which the
Fund invests is downgraded or defaults, there
may be a negative impact on the income and/or
asset value of the Fund's portfolio;
2
- the Fund is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political
or regulatory occurrence; and
- the Fund's policy of investing primarily in
municipal obligations of issuers located in
California makes the Fund more susceptible to
adverse economic, political or regulatory
occurrences affecting those issuers. To the
extent that a particular industry sector
represents a larger portion of the state's
total economy, the greater the impact that a
downturn in such sector is likely to have on
the state's economy.
For additional general risks of investing in
MuniPreferred shares of the Fund, see "Risk
Factors" below.
Trading Market................ MuniPreferred shares are not listed on an
exchange. Instead, you may buy or sell
MuniPreferred shares at an auction that
normally is held weekly by submitting orders to
one of the broker-dealers that has entered into
an agreement with the auction agent and the
Fund (each, a "Broker-Dealer"), or to a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer. In addition to
the auctions, Broker-Dealers and other
broker-dealers may maintain a secondary trading
market in MuniPreferred shares outside of
auctions, but may discontinue this activity at
any time. There is no assurance that a
secondary market will provide shareholders with
liquidity. You may transfer shares outside of
auctions only to or through a Broker-Dealer, or
a broker-dealer that has entered into a
separate agreement with a Broker-Dealer.
The first auction date for the MuniPreferred
will be , 2002, the business day
before the dividend payment date for the
initial rate period for the MuniPreferred. The
start date for subsequent rate periods normally
will be the business day following the auction
date unless the then-current rate period is a
special rate period, or the day that normally
would be the auction date or the first day of
the subsequent rate period is not a business
day.
Dividends and Rate Periods.... The table below shows the dividend rate for the
initial rate period of the MuniPreferred
offered in this prospectus. For subsequent rate
periods, MuniPreferred shares will pay
dividends based on a rate set at auctions,
normally held weekly. In most instances
dividends are also paid weekly, on the day
following the end of the rate period. The rate
set at auction will not exceed the Maximum
Rate. See "Description of MuniPreferred
shares -- Dividends and Dividend
Periods -- General."
The table below also shows the date from which
dividends on the MuniPreferred shares will
accumulate at the initial rate, the dividend
payment date for the initial rate period and
the day on which dividends will normally be
paid. If dividends are payable on a Monday or
Tuesday and that day is not a business day,
then your dividends will be paid on the first
business day that falls after that day. If
dividends are payable on a Wednesday, Thursday
or Friday and that day is not a business day,
then your dividends generally will be paid on
the first business day prior to that day.
3
Finally, the table below shows the number of
days of the initial rate period for the
MuniPreferred. Subsequent rate periods
generally will be seven days. The dividend
payment date for special rate periods of more
than 28 days will be set out in the notice
designating a special rate period. See
"Description of MuniPreferred
shares -- Dividends and Dividend
Periods -- Designation of Special Rate Periods"
and "-- Gross-up Payments."
DIVIDEND
PAYMENT NUMBER OF
DATE OF DATE FOR SUBSEQUENT DAYS OF
ACCUMULATION INITIAL DIVIDEND INITIAL
AT INITIAL RATE PAYMENT RATE
INITIAL DIVIDEND RATE RATE* PERIOD* DAY PERIOD
--------------------- ------------ -------- ---------- ---------
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* All dates are 2002.
Taxation...................... Because under normal circumstances the Fund
will invest substantially all of its assets in
municipal bonds that pay interest exempt from
regular federal income tax and the alternative
minimum tax applicable to individuals, the
income you receive will ordinarily be similarly
exempt. Taxable income and gain earned by the
Fund will be allocated proportionately to
holders of MuniPreferred shares and common
shares, based on the percentage of total
dividends paid to each class for that year.
Accordingly, certain specified MuniPreferred
dividends may be subject to regular federal
income tax on income or gains attributed to the
Fund. The Fund intends to notify shareholders,
before any applicable auction for a rate period
of 28 days or less, of the amount of any
taxable income and gain for regular federal
income tax purposes only, to be paid for the
period relating to that auction. For longer
periods, the Fund will notify shareholders. In
certain limited circumstances, the Fund will
make shareholders whole for taxes owing on
dividends paid to shareholders that include
taxable income and gain. See "Tax Matters."
Ratings....................... Shares of each series of MuniPreferred will be
issued with a rating of "Aaa" from Moody's and
"AAA" from S&P. Because the Fund is required to
maintain at least one of these ratings, it must
own portfolio securities of a sufficient value
and with adequate credit quality to meet the
rating agencies' guidelines. See "Description
of MuniPreferred shares -- Rating Agency
Guidelines and Asset Coverage."
Redemption.................... Although the Fund will not ordinarily redeem
MuniPreferred shares, it may be required to
redeem shares if, for example, the Fund does
not meet an asset coverage ratio required by
law or in order to correct a failure to meet a
rating agency guideline in a timely manner. The
Fund voluntarily may redeem MuniPreferred
shares in certain circumstances. See
"Description of MuniPreferred
shares -- Redemption" and "Description of
MuniPreferred shares -- Rating Agency
Guidelines and Asset Coverage."
Liquidation Preference........ The liquidation preference of the shares of
MuniPreferred will be $25,000 per share plus
accumulated but unpaid dividends, if any,
thereon. See "Description of MuniPreferred
shares -- Liquidation."
4
Voting Rights................. The holders of the Fund's preferred shares,
$.01 par value ("Preferred Shares"), including
MuniPreferred, voting as a separate class, have
the right to elect at least two trustees at all
times and to elect a majority of the trustees
in the event two full years' dividends on the
Preferred Shares are unpaid. In each case, the
remaining trustees will be elected by holders
of common shares and Preferred Shares,
including MuniPreferred, voting together as a
single class. The holders of shares of
Preferred Shares, including MuniPreferred, will
vote as a separate class or classes on certain
other matters as required under the Declaration
of Trust, the Investment Company Act of 1940
(the "1940 Act") and Massachusetts law. See
"Description of MuniPreferred shares -- Voting
Rights" and "Certain Provisions in the
Declaration of Trust."
5
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on , 2002 until , 2002. Since the Fund commenced
operations on , 2002, the table covers approximately of
operations, during which a substantial portion of the Fund's assets were held in
cash pending investment in municipal bonds that meet the Fund's investment
objectives and policies. Accordingly, the information presented may not provide
a meaningful picture of the Fund's operating performance. The report of the
Fund's independent auditors is contained in the Statement of Additional
Information and can be obtained by shareholders of the Fund upon request.
-
-----------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period......................
Net Investment Income..................................
Net Gains on Securities (Unrealized)...................
Total from Investment Operations.....................
Offering Costs............................................
Net Asset Value, End of Period............................
Per Share Market Value, End of Period.....................
Total Return on Net Asset Value...........................
Total Investment Return on Market Value...................
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands)..................
Ratio of Expenses to Average Net Assets Before
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets
Before Reimbursement...................................
Ratio of Expenses to Average Net Assets After
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets After
Reimbursement..........................................
Portfolio Turnover Rate...................................
6
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940 (the
"1940 Act"). The Fund was organized as a Massachusetts business trust on July
29, 2002, pursuant to a Declaration of Trust (the "Declaration") governed by the
laws of the Commonwealth of Massachusetts. On , 2002, the Fund issued
an aggregate of common shares of beneficial interest, par value $.01
per share pursuant to the initial public offering thereof. The Fund's common
shares are traded on the Exchange under the symbol "NKX." The Fund's principal
office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is (800) 257-8787. The Fund is designed to provide tax benefits
to investors who are residents of California.
The following provides information about the Fund's outstanding shares as
of , 2002:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common............................................
MuniPreferred.....................................
Series ........................................
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of the sales load and estimated offering costs.
The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in municipal bonds that meet those investment objectives and policies
within three months after the completion of the offering. Pending such
investment, it is anticipated that the proceeds will be invested in short-term,
tax-exempt securities in accordance with the Fund's investment policies.
7
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
, 2002, and as adjusted to give effect to the issuance of the shares
of MuniPreferred offered hereby.
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
MuniPreferred shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no shares
issued and shares issued, as adjusted*),
respectively..............................................
COMMON SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value per share; unlimited shares
authorized, shares outstanding*...................
Paid-in surplus**.........................................
Undistributed net investment income.......................
Accumulated net realized gain from investments:
Net unrealized appreciation (depreciation) of
investments............................................
Net assets applicable to common shares....................
------------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted, paid-in surplus reflects the proceeds of the issuance of the
common shares ($ ) less $.01 par value per common share ($ ) and
the offering costs of per common share ($ ) as well as a reduction
for the sales load and estimated offering costs of the MuniPreferred shares'
issuance ($ ).
PORTFOLIO COMPOSITION
As of , 2002, % of the market value of the Fund's portfolio
was invested in long-term municipal bonds. The following table sets forth
certain information with respect to the composition of the Fund's investment
portfolio as of , 2002.
CREDIT RATING* VALUE PERCENT
-------------- -------- --------
Aaa/AAA.....................................................
Aa/AA.......................................................
A/A.........................................................
Baa/BBB.....................................................
Short-Term..................................................
Total.....................................................
------------
* Using the higher of S&P's or Moody's rating.
8
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives are:
- to provide current income exempt from regular federal income tax, the
alternative minimum tax applicable to individuals and California income
tax; and
- to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes are
underrated or undervalued or that represent municipal market sectors that
are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times believe
that bonds associated with a particular municipal market sector (for example,
electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds
regardless of the direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to common shareholders and MuniPreferred shareholders.
Under normal circumstances, the Fund will invest at least 80% of its
Managed Assets in a portfolio of municipal bonds that:
- pay interest that is exempt from regular federal and California income
tax and from the federal alternative minimum tax applicable to
individuals; and
- are covered by insurance guaranteeing the timely payment of principal and
interest thereon.
This insurance does not protect the market value of portfolio holdings or the
net asset value of the Fund.
Under normal circumstances, the Fund (i) expects to be fully invested (at
least 95% of its assets) in municipal bonds that pay interest that is exempt
from regular federal and California income tax and (ii) will not invest in AMT
Bonds. During the Invest-up Period, the Fund may invest in Out of State Bonds,
provided that no more than 10% of the Fund's investment income during that time
may be derived from Out of State Bonds. The Fund will purchase Out of State
Bonds if other suitable investments are not available. Investment in Out of
State Bonds would result in a portion of your dividends being subject to
California income tax. For more information, see the Statement of Additional
Information. In addition, capital gain dividends will be subject to capital
gains taxes. See "Tax Matters."
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are 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, or (ii) other municipal bonds
that, at the time of investment, are investment grade quality. Investment grade
quality means that such bonds are rated by all NRSROs that rate the bond within
the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are
unrated but judged to be of comparable quality by Nuveen Advisory. The foregoing
credit quality policy applies only at the time a security is purchased, and the
Fund is not required to dispose of a security in the event that a rating agency
downgrades its assessment of the credit characteristics of a particular issue.
In
9
determining whether to retain or sell such a security, Nuveen Advisory may
consider such factors as Nuveen Advisory's assessment of the credit quality of
the issuer of such security, the price at which such security could be sold and
the rating, if any, assigned to such security by other rating agencies. A
general description of Moody's, S&P's and Fitch's ratings of municipal bonds is
set forth in Appendix B to the Statement of Additional Information. See
"--Municipal Bonds" below for a general description of the economic and credit
characteristics of municipal issuers in California. The Fund may also invest in
securities of other open- or closed-end investment companies that invest
primarily in municipal bonds of the types in which the Fund may invest directly.
See "-- Other Investment Companies."
Each insured municipal bond that the Fund acquires will be (1) covered by
an insurance policy applicable to a specific security and obtained by the issuer
of the security or a third party at the time of original issuance ("Original
Issue Insurance"), (2) covered by an insurance policy applicable to a specific
security and obtained by the Fund or a third party subsequent to the time of
original issuance ("Secondary Market Insurance"), or (3) covered by a master
municipal insurance policy purchased by the Fund ("Portfolio Insurance"). See
"-- Municipal Bond Insurance." The Fund, as non-fundamental policies that can be
changed by the Board of Trustees, (A) will only buy Portfolio Insurance from
insurers whose claims-paying ability Moody's rates "Aaa" or S&P or Fitch rates
"AAA" and (B) will maintain at least 80% of its total Managed Assets in
municipal bonds covered by insurance from insurers with a claims-paying ability
rated, at the time of the bond's purchase, "Aaa" by Moody's or "AAA" by S&P or
Fitch.
The credit quality of companies that provide insurance on bonds will affect
the value of those bonds. Although the insurance feature reduces certain
financial risks, the premiums for insurance and the higher market price paid for
insured obligations may reduce the Fund's income. The insurance feature does not
guarantee the market value of the insured obligations or the net asset value of
the common shares or the shares of MuniPreferred.
The Fund may at all times invest up to 20% of its net assets in uninsured
municipal bonds that are entitled to the benefit of an escrow or trust account
that contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies backed by the full faith and credit of the United States,
and sufficient in amount to ensure the payment of interest and principal on the
original interest payment and maturity dates ("collateralized obligations").
These collateralized obligations generally will not be insured and will include,
but are not limited to, municipal bonds that have been (1) advance refunded
where the proceeds of the refunding have been used to buy 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 that municipal bond; or (2) issued under state or
local housing finance programs that 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 those municipal bonds. These
collateralized obligations are normally regarded as having the credit
characteristics of the underlying U.S. Government or U.S. Government agency
securities.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period during
which the net proceeds of the offering of shares of MuniPreferred are being
invested, the Fund may deviate from its investment objectives and policies and
invest up to 100% of its net assets in short-term investments including high
quality, short-term securities that may be either tax-exempt or taxable. The
Fund intends to invest in taxable short-term investments only in the event that
suitable tax-exempt short-term investments are not available at reasonable
prices and yields. Investment in such short-term investments would result in a
portion of your dividends being subject to regular federal income tax, the
alternative minimum tax applicable to individuals and California income tax. For
more information, see the Statement of Additional Information. Likewise, the
Fund may deviate from its normal investment policies and invest up to 5% of its
net assets in tax-exempt or in taxable fixed-income or equity securities of an
issuer of municipal bonds that the Fund already owns for the purpose of
acquiring control of that issuer when Nuveen Advisory determines that such
investment should enable the Fund to better maximize the value of its existing
investment. See the Statement of Additional Information under "Other Investment
Policies and Techniques -- Miscellaneous Investments."
10
The Fund cannot change (i) its fundamental investment restrictions set
forth in the Statement of Additional Information or (ii) its policy to invest
80% of its Managed Assets in a portfolio of municipal bonds that pay interest
that is exempt from regular federal and California income taxes and the federal
alternative minimum tax applicable to individuals without the approval of the
holders of a "majority of the outstanding" common shares and shares of
MuniPreferred voting together as a single class, and of the holders of a
"majority of the outstanding" shares of MuniPreferred voting as a separate
class. When used with respect to particular shares of the Fund, a "majority of
the outstanding" shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
See "Description of Shares -- MuniPreferred shares -- Voting Rights" and the
Statement of Additional Information under "Description of
Shares -- MuniPreferred shares -- Voting Rights" for additional information with
respect to the voting rights of holders of shares of MuniPreferred. Other than
as noted above, the investment objectives and policies of the Fund may be
changed by the Board without shareholder action.
MUNICIPAL BONDS
General. Municipal bonds are either general obligation or revenue bonds
and typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Fund will only
purchase municipal bonds representing lease obligations where Nuveen Advisory
believes the issuer has a strong incentive to continue making appropriations
until maturity.
The municipal bonds in which the Fund will invest are generally issued by
the State of California, a municipality in California, or a political
subdivision or agency or instrumentality of such State or municipality
("California municipal bonds"), and pay interest that, in the opinion of bond
counsel to the issuer (or on the basis of other authority believed by Nuveen
Advisory to be reliable), is exempt from regular federal income tax, the
alternative minimum tax applicable to individuals and California income tax. The
Fund may invest in municipal bonds issued by United States territories (such as
Puerto Rico or Guam) that pay interest that is exempt from regular federal and
California income taxes and the federal alternative minimum tax applicable to
individuals. During the Invest-up Period, the Fund also may invest in Out of
State Bonds, subject to the limitations described under "-- Investment
Objectives and Policies." It is a fundamental policy of the Fund that its
investment in municipal bonds to which the interest is not taxable under regular
federal and California income taxes or the alternative minimum tax applicable to
individuals will, under normal circumstances, comprise at least 80% of the
Fund's Managed Assets.
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of municipal bonds will
vary with changes in interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.
The Fund expects to primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15-30 years, but
the weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
Special Considerations Relating to California Municipal Bonds. As
described above, except to the extent the Fund invests in temporary investments,
the Fund will invest substantially all of its net assets in California municipal
bonds. The Fund is therefore susceptible to political, economic or regulatory
factors affecting issuers of California municipal bonds. The information set
forth below and the related information in
11
the Statement of Additional Information is derived from sources that are
generally available to investors. The information is provided as general
information intended to give a recent historical description and is not intended
to indicate future or continuing trends in the financial or other positions of
California. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State of California, and that there is no obligation
on the part of the State to make payment on such local obligations in the event
of default.
California's economy is the largest among the 50 states and one of the
largest in the world. The State has a diversified economy with major sectors in
manufacturing, agriculture, services, tourism, international trade and
construction. The State has a population of about 35 million, which has been
growing at a 1-2% annual rate for several decades. Gross domestic product of
goods and services in the State exceeds $1 trillion. Personal income was
estimated at over $1,095 billion in 2000. Total employment is over 16 million.
Since 1994 the California economy had been growing steadily, outpacing the
rest of the nation, with particular strength in high technology manufacturing,
software, exports, services, entertainment and construction. By late 2000,
unemployment had fallen to its lowest level in three decades. After a strong
fourth quarter of 2000, the economy entered a mild recession in 2001, in concert
with the slowdown of the national economy and a cyclical downturn in the high
technology sector. The aftermath of the September 11, 2001 terrorist attacks
temporarily hurt tourism-based areas. California's economy appears to have begun
a mild recovery in early 2002, but employment growth had stagnated by the summer
of 2002.
The State has received significant tax revenues in recent years, derived
from the strong economy and stock market through 2000. Capital gains and stock
option income represented almost a quarter of General Fund revenue in the
2000-01 fiscal year. The slowing economy and depressed stock market after
mid-2000 will result in significantly reduced revenues in fiscal year 2001-02,
compared both to the prior year and to earlier forecasts. An updated budget
report in May 2002 indicated that total revenues for the combined 2001-02 and
2002-03 fiscal years would be over $19 billion below initial projections, and
combined with increased expenditure requirements, resulted in a total "budget
gap" of $23.6 billion for the two years. The final 2002-03 Budget closed this
gap with a combination of expenditure reductions and deferrals, limited revenue
increases, borrowing and substantial interfund loans and securitizations.
Reduced revenues have also created a cash flow shortfall for the State which
required the State Controller to issue $7.5 billion of short-term warrants in
June 2002 to allow the State to meet all its obligations in June, July and
August 2002. Continued cash flow difficulties have led the State to issue a
record $12.5 billion of revenue anticipation notes to maintain adequate cash
resources in the 2002-03 fiscal year.
A large part of the State's annual budget is mandated by constitutional
guarantees (such as for education funding and debt service) and caseload
requirements for health and welfare programs. State General Obligation bonds
are, as of October 1, 2002, rated "A1" by Moody's, "A+" by Standard and Poors,
and "AA" by Fitch with all three agencies maintaining a negative outlook.
Many local government agencies, particularly counties, continue to face
budget constraints due to limited taxing powers and mandated expenditures for
health, welfare and public safety, among other factors. The State and local
governments are limited in their ability to levy and raise property taxes and
other forms of taxes, fees or assessments, and in their ability to appropriate
their tax revenues, by a series of constitutional amendments, enacted by voter
initiative since 1978. Individual local governments may also have local
initiative which affect their fiscal flexibility.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to
which the issuers of municipal bonds held by the Fund are subject. Additionally,
many factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of the municipal
bonds, could affect or could have an adverse impact on the financial condition
of the issuers. The Fund is unable to predict whether or to what extent such
factors or other factors may affect the issuers of the municipal bonds, the
market value or marketability of the municipal bonds or the ability of the
respective issuers of the municipal bonds acquired by the Fund to pay interest
on or
12
principal of the municipal bonds. This information has not been independently
verified. See the Statement of Additional Information for a further discussion
of factors affecting municipal bonds in California.
MUNICIPAL BOND INSURANCE
Each insured municipal bond the Fund acquires will be covered by Original
Issue Insurance, Secondary Market Insurance or Portfolio Insurance. The Fund
expects initially to emphasize investments in municipal bonds insured under
bond-specific insurance policies (i.e., Original Issue or Secondary Market
Insurance). The Fund may obtain Portfolio Insurance from the insurers described
in Appendix C to the Statement of Additional Information. The Fund, as a
non-fundamental policy that can be changed by its Board, will only obtain
policies of Portfolio Insurance issued by insurers whose claims-paying ability
is rated "Aaa" by Moody's or "AAA" by S&P or Fitch. There is no limit on the
percentage of the Fund's assets that may be invested in municipal bonds insured
by any one insurer.
A municipal bond covered by Original Issue Insurance or Secondary Market
Insurance is itself typically assigned the same rating as that of the insurer.
For example, if the insurer has a rating of "Aaa" or "AAA," a bond covered by an
Original Issue Insurance or Secondary Market Insurance policy would also
typically be assigned the same rating. Such a municipal bond would generally be
assigned a lower rating if the ratings were based instead upon the credit
characteristics of the issuer without regard to the insurance feature. By way of
contrast, the rating, if any, assigned to a municipal bond insured under
Portfolio Insurance will be based primarily upon the credit characteristics of
the issuer, without regard to the insurance feature, and therefore will
generally carry a rating that is below "Aaa" or "AAA." While in the portfolio of
the Fund, however, a municipal bond backed by Portfolio Insurance from a
particular insurer will effectively be of the same credit quality as a municipal
bond issued by an issuer of comparable credit characteristics that is backed by
Original Issue Insurance or Secondary Market Insurance from that insurer.
The Fund's policy of investing primarily in municipal bonds insured by
insurers whose claims-paying ability is rated "Aaa" or "AAA" applies only at the
time of purchase of a security, and the Fund will not be required to dispose of
the securities in the event Moody's, S&P or Fitch, 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 the event Moody's, S&P
or Fitch (or all of them) should downgrade its (or their) rating of a particular
insurer, it (or they) could also be expected to downgrade the ratings assigned
to municipal bonds insured under Original Issue Insurance or Secondary Market
Insurance policies by such insurer, and municipal bonds insured under Portfolio
Insurance issued by such insurer also would be of reduced quality in the
portfolio of the Fund. Moody's, S&P and Fitch 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.
The value of municipal bonds covered by Portfolio Insurance that are in
default or in significant risk of default will be determined by separately
establishing a value for the municipal bond and a value for the Portfolio
Insurance.
Original Issue Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal bonds by the issuer thereof or a
third party in conjunction with the original issuance of such municipal bonds.
Under this insurance, the insurer unconditionally guarantees to the holder of
the municipal bond the timely payment of principal and interest on such
obligations when and as these payments become due but not paid by the issuer,
except that in the event of the 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 the amounts and at the times as payment of principal would have
been due had there not been any acceleration. The insurer is responsible for
these payments less any amounts received by the holder from any trustee for the
municipal bond issuer 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 bonds), the
value of the Fund's shares, the market value of municipal bonds, or payments of
any tender purchase price upon the tender of the municipal
13
bonds. Original Issue Insurance also does not insure against nonpayment of
principal or interest on municipal bonds resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
these bonds.
Original Issue Insurance remains in effect as long as the municipal bonds
it covers remain outstanding and the insurer remains in business, regardless of
whether the Fund ultimately disposes of these municipal bonds. Consequently,
Original Issue Insurance may be considered to represent an element of market
value with respect to the municipal bonds so insured, but the exact effect, if
any, of this insurance on the market value cannot be estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of
a municipal bond, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on that security. Secondary Market Insurance
generally provides the same type of coverage as Original Issue Insurance and, as
with Original Issue Insurance, Secondary Market Insurance remains in effect as
long as the municipal bonds it covers remain outstanding and the insurer remains
in business, regardless of whether the Fund ultimately disposes of these
municipal bonds.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal bond would be to enable the Fund to enhance the value of
the security. The Fund, for example, might seek to purchase a particular
municipal bond and obtain Secondary Market Insurance, for it if, in Nuveen
Advisory's opinion, the market value of the security, as insured, less the cost
of the Secondary Market Insurance would exceed the current value of the security
without insurance. Similarly, if the Fund owns but wishes to sell a municipal
bond that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance for it if, in Nuveen Advisory's opinion, the net
proceeds of the Fund's sale of the security, as insured, less the cost of the
Secondary Market Insurance would exceed the current value of the security. In
determining whether to insure municipal bonds the Fund owns, an insurer will
apply its own standards, which correspond generally to the standards it has
established for determining the insurability of new issues of municipal bonds.
See "-- Original Issue Insurance" above.
Portfolio Insurance. Portfolio Insurance guarantees the payment of
principal and interest on specified eligible municipal bonds purchased by the
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 bonds insured under a Portfolio Insurance policy would
generally not be insured under any other policy. A municipal bond is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund.
If a municipal bond is already covered by Original Issue Insurance or
Secondary Market Insurance, then the security is not required to be additionally
insured under any Portfolio Insurance that the Fund may purchase. All premiums
respecting municipal bonds 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 bonds owned
by and held by the Fund, and do not cover municipal bonds 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 bond.
In determining whether to insure municipal bonds held by the 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 bonds. See "-- Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable and will remain in
effect so long as the Fund is in existence, the municipal bonds covered by the
policy continue to be held by the Fund, and the Fund pays the premiums for the
policy. Each insurer will generally reserve the right at any time upon 90 days'
written notice to the Fund to refuse to insure any additional bonds purchased by
the Fund after the effective date of such notice. The Fund generally will
reserve the right to terminate each policy upon seven days' written notice to an
14
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 will terminate as to any municipal bond
that has been redeemed from or sold by the Fund on the date of redemption or the
settlement date of sale, and an insurer will not have any liability thereafter
under a policy for any municipal bond, except that if the redemption date or
settlement date occurs after a record date and before the related payment date
for any municipal bond, the policy will terminate for that municipal bond on the
business day immediately following the payment date. Each policy will terminate
as to all municipal bonds covered thereby on the date on which the last of the
covered municipal bonds mature, are redeemed or are sold by the Fund.
One or more Portfolio Insurance policies may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") for a municipal bond that
is sold by the Fund. The Fund would exercise the right to obtain Permanent
Insurance upon payment of a single, predetermined insurance premium payable from
the sale proceeds of the municipal bond. The Fund expects to exercise the right
to obtain Permanent Insurance for a municipal bond only if, in Nuveen Advisory's
opinion, upon the exercise the net proceeds from the sale of the municipal bond,
as insured, would exceed the proceeds from the sale of the security without
insurance.
The Permanent Insurance premium for each municipal bond is determined based
upon the insurability of each security as of the date of purchase and will not
be increased or decreased for any change in the security's creditworthiness
unless the security is in default as to payment of principal or interest, or
both. If such event occurs, the Permanent Insurance premium will be subject to
an increase predetermined at the date of the Fund's purchase.
The Fund generally intends to retain any insured bonds covered by Portfolio
Insurance that are in default or in significant risk of default and to place a
value on the insurance, which ordinarily will be the difference between the
market value of the defaulted bond and the market value of similar bonds of
minimum investment grade (that is, rated "Baa" or "BBB") that are not in
default. In certain circumstances, however, Nuveen Advisory may determine that
an alternative value for the insurance, such as the difference between the
market value of the defaulted bond and either its par value or the market value
of similar bonds that are not in default or in significant risk of default, is
more appropriate. Except as described above for bonds covered by Portfolio
Insurance that are in default or subject to significant risk of default, the
Fund will not place any value on the Portfolio Insurance in valuing the
municipal bonds it holds.
Because each Portfolio Insurance policy will terminate for municipal bonds
sold by the 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 the Fund's bonds, whether or not
the bonds are in default or in significant risk of default. On the other hand,
because Original Issue Insurance and Secondary Market Insurance generally will
remain in effect as long as the municipal bonds they cover are outstanding,
these insurance policies may enhance the marketability of these bonds even when
they are in default or in significant risk of default, but the exact effect, if
any, on marketability, cannot be estimated. Accordingly, the Fund may determine
to retain or, alternatively, to sell municipal bonds covered by Original Issue
Insurance or Secondary Market Insurance that are in default or in significant
risk of default.
Premiums for a Portfolio Insurance policy are paid monthly, and are
adjusted for purchases and sales of municipal bonds covered by the policy during
the month. The yield on the Fund is reduced to the extent of the insurance
premiums it pays.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve an
element of risk because no interest accrues on the bonds prior to settlement
and, because bonds are subject to market fluctuations, the value of the bonds at
time of delivery may be less (or more) than cost. A
15
separate account of the Fund will be established with its custodian consisting
of cash, cash equivalents, or liquid securities having a market value at all
times at least equal to the amount of the commitment.
MISCELLANEOUS INVESTMENTS
The Fund may invest up to 5% of its net assets in tax-exempt or taxable
fixed-income or equity securities, for the purpose of acquiring control of an
issuer whose municipal bonds (a) the Fund already owns and (b) have deteriorated
or are expected shortly to deteriorate significantly in credit quality; provided
Nuveen Advisory determines that such investment should enable the Fund to better
maximize its existing investment in such issuer. Investment in such securities
would result in a portion of your dividend being subject to regular federal and
California income taxes or the alternative minimum tax applicable to
individuals.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of its common shares or MuniPreferred
shares, or during periods when there is a shortage of attractive, high-yielding
municipal bonds available in the market. As a stockholder in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's advisory and
administrative fees with respect to assets so invested. Holders of the Fund's
common shares would therefore be subject to duplicative expenses to the extent
the Fund invests in other investment companies. Nuveen Advisory will take
expenses into account when evaluating the investment merits of an investment in
the investment company relative to available municipal bond investments. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the section entitled "Risk Factors," the net asset value and market
value of leveraged shares will be more volatile and the yield to shareholders of
the Fund will tend to fluctuate more than the yield generated by unleveraged
shares.
16
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in MuniPreferred shares.
LIMITED OPERATING HISTORY
The Fund is a recently organized, non-diversified, closed-end management
investment company and has a limited operating history.
INTEREST RATE RISK
The Fund issues MuniPreferred shares, which pay dividends based on
short-term interest rates, and use the proceeds to buy municipal bonds, which
pay interest based on long-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest rates. Both
long-term and short term interest rates may fluctuate. If short-term interest
rates rise, MuniPreferred rates may rise so that the amount of dividends paid to
MuniPreferred shareholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of MuniPreferred shares. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the MuniPreferred share offering) is
available to pay MuniPreferred dividends, however, MuniPreferred dividend rates
would need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay MuniPreferred dividends would be jeopardized. If long-term rates
rise, the value of the Fund's investment portfolio will decline, reducing the
amount of assets serving as asset coverage for the MuniPreferred shares.
AUCTION RISK
You may not be able to sell your MuniPreferred shares at an auction if the
auction fails; that is, if there are more MuniPreferred shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain MuniPreferred shares) at an auction only at a specified rate, and that
bid rate exceeds the rate set at the auction, you will not retain your
MuniPreferred shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. See "Description of
MuniPreferred shares" and "The Auction -- Auction Procedures."
SECONDARY MARKET RISK
If you try to sell your MuniPreferred shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than 7 days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for MuniPreferred shares, if any, are not required to maintain
this market, and the Fund is not required to redeem shares either if an auction
or an attempted secondary market sale fails because of a lack of buyers.
MuniPreferred shares are not registered on a stock exchange or the NASDAQ stock
market. If you sell your MuniPreferred shares to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially when
market interest rates have risen since the last auction. Accrued MuniPreferred
dividends, however, should at least partially compensate for the increased
market interest rates.
RATINGS AND ASSET COVERAGE RISK
While Moody's and S&P assign ratings of "Aaa" and "AAA," respectively, to
MuniPreferred shares, the ratings do not eliminate or necessarily mitigate the
risks of investing in MuniPreferred shares. A rating agency could downgrade
MuniPreferred shares, which may make your shares less liquid at an auction or in
the secondary market, although the downgrade would probably result in higher
dividend rates. If a rating agency
17
downgrades MuniPreferred shares, the Fund will alter its portfolio or redeem
MuniPreferred shares. The Fund may voluntarily redeem MuniPreferred shares under
certain circumstances. See "Description of MuniPreferred shares -- Rating Agency
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Fund must meet.
CREDIT RISK
Credit risk is the risk that one or more municipal bonds in the Fund's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the bond experiences a decline in its financial status. In
general, lower-rated municipal bonds carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the Fund's net asset value or dividends.
CONCENTRATION IN CALIFORNIA ISSUERS
The Fund's policy of investing primarily in municipal obligations of
issuers located in California makes the Fund more susceptible to adverse
economic, political or regulatory occurrences affecting such issuers. For a
description of unique considerations relating to California municipal bonds, see
"The Fund's Investments -- Municipal Bonds -- Special Considerations Relating to
California Municipal Bonds."
MUNICIPAL BOND MARKET RISK
Investing in the municipal bond market involves certain risks. The amount
of public information available about the municipal bonds in the Fund's
portfolio is generally less than that for corporate equities or bonds, and the
investment performance of the Fund may therefore be more dependent on the
analytical abilities of Nuveen Advisory than if the Fund were a stock fund or
taxable bond fund. The secondary market for municipal bonds also tends to be
less well-developed or liquid than many other securities markets, which may
adversely affect the Fund's ability to sell its bonds at attractive prices or at
prices approximating those at which the Fund currently values them.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage any assets which might be
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses. Any income derived from the Fund's ownership or
operation of such assets may not be exempt from regular federal income tax.
MUNICIPAL BOND INSURANCE
In the event Moody's, S&P or Fitch (or all of them) should downgrade its
assessment of the claims-paying ability of a particular insurer, it (or they)
could also be expected to downgrade the ratings assigned to municipal bonds
insured by such insurer, and municipal bonds insured under Portfolio Insurance
issued by such insurer also would be of reduced quality in the portfolio of the
Fund.
In addition, the Fund may be subject to certain restrictions on investments
imposed by guidelines of the insurance companies issuing Portfolio Insurance.
The Fund does not expect these guidelines to prevent Nuveen Advisory from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies.
18
INCOME RISK
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short-term and long-term. If
interest rates drop, the Fund's income available over time to make dividend
payments with respect to the MuniPreferred could drop as well if the Fund
purchases securities with lower interest coupons.
REINVESTMENT RISK
Reinvestment risk is the risk that income from the Fund's bond portfolio
will decline if and when the Fund invests the proceeds from matured, traded or
called bonds at market interest rates that are below the portfolio's current
earnings rate.
PORTFOLIO INSURANCE
The Fund may be subject to certain restrictions with investments imposed by
guidelines of the insurance companies issuing portfolio insurance. The Fund does
not expect these guidelines to prevent Nuveen Advisory from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of your MuniPreferred investment
or the income from that investment will be worth less in the future. In other
word, as inflation occurs, the real value of the MuniPreferred shares and
distributions declines. In an inflationary period, however, it is expected that,
through the auction process, MuniPreferred dividend rates would increase,
tending to offset this risk.
CALL RISK
If interest rates fall, it is possible that issuers of callable bonds with
higher interest coupons will "call" (or prepay) their bonds before their
maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.
ECONOMIC SECTOR RISK
The Fund may invest 25% or more of its total assets in municipal
obligations in the same economic sector. This may make the Fund more susceptible
to adverse economic, political or regulatory occurrences affecting an economic
sector. As concentration increases, so does the potential for fluctuation in the
value of the Fund's assets.
NON-DIVERSIFICATION
Because the Fund is classified as "non-diversified" under the 1940 Act it
can invest a greater portion of its assets in obligations of a single issuer. As
a result, the Fund will be more susceptible than a diversified fund to any
single corporate, economic, political or regulatory occurrence. See "The Fund's
Investments." Also, the Fund's policy of generally investing in bonds that are
exempt from the federal alternative minimum tax applicable to individuals may
prevent the Fund from investing in certain kinds of bonds and thereby limit the
Fund's ability to optimally diversify its portfolio. In addition, the Fund must
satisfy certain asset diversification rules in order to qualify as a regulated
investment company for federal income tax purposes.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of
19
the holders of a "majority of the outstanding" common shares and MuniPreferred
shares voting together as a single class, and the approval of the holders of a
"majority of the outstanding" MuniPreferred shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less. Among other
restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does not
apply to municipal bonds backed by the assets and revenues of governments or
political subdivisions of governments.
The Fund is subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred shares. See "Investment Objectives" in
the Statement of Additional Information for information about these guidelines
and a complete list of the fundamental and non-fundamental investment policies
of the Fund.
The Fund seeks to reduce credit risk by buying bonds that are either
covered by insurance or backed by an escrow or trust account, each with the
purpose of ensuring timely payment of principal and interest. However, these
municipal bonds remain subject to market risk.
HEDGING STRATEGIES
The Fund may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on taxable
debt securities whose prices, in the opinion of Nuveen Advisory, correlate with
the prices of the Fund's investments. The Fund does not intend to use
derivatives to increase leverage or to enhance current income. Successful
implementation of most hedging strategies would generate taxable income.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISER
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the municipal bonds in
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and administrative services. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$44.7 billion in assets under management as of September 30, 2002. See the
Statement of Additional Information under "Investment Adviser."
Nuveen Advisory is responsible for execution of specific investment
strategies and day-to-day investment operations. Nuveen Advisory manages the
Fund using a team of analysts and portfolio managers that focus on a specific
group of funds. William M. Fitzgerald is the portfolio manager of the Fund and
will provide daily oversight for, and execution of, the Fund's investment
activities. Mr. Fitzgerald has been a Managing Director of Nuveen Advisory since
2000. Prior to that time, he was a Vice President of Nuveen Advisory. Mr.
Fitzgerald currently manages investments for fourteen (14) Nuveen-sponsored
investment companies.
Nuveen Advisory is a wholly owned subsidiary of The John Nuveen Company,
333 West Wacker Drive, Chicago, Illinois 60606. Founded in 1898, The John Nuveen
Company and its affiliates had over $83 billion of assets under management or
surveillance as of September 30, 2002. The John Nuveen Company is a majority-
20
owned subsidiary of The St. Paul Companies, Inc., a publicly-traded company
which is principally engaged in providing property-liability insurance through
subsidiaries.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided by
Nuveen Advisory an annual management fee, payable on a monthly basis, according
to the following schedule:
AVERAGE DAILY MANAGED ASSETS* MANAGEMENT FEE
----------------------------- --------------
Up to $125 million.......................................... .6500%
$125 million to $250 million................................ .6375
$250 million to $500 million................................ .6250
$500 million to $1 billion.................................. .6125
$1 billion to $2 billion.................................... .6000
$2 billion and over......................................... .5750
------------
* Including assets attributable to outstanding MuniPreferred shares ("Managed
Assets").
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing any MuniPreferred shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies, and taxes, if any.
For the first eight full years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
YEAR (AS A PERCENTAGE YEAR (AS A PERCENTAGE
ENDING OF MANAGED ENDING OF MANAGED
NOVEMBER 30, ASSETS) NOVEMBER 30, ASSETS)
------------------------------- ---------------- ------------------------------- ----------------
2002(1)........................ .32% 2007........................... .32%
2003........................... .32 2008........................... .24
2004........................... .32 2009........................... .16
2005........................... .32 2010........................... .08
2006........................... .32
------------
(1) From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond November 30, 2010.
DESCRIPTION OF MUNIPREFERRED SHARES
The following is a brief description of the terms of the MuniPreferred
shares. This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the more detailed description of the
MuniPreferred shares in the Fund's Statement attached as Appendix A to the
Statement of Additional Information. Capitalized terms not otherwise defined in
the prospectus shall have the same meaning as defined in the Statement.
GENERAL
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees
21
without the approval of holders of common shares. The Statement currently
authorizes the issuance of shares of MuniPreferred Series . All
MuniPreferred shares will have a liquidation preference of $25,000 per share
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared).
The MuniPreferred shares of each series will rank on parity with shares of
any other series of MuniPreferred and with shares of any other series of
preferred shares of the Fund as to the payment of dividends and the distribution
of assets upon liquidation. All MuniPreferred shares carry one vote per share on
all matters on which such shares are entitled to be voted. Shares of
MuniPreferred are, when issued, fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable and have no
preemptive, conversion or cumulative voting rights.
DIVIDENDS AND DIVIDEND PERIODS
General. The Initial Rate Period of MuniPreferred Series will be a period
consisting of days. Any Subsequent Rate Period of shares of a series of
MuniPreferred will be a Minimum Rate Period (7 Rate Period Days), unless the
Fund, subject to certain conditions, designates such Subsequent Rate Period as a
Special Rate Period. See "-- Designation of Special Rate Periods" below.
Dividends on shares of each series of MuniPreferred shall be payable, when,
as and if declared by the Board out of funds legally available therefor in
accordance with the Declaration of Trust, including the Statement, and
applicable law, on shares of MuniPreferred Series , on , 2002, and
thereafter on each ; provided, however, that (i) if the Monday or the
Tuesday, as the case may be, on which dividends would otherwise be payable as
set forth above is not a Business Day, then such dividends shall be payable on
such shares on the first Business Day that falls after such Monday or Tuesday,
as the case may be; (ii) if the Wednesday, Thursday or Friday on which dividends
would otherwise be payable as set forth above is not a Business Day, then such
dividends shall be payable on such shares on the first Business Day that falls
prior to such Wednesday, Thursday or Friday, as the case may be; and (iii) the
Fund may specify different Dividend Payment Dates in respect of any Special Rate
Period of more than 28 Rate Period Days.
The amount of dividends per share payable on shares of a series of
MuniPreferred on any date on which dividends shall be payable on shares of such
series shall be computed by multiplying the Applicable Rate for shares of such
series in effect for such Dividend Period or Dividend Periods or part thereof
for which dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods or part
thereof and the denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which currently provide
for it to distribute dividends in next-day funds to Agent Members, who in turn
are expected to distribute such dividend payments to the persons for whom they
are acting as agents. Each of the current Broker-Dealers, however, has indicated
to the Fund that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of each series of MuniPreferred will accumulate from
the Date of Original Issue thereof. The dividend rate for shares of
MuniPreferred of a particular series for the initial Rate Period for such shares
shall be % per annum for Series . For each Subsequent Rate Period of
shares of MuniPreferred of a particular series, the dividend rate for such
shares will be the Applicable Rate for such shares that the Auction Agent
advises the Fund results from an Auction, except as provided below. The
Applicable Rate that results from an Auction for shares of any series of
MuniPreferred will not be greater than the Maximum Rate for shares of such
series, which is:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the
22
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.
If an Auction for any Subsequent Rate Period of shares of any series of
MuniPreferred is not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), but, prior to 12:00 noon on the third
Business Day next succeeding the date such failure occurred, such failure shall
have been cured and the Fund shall have paid a late charge, as described more
fully in the Statement, no Auction will be held in respect of shares of such
series for the Subsequent Rate Period thereafter and the dividend rate for
shares of such series for such Subsequent Rate Period will be the Maximum Rate
for shares of such series on the Auction Date for such Subsequent Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), and, prior to 12:00 noon on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Fund shall not have paid a late charge,
as described more fully in the Statement, no Auction will be held in respect of
shares of such series for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured and such late charge so paid) (such late
charge to be paid only in the event Moody's is rating such shares at the time
the Fund cures such failure), and the dividend rate for shares of such series
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such
23
series on the Auction Date for such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes of determining such
Maximum Rate, being deemed to be "Below 'ba3'/BB2").
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during a Special Rate Period thereof of more than 364 Rate
Period Days, or during any Rate Period thereof succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured, and such failure shall not have been cured or the Fund
shall not have paid a late charge, as described more fully in the Statement, no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period thereof (or for any Rate Period thereof thereafter to and including
the Rate Period during which such failure is so cured and such late charge so
paid) (such late charge to be paid only in the event Moody's is rating such
shares at the time the Fund cures such failure), and the dividend rate for
shares of such series for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate for shares of such series on the Auction Date
for each such Subsequent Rate Period (but with the prevailing rating for shares
of such series, for purposes of determining such Maximum Rate, being deemed to
be "Below 'ba3'/BB2").
A failure to pay dividends on, or the redemption price of, shares of any
series of MuniPreferred shall have been cured (if such failure is not solely due
to the willful failure of the Fund to make the required payment to the Auction
Agent) with respect to any Rate Period thereof if, within the respective time
periods described in the Statement, the Fund shall have paid to the Auction
Agent (a) all accumulated and unpaid dividends on the shares of such series and
(b) without duplication, the redemption price for shares, if any, of such series
for which notice of redemption has been mailed by the Fund; provided, however,
that the foregoing clause (b) shall not apply to the Fund's failure to pay the
redemption price in respect of shares of MuniPreferred when the related notice
of redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such notice of
redemption.
Gross-up Payments. Holders of shares of MuniPreferred are entitled to
receive, when, as and if declared by the Board, out of funds legally available
therefor in accordance with the Declaration of Trust, including the Statement,
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payments in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for regular federal income tax purposes to a dividend paid on
shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as described below under "The Auction -- Auction Procedures" (a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of MuniPreferred or the liquidation of the Fund, the Fund
will, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares (initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the record books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
MuniPreferred without having given notice thereof to the Auction Agent, the Fund
shall, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares that was entitled to such dividend payment during such calendar year at
such holder's address as the same appears or last appeared on the record books
of the Fund.
A "Gross-up Payment" means payment to a holder of shares of MuniPreferred
of an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates, would
cause such holder's dividends in dollars (after federal income tax consequences)
from the aggregate of such Taxable Allocations and the related Gross-up Payment
to be equal to the dollar amount of the dividends which would have been received
by such holder if the amount of the
24
aggregate Taxable Allocations would have been excludable from the gross income
of such holder. Such Gross-up Payment shall be calculated: (a) without
consideration being given to the time value of money; (b) assuming that no
holder of shares of MuniPreferred is subject to the federal alternative minimum
tax with respect to dividends received from the Fund; and (c) assuming that each
Taxable Allocation and each Gross-up Payment (except to the extent such Gross-up
Payment is designated as an exempt-interest dividend under Section 852(b)(5) of
the Internal Revenue Code or successor provisions) would be taxable in the hands
of each holder of shares of MuniPreferred at the maximum marginal combined
regular federal personal income tax rate applicable to ordinary income (taking
into account the federal income tax deductibility of state and local taxes paid
or incurred) or net capital gain, as applicable, or the maximum marginal regular
federal corporate income tax rate applicable to ordinary income or net capital
gain, as applicable, whichever is greater, in effect at the time such Gross-up
Payment is made.
Restrictions on Dividends and Other Distributions. Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, its common shares or
other shares, if any, ranking junior to the shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of its common shares or any other shares
of the Fund ranking junior to, or on parity with, shares of MuniPreferred as to
the payments of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any common shares or any other such junior shares or
other such parity shares (except by conversion into or exchange for shares of
the Fund ranking junior to the shares of MuniPreferred as to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up of the affairs of the Fund), unless (a) full cumulative dividends on
shares of each series of MuniPreferred through its most recently ended Dividend
Period shall have been paid or shall have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent and (b) the Fund shall have
redeemed the full number of shares of MuniPreferred required to be redeemed by
any provision for mandatory redemption pertaining thereto. Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, common shares or other
shares, if any, ranking junior to shares of MuniPreferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of common shares or any other shares of the Fund ranking
junior to shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any common
shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of the Fund's portfolio would at least equal the MuniPreferred
Basic Maintenance Amount in accordance with guidelines of the rating agency or
agencies then rating the shares of MuniPreferred.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of Fund
shares ranking, as to the payment of dividends, on a parity with shares of
MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of
MuniPreferred through its most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of each series of MuniPreferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred through their most recent respective dividend payment dates,
all dividends declared upon shares of MuniPreferred and any other such class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares shall in all cases bear to each other the same ratio that accumulated
dividends per share on the shares of MuniPreferred and such other class or
series of shares bear to each other.
25
Designation of Special Rate Periods. The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a particular series
of MuniPreferred as a Special Rate Period consisting of a specified number of
Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to certain adjustments. A designation of a
Special Rate Period shall be effective only if, among other things, (a) the Fund
shall have given certain notices to the Auction Agent, (b) an Auction for shares
of such series shall have been held on the Auction Date immediately preceding
the first day of such proposed Special Rate Period and Sufficient Clearing Bids
for shares of such series shall have existed in such Auction and (c) if the Fund
shall have mailed a notice of redemption with respect to any shares of such
series, the redemption price with respect to such shares shall have been
deposited with the Auction Agent. The Fund will give MuniPreferred shareholders
notice of a special rate period as provided in the Statement.
REDEMPTION
Mandatory Redemption. In the event the Fund does not timely cure a failure
to maintain (a) a Discounted Value of its eligible portfolio securities equal to
the MuniPreferred Basic Maintenance Amount or (b) the 1940 Act MuniPreferred
Asset Coverage (as defined below), in each case in accordance with the
requirements of the rating agency or agencies then rating the shares of
MuniPreferred, shares of MuniPreferred will be subject to mandatory redemption
on a date fixed by the Board out of funds legally available therefor in
accordance with the Declaration of Trust, including the Statement, and
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption. Any such
redemption will be limited to the lesser of the (i) number of shares of
MuniPreferred necessary to restore the required Discounted Value or the 1940 Act
MuniPreferred Asset Coverage, as the case may be, and (ii) the maximum number
that can be redeemed with the funds legally available under the Declaration of
Trust and applicable law.
Optional Redemption. Shares of MuniPreferred of each series are
redeemable, at the option of the Fund:
(a) as a whole or from time to time in part, on the second Business
Day preceding any Dividend Payment Date for shares of such series, out of
funds legally available therefor in accordance with the Declaration of
Trust, including the Statement, and applicable law, at the redemption price
of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (i)
shares of such series may not be redeemed in part if after such partial
redemption fewer than 250 shares of such series would remain outstanding;
(ii) shares of a series of MuniPreferred are redeemable by the Fund during
the Initial Rate Period thereof only on the second Business Day next
preceding the last Dividend Payment Date for such Initial Rate Period; and
(iii) the notice establishing a Special Rate Period of shares of such
series, as delivered to the Auction Agent and filed with the Secretary of
the Fund, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in clause (b) below) or shall be redeemable during the whole or
any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration of Trust, including the
Statement, and applicable law, on the first day following any Dividend
Period thereof included in a Rate Period of more than 364 Rate Period Days
if, on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equaled or exceeded on
such date of determination the Treasury Note Rate for such Rate Period, at
a redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of a series of
MuniPreferred (whether or not earned or declared) are in arrears, no shares of
such series shall be redeemed unless all outstanding shares of such series are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any shares of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all
26
outstanding shares of such series pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding shares of such series.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of MuniPreferred with respect to the
distribution of assets upon the dissolution, liquidation or winding up of the
Fund, upon a liquidation of the Fund, whether voluntary or involuntary, the
holders of shares of MuniPreferred then outstanding will be entitled to receive
and to be paid out of the assets of the Fund available for distribution to its
shareholders, before any payment or distribution shall be made on the common
shares, an amount equal to the liquidation preference with respect to such
shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared) accumulated but unpaid to (but not
including) the date of final distribution in same-day funds, together with any
applicable Gross-up Payments in connection with the liquidation of the Fund.
After the payment to the holders of shares of MuniPreferred of the full
preferential amounts provided for as described in this paragraph, the holders of
shares of MuniPreferred as such shall have no right or claim to any of the
remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Fund, shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a Discounted Value at least equal to the MuniPreferred
Basic Maintenance Amount. Moody's and S&P have each established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value (as defined by such rating agency). The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Fund's assets
that may be invested in holdings not eligible for inclusion in the calculation
of the Discounted Value of the Fund's portfolio. The amount of such assets
included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio, although it is not anticipated that in the normal course of business
the value of such assets would exceed 20% of the Fund's total assets. The
MuniPreferred Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of shares of MuniPreferred then outstanding and (b)
certain accrued and projected payment obligations of the Fund.
The Fund is also required under the 1940 Act and rating agency guidelines
to maintain, with respect to shares of MuniPreferred, as of the last Business
Day of each month in which any such shares are outstanding, asset coverage of at
least 200% with respect to all outstanding senior securities which are shares of
beneficial interest, including MuniPreferred (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
MuniPreferred Asset Coverage"). Based on the composition of the portfolio of the
Fund and market conditions as of , 2002, 1940 Act MuniPreferred Asset
Coverage with respect to shares of MuniPreferred, assuming the issuance on the
date thereof of all shares of MuniPreferred offered hereby and giving effect to
the deduction of sales load and offering costs related thereto estimated at
$ , would have been computed as follows:
Value of Fund assets less liabilities not
constituting senior securities $
------------------------------------------------------------ = --------------- = %
Senior securities representing indebtedness plus $
liquidation value of the shares of MuniPreferred
27
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the MuniPreferred Basic Maintenance
Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in each case in
accordance with the requirements of the rating agency or agencies then rating
the shares of MuniPreferred, the Fund will be required to redeem shares of
MuniPreferred as described under "Redemption -- Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the shares of MuniPreferred may, at any time, change or
withdraw any such rating. The Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Fund pursuant to the rating agency guidelines in the event
the Fund receives written confirmation from Moody's or S&P, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's and S&P to shares of MuniPreferred.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the shares of MuniPreferred are not recommendations
to purchase, hold or sell those shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
shares of MuniPreferred will be able to sell such shares in an Auction or
otherwise. The ratings are based on current information furnished to Moody's and
S&P by the Fund and the Adviser and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The common shares have not been rated by a
nationally recognized statistical rating organization.
A rating agency's guidelines will apply to shares of MuniPreferred only so
long as such rating agency is rating such shares. The Fund will pay certain fees
to Moody's or S&P, or both, for rating shares of MuniPreferred.
VOTING RIGHTS
Except as otherwise provided in this prospectus and in the Statement of
Additional Information, in the Declaration of Trust or as otherwise required by
law, holders of shares of MuniPreferred will have equal voting rights with
holders of common shares and any Preferred Shares (one vote per share) and will
vote together with holders of common shares and any Preferred Shares as a single
class.
In connection with the election of the Fund's trustees, holders of
outstanding Preferred Shares, including MuniPreferred shares, voting as a
separate class, are entitled to elect two of the Fund's trustees, and the
remaining trustees are elected by holders of common shares and Preferred Shares,
including MuniPreferred shares, voting together as a single class. In addition,
if at any time dividends (whether or not earned or declared) on any outstanding
Preferred Shares, including MuniPreferred shares, shall be due and unpaid in an
amount equal to at least two full years' dividends thereon, and sufficient cash
or specified securities shall not have been deposited with the Auction Agent for
the payment of such dividends, then, as the sole remedy of holders of
outstanding Preferred Shares, including MuniPreferred shares, the number of
trustees constituting the Board shall be automatically increased by the smallest
number that, when added to the two trustees elected exclusively by the holders
of Preferred Shares, including shares of MuniPreferred, as described above,
would constitute a majority of the Board as so increased by such smallest
number, and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of MuniPreferred,
voting as a separate class, will be entitled to elect the smallest number of
additional trustees that, together with the two trustees which such holders will
be in any event entitled to elect, constitutes a majority of the total number of
trustees of the Fund as so increased. The terms of office of the persons who are
trustees at the time of that election will continue. If the Fund thereafter
shall pay, or declare and set apart for payment, in full, all dividends payable
on all outstanding Preferred Shares, including MuniPreferred shares, the voting
rights stated in the second preceding sentence shall cease, and the terms of
office of all of the additional trustees
28
elected by the holders of Preferred Shares, including MuniPreferred shares (but
not of the trustees with respect to whose election the holders of common shares
were entitled to vote or the two trustees the holders of Preferred Shares have
the right to elect in any event), will terminate automatically.
So long as any shares of MuniPreferred are outstanding, the Fund will not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of MuniPreferred outstanding at the time (voting as a separate
class):
(a) authorize, create or issue any class or series of stock ranking
prior to or on a parity with shares of MuniPreferred with respect to the
payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up of the affairs of the Fund or authorize, create
or issue additional shares of any series of MuniPreferred (except that,
notwithstanding the foregoing, but subject to certain rating agency
approvals, the Board, without the vote or consent of the holders of
MuniPreferred, may from time to time authorize and create, and the Fund may
from time to time issue additional shares of, any series of MuniPreferred
or classes or series of Preferred Shares ranking on a parity with shares of
MuniPreferred with respect to the payment of dividends and the distribution
of assets upon liquidation, dissolution or winding up of the affairs of the
Fund; provided, however, that if Moody's or S&P is not then rating the
shares of MuniPreferred, the aggregate liquidation preference of all
Preferred Shares of the Fund outstanding after any such issuance, exclusive
of accumulated and unpaid dividends, may not exceed $ ) or
(b) amend, alter or repeal the provisions of the Declaration of Trust,
including the Statement, whether by merger, consolidation or otherwise, so
as to affect any preference, right or power of such shares of MuniPreferred
or the holders thereof;
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the holders
of shares of MuniPreferred and (iii) the authorization, creation and issuance of
classes or series of shares ranking junior to shares of MuniPreferred with
respect to the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the affairs of the Fund will be deemed
to affect such preferences, rights or powers only if Moody's or S&P is then
rating shares of MuniPreferred and such issuance would, at the time thereof,
cause the Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage or the
MuniPreferred Basic Maintenance Amount. So long as any shares of MuniPreferred
are outstanding, the Fund shall not, without the affirmative vote or consent of
the holders of at least 66 2/3% of the shares of MuniPreferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
If any action set forth above would adversely affect the rights of one or
more series (the "Affected Series") of MuniPreferred shares in a manner
different from any other series of MuniPreferred shares, the Fund will not
approve any such action without the affirmative vote or consent of the holders
of at least a majority of the shares of each such Affected Series outstanding at
the time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class). The Board may, without shareholder
approval, from time to time, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by the Fund pursuant
to the rating agency guidelines in the event the Fund receives written
confirmation from Moody's or S&P, or both, as appropriate, that any such
amendment, alteration or repeal would not impair the ratings then assigned by
Moody's and S&P to shares of MuniPreferred. Unless a higher percentage is
provided for in the Declaration of Trust (see "Certain Provisions in the
Declaration of Trust"), (A) the affirmative vote of the holders of at least a
majority of the Preferred Shares, including MuniPreferred shares, outstanding at
the time, voting as a separate class, shall be required to approve any
conversion of the Fund from a closed-end to an open-end investment company and
(B) the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including MuniPreferred shares, voting as a separate class,
shall be required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares. The affirmative vote of the
holders of a majority of the
29
outstanding Preferred Shares, including MuniPreferred shares, voting as a
separate class, shall be required to approve any action not described in the
preceding sentence requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act.
The foregoing voting provisions will not apply with respect to shares of
MuniPreferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described herein, the
Applicable Rate for the shares of each series of MuniPreferred, including the
shares of MuniPreferred to be issued in this offering, for each Rate Period of
shares of such series after the initial Rate Period thereof shall be equal to
the rate per annum that the Auction Agent advises has resulted on the Business
Day preceding the first day of such Subsequent Rate Period (an "Auction Date")
from implementation of the auction procedures (the "Auction Procedures") set
forth in the Statement and summarized below, in which persons determine to hold
or offer to sell or, based on dividend rates bid by them, offer to purchase or
sell shares of such series. Each periodic implementation of the Auction
Procedures is referred to herein as an "Auction." See the Statement for a more
complete description of the Auction process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign or for any reason its appointment is terminated during any
period that any shares of MuniPreferred are outstanding, the Board will use its
best efforts to appoint a successor Auction Agent. The Fund may remove the
Auction Agent; provided, that prior to such removal the Fund shall have entered
into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred.
The Auction Agent, on the Business Day next succeeding each Auction for
shares of MuniPreferred, will pay to each Broker-Dealer, from funds provided by
the Fund, a service charge at the annual rate of 1/4 of 1% in the case of any
Auction immediately preceding a Rate Period of less than 364 days, or a
percentage agreed to by the Fund and the Broker-Dealers in the case of any
Auction immediately preceding a Rate Period of 364 days or longer, of the
purchase price of shares of MuniPreferred placed by such Broker-Dealer at such
Auction. For the purposes of the preceding sentence, shares of MuniPreferred
will be placed by a Broker-Dealer if such shares were (a) the subject of Hold
Orders deemed to have been submitted to the Auction Agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its own account or were acquired by
such Broker-Dealer for its customers who are Beneficial Owners or (b) the
subject of an Order submitted by such Broker-Dealer that is (i) a Submitted Bid
of an Existing Holder that resulted in such Existing Holder continuing to hold
such shares as a result of the Auction or (ii) a Submitted Bid of a Potential
Holder that resulted in such Potential Holder purchasing such shares as a result
of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
30
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a
series of MuniPreferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares of such series (a "Beneficial Owner") may submit orders ("Orders")
with respect to shares of such series to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof.
- Bid -- indicating its desire to sell shares of such series at $25,000 per
share if the Applicable Rate for shares of such series for the next Rate
Period thereof is less than the rate specified in such Bid (also known as
a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for shares of
such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of MuniPreferred then held by
such Beneficial Owner. A Beneficial Owner of shares of such series that submits
a Bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the Maximum Rate for shares of such series on the Auction Date
therefor will be treated as having submitted a Sell Order with respect to such
shares to its Broker-Dealer. A Beneficial Owner of shares of such series that
fails to submit an Order with respect to such shares to its Broker-Dealer will
be deemed to have submitted a Hold Order with respect to such shares of such
series to its Broker-Dealer; provided, however, that if a Beneficial Owner of
shares of such series fails to submit an Order with respect to shares of such
series to its Broker-Dealer for an Auction relating to a Rate Period of more
than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted
a Sell Order with respect to such shares to its Broker-Dealer. A Sell Order
shall constitute an irrevocable offer to sell the shares of MuniPreferred
subject thereto. A Beneficial Owner that offers to become the Beneficial Owner
of additional shares of MuniPreferred is, for purposes of such offer, a
Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of MuniPreferred but that wishes to purchase shares of such series, or
that is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series (in each case, a "Potential Beneficial Owner"),
may submit Bids to its Broker-Dealer in which it offers to purchase shares of
such series at $25,000 per share if the Applicable Rate for shares of such
series for the next Rate Period thereof is not less than the rate specified in
such Bid. A Bid placed by a Potential Beneficial Owner of shares of such series
specifying a rate higher than the Maximum Rate for shares of such series on the
Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of MuniPreferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
MuniPreferred held by it. A Broker-Dealer may also submit Orders to the Auction
Agent for its own account as an Existing Holder or Potential Holder, provided it
is not an affiliate of the Fund.
If Sufficient Clearing Bids for shares of a series of MuniPreferred exist
(that is, the number of shares of such series subject to Bids submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Potential Holders with rates equal to or lower than the Maximum Rate for shares
of such series is at least equal to the number of shares of such series subject
to Sell Orders submitted or deemed submitted to the
31
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 the shares of such series available for purchase in the
Auction. If Sufficient Clearing Bids for shares of a series of MuniPreferred do
not exist, the Applicable Rate for shares of such series for the next succeeding
Rate Period thereof will be the Maximum Rate for shares of such series on the
Auction Date therefor. In such event, Beneficial Owners of shares of such series
that have submitted or are deemed to have submitted Sell Orders may not be able
to sell in such Auction all shares of such series subject to such Sell Orders.
If Broker-Dealers submit or are deemed to have submitted to the Auction Agent
Hold Orders with respect to all Existing Holders of shares of a series of
MuniPreferred, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of
MuniPreferred that is fewer than the number of shares of such series specified
in its Order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as Existing Holders or Potential
Holders in respect of customer Orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
The Auctions for shares of MuniPreferred Series will normally be held
every and each Subsequent Rate Period of shares of such series will
normally begin on the following .
Whenever the Fund intends to include any net capital gain or other income
taxable for regular federal income tax purposes in any dividend on shares of
MuniPreferred, the Fund shall, in the case of Minimum Rate Periods or Special
Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.
SECONDARY MARKET TRADING AND TRANSFER OF MUNIPREFERRED SHARES
The Broker-Dealers are expected to maintain a secondary trading market in
shares of MuniPreferred outside of Auctions, but are not obligated to do so, and
may discontinue such activity at any time. There can be no assurance that such
secondary trading market in shares of MuniPreferred will provide owners with
liquidity of investment. The shares of MuniPreferred are not registered on any
stock exchange or on the Nasdaq Stock Market. Investors who purchase shares in
an Auction for a Special Rate Period should note that because the dividend rate
on such shares will be fixed for the length of such Rate Period, the value of
the shares may fluctuate in response to changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction therefor, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of shares of MuniPreferred only in whole shares and only (1) pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of shares of MuniPreferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the
32
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of the foregoing if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other person, if permitted by the Fund) to
whom such transfer is made shall advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the MuniPreferred shares, the Declaration authorizes the
issuance of an unlimited number of common shares, par value of $0.01 per share.
All outstanding common shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation, are fully paid and, subject to
matters discussed in "Certain Provisions in the Declaration of Trust,"
non-assessable, and have no pre-emptive or conversion rights or rights to
cumulative voting. Whenever MuniPreferred shares are outstanding, holders of the
Fund's common shares will not be entitled to receive any cash distributions from
the Fund unless all accrued dividends on MuniPreferred shares have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to
MuniPreferred shares would be at least 200% after giving effect to the
distributions.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the common shares and MuniPreferred shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund, or
(5) a removal of trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's common shares and
MuniPreferred shares outstanding at the time, voting together as a single class,
is required, provided, however, that where only a particular class or series is
affected (or, in the case of removing a trustee, when the trustee has been
elected by only one class), only the required vote by the applicable class or
series will be required. Approval of shareholders is not required, however, for
any transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues Shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. In the case of the conversion of the Fund to an
open-end investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the Fund's MuniPreferred shares
outstanding at the time, voting as a separate class, or, if such action has been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, the affirmative vote of
the holders of at least a majority of the Fund's MuniPreferred shares
outstanding at the time, voting as a separate class. None of the foregoing
provisions may be amended except
33
by the vote of at least two-thirds of the common shares and MuniPreferred
shares, voting together as a single class. The votes required to approve the
conversion of the Fund from a closed-end to an open-end investment company or to
approve transactions constituting a plan of reorganization which adversely
affects the holders of MuniPreferred shares are higher than those required by
the 1940 Act. The Board of Trustees believes that the provisions of the
Declaration relating to such higher votes are in the best interest of the Fund
and its shareholders. See the Statement of Additional Information under "Certain
Provisions in the Declaration of Trust."
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
common shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of common
shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. The Fund
cannot assure you that its Board of Trustees will decide to take any of these
actions, or that share repurchases or tender offers will actually reduce market
discount.
If the Fund converted to an open-end investment company, it would be
required to redeem all MuniPreferred shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the common shares
would no longer be listed on the Exchange. In contrast to a closed-end
investment company, shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less any
redemption charge that is in effect at the time of redemption. See the Statement
of Additional Information under "Certain Provisions in the Declaration of Trust"
for a discussion of the voting requirements applicable to the conversion of the
Fund to an open-end investment company.
Before deciding whether to take any action if the common shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Common Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
The discussions below and in the Statement of Additional Information
provide general tax information. Because tax laws are complex and often change,
you should consult your tax advisor about the tax consequences of an investment
in the MuniPreferred shares before making such an investment.
FEDERAL INCOME TAX MATTERS
The Fund intends to elect to be treated, and to qualify each year, as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), and intends to distribute substantially all of
its net income and gains to its shareholders. Therefore, it is not expected that
the Fund will be subject to any federal income tax. The Fund primarily invests
in municipal bonds from issuers
34
located in California or in municipal bonds whose income is otherwise exempt
from regular federal and California income taxes, and the alternative minimum
tax applicable to individuals. Substantially all of the Fund's dividends to you
should qualify as "exempt-interest dividends." A shareholder treats an exempt-
interest dividend as interest on state and local bonds exempt from regular
federal income tax. Some or all of an exempt-interest dividend, however, may be
subject to federal alternative minimum tax imposed on the shareholder. Different
federal alternative minimum tax rules apply to individuals and to corporations.
In addition to exempt-interest dividends, the Fund also may distribute to
its shareholders amounts that are treated as long-term capital gain or ordinary
income. These distributions will generally be taxable to holders of
MuniPreferred. The Fund will allocate distributions to shareholders that are
treated as tax-exempt interest and as long-term capital gain and ordinary
income, if any, among the common shares and MuniPreferred shares in proportion
to total dividends paid to each class for the year. The Fund intends to notify
MuniPreferred shareholders in advance if it will allocate to them income that is
not exempt from regular federal income tax. In certain circumstances the Fund
will make payments to MuniPreferred shareholders to offset the tax effects of
the taxable distribution. See "Description of MuniPreferred shares -- Dividends
and Dividend Periods -- Gross-Up Payments." As long as the Fund qualifies as a
regulated investment company, distributions paid by the Fund generally will not
be eligible for the dividends-received deduction available to corporations.
Although dividends generally will be treated as distributed when paid, dividends
declared in October, November or December, payable to shareholders of record on
a specified date in one of those months and paid during the following January,
will be treated as having been distributed by the Fund (and received by the
shareholders) on December 31 of the year declared.
The Code provides that interest on indebtedness incurred or used to
purchase or carry the Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the Internal Revenue Service
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 sale or
other disposition of common shares or shares of MuniPreferred of the Fund will
normally result in capital gain or loss to shareholders if such shares are held
as a capital asset. Present law taxes both long-term and short-term capital
gains of corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, long-term capital gains are generally subject to
reduced rates of taxation. Losses realized by a shareholder on the sale or
exchange of shares of the Fund held for six months or less are disallowed to the
extent of any distribution of exempt-interest dividends received with respect to
such shares, and, if not disallowed, such losses are treated as long-term
capital losses to the extent of any distribution of long-term capital gain
received (or designated amounts of undistributed capital gain that are treated
as received) with respect to such shares. Under certain circumstances, a
shareholder's holding period may have to restart after, or may be suspended for,
any periods during which the shareholder's risk of loss is diminished as a
result of holding one or more other positions in substantially similar or
related property, or through certain options or short sales. Any loss realized
on a sale or exchange of shares of the Fund will be disallowed to the extent
those shares of the Fund are replaced by other substantially identical shares of
the Fund within a period of 61 days beginning 30 days before and ending 30 days
after the date of disposition of the original shares. In that event, the basis
of the replacement shares of the Fund will be adjusted to reflect the disallowed
loss. The Fund is required in certain circumstances to withhold a portion of
dividends and certain other payments paid to certain holders of the Fund's
shares who do not furnish to the Fund their correct taxpayer identification
number (in the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
The Statement of Additional Information contains a more detailed summary of
the federal income tax rules that apply to the Fund and its shareholders.
Legislative, judicial or administrative action may change the tax rules that
apply to the Fund or its shareholders and any such change may be retroactive.
You should consult with your tax advisor about federal income tax matters before
making an investment in the Fund.
35
CALIFORNIA TAX MATTERS
The following is based upon the advice of Orrick, Herrington & Sutcliffe,
LLP, special California counsel to the Fund.
The Fund's regular monthly dividends will not be subject to California
personal income taxes to the extent they are paid out of income earned on
obligations that, when held by individuals, pay interest that is exempt from
taxation by California under California law (e.g., obligations of California and
its political subdivisions) or federal law, so long as at the close of each
quarter of the Fund's taxable year at least 50 percent of the value of the
Fund's total assets consist of such obligations. The portion of the Fund's
monthly dividends that is attributable to income other than as described in the
preceding sentence will be subject to the California income tax. The Fund
expects to earn no or only a minimal amount of such non-exempt income. You will
be subject to California personal income taxes to the extent the Fund
distributes any taxable income or realized capital gains, or if you sell or
exchange MuniPreferred shares and realize a capital gain on the transaction.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters. Please refer to the
Statement of Additional Information for more detailed information.
OTHER MATTERS
A lawsuit was brought in June 1996 (Green et al. v. Nuveen Advisory Corp.,
et al.) by certain individual common shareholders of six leveraged closed-end
funds sponsored by Nuveen, and ultimately heard in the federal district court
for the Northern District of Illinois. The suit was originally brought against
Nuveen, Nuveen Advisory, six Nuveen investment companies (the "leveraged
closed-end funds") managed by Nuveen Advisory and two of the leveraged
closed-end funds' former directors seeking unspecified damages, an injunction
and other relief. The suit also sought certification of a defendant class
consisting of all Nuveen-managed leveraged funds.
The plaintiffs alleged that the leveraged closed-end funds engaged in
certain practices that violated various provisions of the 1940 Act and common
law. The plaintiffs also alleged, among other things, breaches of fiduciary duty
by the funds' directors and Nuveen Advisory and various misrepresentations and
omissions in prospectuses and shareholder reports relating to the use of
leverage through the issuance and periodic auctioning of preferred stock and the
basis of the calculation and payment of management fees to Nuveen Advisory and
Nuveen. Plaintiffs also filed a motion to certify defendant and plaintiff
classes.
The defendants filed motions to dismiss the entire lawsuit asserting that
the claims were without merit and to oppose certification of any classes. On
March 30, 1999, the court entered a memorandum opinion and order (1) granting
the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to
dismiss all of plaintiffs' counts against it other than breach of fiduciary duty
under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs' motion to
certify a plaintiff class and a defendant class. No appeal was made by
plaintiffs of this decision, and the remaining Section 36(b) count against
Nuveen Advisory is discussed below.
As to alleged damages, plaintiffs have claimed as damages the portion of
all advisory compensation received by Nuveen Advisory from the funds during the
period from June 21, 1995 to the present that is equal to the proportion of each
of such fund's preferred stock to its total assets. The preferred stock
constitutes approximately one third of the funds' assets so the amount claimed
would equal approximately one third of management fees received by Nuveen
Advisory for managing the funds during this period. Nuveen Advisory believes
that it has no liability and the plaintiffs have suffered no damages and filed a
motion for summary judgment as to both liability and damages.
Plaintiffs filed a motion for partial summary judgment as to liability
only. In a memorandum opinion and order dated September 6, 2001, the federal
district court granted Nuveen Advisory's motion for summary judgment and denied
plaintiffs' motion for partial summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on October 8,
2001. In an opinion dated July 8, 2002, the
36
Seventh Circuit Court of Appeals affirmed the opinion of the district court
dismissing the plaintiffs' lawsuit. Plaintiffs filed a petition for certiorari
with the United States Supreme Court on October 1, 2002 seeking to appeal the
Seventh Circuit opinion. The defendants intend to file a brief in opposition to
the petition.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of and transfer, shareholder services and
dividend paying agent for the Fund is State Street Bank Corp., 225 Franklin
Street, Boston, Massachusetts 02110. The Custodian performs custodial, fund
accounting and portfolio accounting services. Deutsche Bank Trust Company
Americas, 100 Plaza One, 6th Floor, Jersey City, NJ 07311, a banking corporation
organized under the laws of New York, is the Auction Agent with respect to
shares of MuniPreferred and acts as transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to such shares.
37
UNDERWRITING
Salomon Smith Barney is acting as the representative of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus, each underwriter named below has
severally agreed to purchase, and the Fund has agreed to sell to such
underwriter, the number of shares of MuniPreferred set forth opposite the name
of such underwriter.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Salomon Smith Barney Inc....................................
Nuveen Investments..........................................
-------
Total.....................................................
=======
The underwriting agreement provides that the obligations of the several
underwriters to purchase the MuniPreferred shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the MuniPreferred
shares if they purchase any of the MuniPreferred shares.
The underwriters propose to offer some of the MuniPreferred shares directly
to the public at the public offering price set forth on the cover page of this
prospectus and some of the MuniPreferred shares to dealers at the public
offering price less a concession not in excess of $ per MuniPreferred share.
The sales load the Fund will pay of $ per share is equal to % of the
initial offering price. One half of the sales load from this offering will be
paid to certain underwriters based on their participation in the offering of the
Fund's common shares. The underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per MuniPreferred share on sales to other
dealers. If all of the MuniPreferred shares are not sold at the initial offering
price, the underwriters may change the public offering price and other selling
terms. Investors must pay for any MuniPreferred shares purchased on or before
, 2002.
The Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters and, subject to certain restrictions, may act as
brokers while they are underwriters. The underwriters are active underwriters
of, and dealers in, securities and act as market makers in a number of such
securities, and therefore can be expected to engage in portfolio transactions
with, and perform services for, the Fund. Nuveen may engage in these
transactions only in compliance with the 1940 Act.
The Fund anticipates that the underwriters or their respective affiliates
may, from time to time, act in auctions as Broker-Dealers and receive fees as
set forth under "The Auction" and in the Statement of Additional Information.
Nuveen, one of the underwriters, is an affiliate of Nuveen Advisory.
The Fund and Nuveen Advisory have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, or to contribute payments the underwriters may be required to make
for any of those liabilities. Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
38
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
LEGAL OPINIONS
Certain legal matters in connection with the MuniPreferred shares will be
passed upon for the Fund by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois, and for the underwriters by Simpson Thacher & Bartlett, New York, New
York. Vedder, Price, Kaufman & Kammholz and Simpson Thacher & Bartlett may rely
as to certain matters of Massachusetts law on the opinion of Bingham McCutchen
LLP, Boston, Massachusetts and as, to certain matters of California law on the
opinion of Orrick, Harrington & Sutcliffe, LLP.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and Northeast Regional Office, Woolworth Building, 233
Broadway, New York, NY 10013-2409. Reports, proxy statements, and other
information about the Fund can be inspected at the offices of the Exchange.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and MuniPreferred shares can be found
in the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains each Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
39
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives....................................... S-2
Investment Policies and Techniques.......................... S-5
Other Investment Policies and Techniques.................... S-11
Management of the Fund...................................... S-13
Investment Adviser.......................................... S-21
Portfolio Transactions...................................... S-23
Net Asset Value............................................. S-24
Additional Information Concerning the Auctions for
MuniPreferred............................................. S-24
Certain Provisions in the Declaration of Trust.............. S-26
Repurchase of Common Shares; Conversion to Open-End Fund.... S-27
Tax Matters................................................. S-28
Experts..................................................... S-33
Custodian................................................... S-33
Additional Information...................................... S-33
Report of Independent Auditors.............................. F-1
Financial Statements........................................ F-2
Appendices
Appendix A -- Statement Establishing and Fixing the Rights
and Preferences of MuniPreferred shares....... A-1
Appendix B -- Ratings of Investments........................ B-1
Appendix C -- Description of Insurers....................... C-1
Appendix D -- Hedging Strategies and Risks.................. D-1
Appendix E -- Factors Pertaining to California.............. E-1
40
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield for federal
regular income tax purposes on a municipal investment. To assist you to more
easily compare municipal investments like the Fund with taxable alternative
investments, the table below presents the taxable equivalent yield for a range
of hypothetical tax-free yields assuming the stated marginal federal tax rates
for 2002 listed below:
TAXABLE EQUIVALENT OF TAX-FREE YIELDS*
TAX-FREE YIELD
COMBINED
TAX RATE* 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
--------- ----- ----- ----- ----- ----- -----
10.00% 0.56% 1.11% 1.67% 2.22% 2.78% 3.33%
15.00 0.59 1.18 1.76 2.35 2.94 3.53
27.00 0.68 1.37 2.05 2.74 3.42 4.11
30.00 0.71 1.43 2.14 2.86 3.57 4.29
35.00 0.77 1.54 2.31 3.08 3.85 4.62
38.60 0.81 1.63 2.44 3.26 4.07 4.89
------------
* In the table above, the taxable equivalent yields are calculated assuming that
the Fund's exempt-interest dividends are 100% federally tax-free. To the
extent the Fund were to invest in federally taxable investments (which it does
not expect to do), its taxable equivalent yield would be lower.
CALIFORNIA
The following tables show the approximate taxable yields to individuals
that are equivalent to tax-free yields under combined Federal and California
state tax rates, using published 2001 marginal Federal tax rates and marginal
California tax rates currently available and scheduled to be in effect.
SINGLE RETURN JOINT RETURN FEDERAL TAX COMBINED TAX
BRACKET BRACKET RATE STATE TAX RATE* RATE*
---------------- ---------------- ----------- --------------- ------------
$ 6,000- 27,500 $ 12,000- 45,200 15.00% 6.00% 20.1%
27,050- 65,550 45,200-109,250 27.50 9.30 34.2
65,550-136,750 109,250-166,500 30.50 9.30 37.0
136,750-297,350 166,500-297,350 35.50 9.30 41.5
Over 297,350 Over 297,350 39.10 9.30 44.8
0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
----- ----- ----- ----- ----- -----
0.57% 1.13% 1.70% 2.27% 2.83% 3.40%
0.63 1.25 1.88 2.50 3.13 3.75
0.76 1.51 2.27 3.02 3.78 4.53
0.79 1.57 2.36 3.15 3.94 4.72
0.85 1.69 2.54 3.39 4.24 5.08
0.90 1.80 2.69 3.59 4.49 5.39
* The combined tax rates shown reflect the fact that state tax payments are
currently deductible for federal tax purposes. Please note that the table does
not reflect (i) any federal or state limitations on the amounts of allowable
itemized deductions, phase-outs of personal or dependent exemption credits or
other allowable credits, (ii) any local taxes imposed, or (iii) any
alternative minimum taxes or any taxes other than personal income taxes. The
table assumes that federal taxable income is equal to state income subject to
tax, and in cases where more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest income within
that federal bracket is used. The numbers in the Combined Tax Rate column are
rounded to the nearest one-tenth of one percent.
A-1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$
NUVEEN INSURED CALIFORNIA TAX-FREE
ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
MUNIPREFERRED(R)
SHARES, SERIES
-----------------
PROSPECTUS
, 2002
-----------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2002
Nuveen Insured California Tax-Free Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Insured California Tax-Free Advantage Municipal Fund (the
"Fund") is a newly organized, non-diversified closed-end management investment
company.
This Statement of Additional Information relating to MuniPreferred
shares of the Fund ("MuniPreferred shares") does not constitute a prospectus,
but should be read in conjunction with the Fund's Prospectus relating thereto
dated , 2002 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing MuniPreferred shares. Investors should obtain and
read the Fund's Prospectus prior to purchasing such shares. A copy of the Fund's
Prospectus may be obtained without charge by calling (800) 257-8787. You may
also obtain a copy of the Fund's Prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus.
TABLE OF CONTENTS
Page
----
Investment Objectives................................................S-2
Investment Policies and Techniques...................................S-5
Other Investment Policies and Techniques............................S-11
Management of the Fund..............................................S-13
Investment Adviser..................................................S-21
Portfolio Transactions..............................................S-23
Net Asset Value.....................................................S-24
Additional Information Concerning the Auctions for MuniPreferred....S-24
Certain Provisions in the Declaration of Trust......................S-26
Repurchase of Common Shares; Conversion to Open-End Fund............S-27
Tax Matters.........................................................S-28
Experts ...........................................................S-33
Custodian...........................................................S-33
Additional Information..............................................S-33
Report of Independent Auditors.......................................F-1
Financial Statements.................................................F-2
Appendices
Appendix A -- Statement Establishing and Fixing the Rights
and Preferences of MuniPreferred Shares............A-1
Appendix B-- Ratings of Investments..................................B-1
Appendix C-- Description of Insurers.................................C-1
Appendix D-- Hedging Strategies and Risks............................D-1
Appendix E-- Factors Pertaining to California........................E-1
This Statement of Additional Information is dated , 2002
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INVESTMENT OBJECTIVES
The Fund's investment objectives are to provide current income exempt
from regular federal income tax, the alternative minimum tax applicable to
individuals and California income tax, and to enhance portfolio value relative
to the municipal bond market by investing in tax-exempt municipal bonds that the
Fund's investment adviser believes are underrated or undervalued or that
represent municipal market sectors that are undervalued.
The Fund's investment in underrated or undervalued municipal bonds will
be based on Nuveen Advisory's belief that their yield is higher than that
available on bonds bearing equivalent levels of interest rate risk, credit risk
and other forms of risk, and that their prices will ultimately rise (relative to
the market) to reflect their true value. The Fund attempts to increase its
portfolio value relative to the municipal bond market by prudent selection of
municipal bonds regardless of the direction the market may move. Any capital
appreciation realized by the Fund will generally result in the distribution of
taxable capital gains to holders of common shares and MuniPreferred shares. The
Fund's investment objectives are fundamental policies of the Fund.
Under normal circumstances, the Fund will invest at least 80% of its
Managed Assets in a portfolio of municipal bonds that:
o pay interest that is exempt from regular federal and
California income taxes and from the federal alternative
minimum tax applicable to individuals; and
o are covered by insurance guaranteeing the timely payment of
principal and interest thereon.
This insurance does not protect the market value of portfolio holdings
or the net asset value of the Fund.
Under normal circumstances, the Fund (i) expects to be fully invested
(at least 95% of its assets) in municipal bonds that pay interest that is exempt
from regular federal and California income taxes and (ii) will not invest in AMT
Bonds. Through November 30, 2003, (the "Invest-Up Period"), the Fund may invest
in municipal bonds that pay interest that is exempt from regular federal income
tax and the alternative minimum tax applicable to individuals but not from
California income tax ("Out of State Bonds"), provided that no more than 10% of
the Fund's investment income during that time may be derived from investments
Out of State Bonds. It is a fundamental policy of the Fund that its investments
in municipal bonds the interest on which is not taxable under regular federal
income tax the alternative minimum income tax applicable to individuals and
California income tax will, under normal circumstances, comprise at least 80% of
the Fund's Managed Assets. The Fund will notify shareholders at least 60 days
prior to any change in its policy to invest 80% of its Managed Assets in bonds
that are covered by insurance guaranteeing the timely payment of principal and
interest thereon.
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are 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, or (ii) other municipal bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated by all NRSROs that rate the bond within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch), or bonds that
are unrated but judged to be of comparable quality by Nuveen Advisory.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding common
shares and MuniPreferred shares (as hereinafter defined) voting together as a
single class, and of the holders of a majority of the outstanding MuniPreferred
shares voting as a separate class:
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(1) Under normal circumstances, invest less than 80% of the Fund's
net assets (plus any borrowings for investment purposes) in
investments the income from which is exempt from both regular
federal and California income taxes and the alternative
minimum tax applicable to individuals;
(2) Issue senior securities, as defined in the Investment Company
Act of 1940, other than MuniPreferred shares, except to the
extent permitted under the Investment Company Act of 1940 and
except as otherwise described in the Prospectus;
(3) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an
amount not exceeding one-third of the value of the Fund's
total assets (including the amount borrowed) less the Fund's
liabilities (other than borrowings);
(4) Act as underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 in connection
with the purchase and sale of portfolio securities;
(5) Invest more than 25% of its total assets in securities of
issuers in any one industry; provided, however, that such
limitation shall not apply to municipal bonds other than those
municipal bonds backed only by the assets and revenues of
non-governmental users;
(6) Purchase or sell real estate, but this shall not prevent the
Fund from investing in municipal bonds secured by real estate
or interests therein or foreclosing upon and selling such
security;
(7) Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the Fund from purchasing or selling
options, futures contracts, derivative instruments or from
investing in securities or other instruments backed by
physical commodities);
(8) Make loans, other than by entering into repurchase agreements
and through the purchase of municipal bonds or short-term
investments in accordance with its investment objectives,
policies and limitations; and
(9) Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies
or instrumentalities), if as a result more than 5% of the
Fund's total assets would then be invested in securities of a
single issuer or if as a result would then be invested in
securities of a single issuer or if as a result the Fund would
hold more than 10% of the outstanding voting securities of any
single issuer; provided that, with respect to 50% of the
Fund's assets, the Fund may invest up to 25% of its assets in
the securities of any are issuer.
For purposes of the foregoing and "Description of Shares --
MuniPreferred shares -- Voting Rights" below, "majority of the outstanding,"
when used with respect to particular shares of the Fund, means (i) 67% or more
of the shares present at a meeting, if the holders of more than 50% of the
shares are present or represented by proxy, or (ii) more than 50% of the shares,
whichever is less.
For the purpose of applying the limitation set forth in subparagraph
(9) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non- governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer),
S-3
it shall also be included in the computation of securities owned that are issued
by such governmental or other entity. Where a security is guaranteed by a
governmental entity or some other facility, such as a bank guarantee or letter
of credit, such a guarantee or letter of credit would be considered a separate
security and would be treated as an issue of such government, other entity or
bank. When a municipal bond is insured by bond insurance, it shall not be
considered a security that is issued or guaranteed by the insurer; instead, the
issuer of such municipal bond will be determined in accordance with the
principles set forth above. The foregoing restrictions do not limit the
percentage of the Fund's assets that may be invested in municipal bonds insured
by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed Assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
stockholder in any investment company, the Fund will bear its ratable share of
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of common shares would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risk Factors", the net
asset value and market value of leveraged shares will be more volatile and the
yield to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right
to obtain securities equivalent in kind and amount to the
securities sold at no added cost, and provided that
transactions in options, futures contracts, options on futures
contracts, or other derivative instruments are not deemed to
constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act
of 1940 or any exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be
represented by futures contracts or more than 5% of the Fund's
net assets would be committed to initial margin deposits and
premiums on futures contracts and related options.
(4) Purchase securities when borrowings exceed 5% of its total
assets if and so long as MuniPreferred shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control, except that the Fund may invest up to 5% of its net
assets in tax-exempt or taxable fixed-income or equity
securities, for the purpose of acquiring control of an issuer
whose municipal bonds (a) the Fund already owns and (b) have
deteriorated or are expected shortly to deteriorate
significantly in credit quality, provided Nuveen Advisory
determines that such investment should enable the Fund to
better maximize the value of its existing investment in such
issuer.
S-4
(6) Invest in inverse floating rate securities (which are
securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and
which represent a leveraged investment in an underlying
municipal bond).
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
INVESTMENT IN MUNICIPAL BONDS
PORTFOLIO INVESTMENTS
Under normal circumstances, the Fund will invest at least 80% of its
Managed Assets in a portfolio of municipal bonds that (i) pay interest that is
exempt from regular federal and California income taxes and from the federal
alternative minimum tax applicable to individuals and (ii) are covered by
insurance guaranteeing the timely payment of principal and interest thereon.
This insurance does not protect the market value of portfolio holdings or the
net asset value of the Fund. During the Invest-up Period, the Fund may invest in
Out of State Bonds, provided that no more than 10% of the Fund's investment
income during that time may be derived from Out of State Bonds.
The Fund may at all times invest up to 20% of its net assets in (i)
uninsured municipal bonds that are 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, or (ii) other municipal bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated by all NRSROs that rate the bond within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch), or bonds that
are unrated but judged to be of comparable quality by Nuveen Advisory.
Under normal circumstances, and except for the temporary investments
described below, the Fund (i) expects to be fully invested (at least 95% of its
assets) in municipal bonds that pay interest that is exempt from regular
federal and California income taxes and (ii) will not invest in AMT Bonds.
Municipal bonds rated Baa or BBB are considered "investment grade"
securities; municipal bonds rated Baa are considered medium grade obligations
which lack outstanding investment characteristics and have speculative
characteristics, while municipal bonds rated BBB are regarded as having adequate
capacity to pay principal and interest. Municipal bonds rated AAA in which the
Fund may invest may have been so rated on the basis of the existence of
insurance guaranteeing the timely payment, when due, of all principal and
interest.
A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix B hereto. The ratings of Moody's, S&P
and Fitch represent their opinions as to the quality of the municipal bonds they
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal bonds with the same
maturity, coupon and rating may have different yields while obligations of the
same maturity and coupon with different ratings may have the same yield.
Each insured municipal bond that the Fund holds will either be (1)
covered by an insurance policy applicable to a specific security and obtained by
the issuer of the security or a third party at the time of original issuance
("Original Issue Insurance"), (2) covered by an insurance policy applicable to a
specific security and obtained by the Fund and/or a third party subsequent to
the time of original issuance
S-5
("Secondary Market Insurance"), or (3) covered by a master municipal insurance
policy purchased by the Fund ("Portfolio Insurance"). The Fund, as
non-fundamental policies that can be changed by the Board of Trustees, (A) will
only buy Portfolio Insurance from insurers whose claims-paying ability Moody's
rates "Aaa" or S&P or Fitch rates "AAA," and (B) will maintain at least 80% of
its total Managed Assets in municipal bonds covered by insurance from insurers
with a claims-paying ability rated, at the time of the bond's purchase, "Aaa" by
Moody's or "AAA" by S&P or Fitch.
Information about the primary municipal bond insurers with whom the
Fund intends to maintain specific insurance policies for particular municipal
bonds or policies of Portfolio Insurance is set forth in Appendix D hereto.
The Fund may at all times invest up to 20% of its net assets in
uninsured municipal bonds that are entitled to the benefit of an escrow or trust
account that contains securities issued or guaranteed by the U.S. Government or
U.S. Government agencies, backed by the full faith and credit of the United
States, and sufficient in amount to ensure the payment of interest and principal
on the original interest payment and maturity dates ("collateralized
obligations"). These collateralized obligations generally will not be insured
and will include, but are not limited to municipal bonds that have been (1)
advance refunded where the proceeds of the refunding have been used to buy 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 that municipal bond; or (2) issued under
state or local housing finance programs that 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 those municipal bonds.
These collateralized obligations are normally regarded as having the credit
characteristics of the underlying U.S. Government or U.S. Government agency
securities.
The Fund will primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15-30 years, but
the average weighted maturity of obligations held by the Fund may be shortened,
depending on market conditions. As a result, the Fund's portfolio at any given
time may include both long-term and intermediate-term municipal bonds. Moreover,
during temporary defensive periods (e.g., times when, in Nuveen Advisory's
opinion, temporary imbalances of supply and demand or other temporary
dislocations in the tax-exempt bond market adversely affect the price at which
long-term or intermediate-term municipal bonds are available), and in order to
keep the Fund's cash fully invested, including the period during which the net
proceeds of the offering are being invested, the Fund may invest up to 100% of
its net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open or closed-end investment companies that
invest primarily in municipal bonds of the type in which the Fund may invest
directly. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Tax-exempt short-term investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. The Fund will invest only in
taxable short-term investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or floating
rate of interest. See Appendix B for a general description of Moody's, S&P's and
Fitch's ratings of securities in such categories. Taxable short-term investments
of the Fund may include certificates of deposit issued by U.S. banks with assets
of at least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Other Investment Policies and Techniques -- Repurchase
Agreements." To the extent the Fund invests in taxable investments, the Fund
will not at such times be in a position to achieve its investment objective of
tax-exempt income.
S-6
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security, and the Fund will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the
municipal bond market by investing in tax-exempt municipal bonds that it
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued. Underrated municipal bonds are those whose ratings
do not, in Nuveen Advisory's opinion, reflect their true creditworthiness.
Undervalued municipal bonds are bonds that, in Nuveen Advisory's opinion, are
worth more than the value assigned to them in the marketplace. Nuveen Advisory
may at times believe that bonds associated with a particular municipal market
sector (for example, electric utilities), or issued by a particular municipal
issuer, are undervalued. Nuveen Advisory may purchase such a bond for the Fund's
portfolio because it represents a market sector or issuer that Nuveen Advisory
considers undervalued, even if the value of the particular bond is consistent
with the value of similar bonds. Municipal bonds of particular types or purposes
(e.g., hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value.
Likewise, the Fund may deviate from its normal investment policies and
invest up to 5% of its net assets in tax-exempt or taxable fixed-income or
equity securities of an issuer of municipal bonds that the Fund already owns for
the purpose of acquiring control of that issuer when Nuveen Advisory determines
that such investment should enable the Fund to better maximize the value of its
existing investment.
Also included within the general category of municipal bonds described
in the Fund's Prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Fund will only purchase
Municipal Lease Obligations where Nuveen Advisory believes the issuer has a
strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
S-7
The Fund will generally select obligations which may not be redeemed at
the option of the issuer for approximately seven to nine years.
ADDITIONAL INFORMATION ON MUNICIPAL BOND INSURANCE
Original Issue Insurance. If interest or principal on a municipal bond
is due, but the issuer fails to pay it, the insurer will make payments in the
amount due to the fiscal agent no later than one business day after the insurer
has been notified of the issuer's nonpayment. The fiscal agent will pay the
amount due to the Fund after the fiscal agent receives evidence of the Fund's
right to receive payment of the principal and/or interest, and evidence that all
of the rights of payment due shall thereupon vest in the insurer. When the
insurer pays the Fund the payment due from the issuer, the insurer will succeed
to the Fund's rights to that payment.
Portfolio Insurance. Each portfolio insurance policy will be
noncancellable and will remain in effect so long as the Fund is in existence,
the Fund continues to own the municipal bonds covered by the policy, and the
Fund pays the premiums for the policy. Each insurer generally will reserve the
right at any time upon 90 days' written notice to the Fund to refuse to insure
any additional bonds the Fund buys after the effective date of the notice. The
Fund's Board of Trustees will generally reserve the right to terminate each
policy upon seven day's written notice to an insurer if it determines that the
cost of the policy is not reasonable in relation to the value of the insurance
to the Fund.
SHORT-TERM INVESTMENTS
SHORT-TERM TAXABLE FIXED INCOME SECURITIES
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its net assets in cash equivalents
and short-term taxable fixed-income securities, although the Fund intends to
invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and
yields. Short-term taxable fixed income investments are defined to include,
without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities. U.S. government
agency securities include securities issued by (a) the Federal
Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith
and credit of the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks, and the Tennessee
Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its
credit. While the U.S. government provides financial support
to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S.
government, its agencies, and instrumentalities do not
guarantee the market value of their securities. Consequently,
the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are
for a definite period of time, earn a specified rate of
return, and are normally negotiable. The issuer of a
certificate of deposit agrees to pay
S-8
the amount deposited plus interest to the bearer of the
certificate on the date specified thereon. Under current FDIC
regulations, the maximum insurance payable as to any one
certificate of deposit is $100,000; therefore, certificates of
deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant
to a repurchase agreement, it simultaneously agrees to resell
and redeliver such securities to the seller, who also
simultaneously agrees to buy back the securities at a fixed
price and time. This assures a predetermined yield for the
Fund during its holding period, since the resale price is
always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity
for the Fund to invest temporarily available cash. The Fund
may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers'
acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the
Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the seller
defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the
Fund could incur a loss of both principal and interest. The
investment adviser monitors the value of the collateral at the
time the action is entered into and at all times during the
term of the repurchase agreement. The Fund's investment
adviser does so in an effort to determine that the value of
the collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Fund. If the seller were to
be subject to a federal bankruptcy proceeding, the ability of
the Fund to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes
issued by corporations to finance their current operations.
Master demand notes are direct lending arrangements between
the Fund and a corporation. There is no secondary market for
such notes. However, they are redeemable by the Fund at any
time. Nuveen Advisory will consider the financial condition of
the corporation (e.g., earning power, cash flow, and other
liquidity measures) and will continuously monitor the
corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited to
commercial paper rated in the highest categories by a major
rating agency and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
SHORT-TERM TAX-EXEMPT FIXED INCOME SECURITIES
Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on
S-9
its BANs is primarily dependent on the issuer's access to the long-term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments. Repayment is
generally to be derived from specific future tax revenues. TANs are usually
general obligations of the issuer. A weakness in an issuer's capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in
delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies,
such as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very
short-term unsecured, negotiable promissory notes issued by states,
municipalities and their agencies. Payment of principal and interest on issues
of municipal paper may be made from various sources, to the extent the funds are
available therefrom. Maturities of municipal paper generally will be shorter
than the maturities of TANs, BANs or RANs. There is a limited secondary market
for issues of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market index.
While the various types of notes described above as a group represent
the major portion of the short-term tax-exempt note market, other types of notes
are available in the marketplace and the Fund may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.
HEDGING STRATEGIES
The Fund may periodically engage in hedging transactions. Hedging is a
term used for various methods of seeking to preserve portfolio capital value by
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in financial futures and index futures as well as related put and
call options on such instruments. Both parties entering into an index or
financial futures contract are required to post an initial deposit of 1% to 5%
of the total contract price. Typically, option holders enter into offsetting
closing transactions to enable settlement in cash rather than take
S-10
delivery of the position in the future of the underlying security. The Fund will
only sell covered futures contracts, which means that the Fund segregates assets
equal to the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in the Fund's
portfolio. In addition, futures and options markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
contracts create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce yield. Net gains, if any, from
hedging and other portfolio transactions will be distributed as taxable
distributions to shareholders. The Fund will not make any investment (whether an
initial premium or deposit or a subsequent deposit) other than as necessary to
close a prior investment if, immediately after such investment, the sum of the
amount of its premiums and deposits would exceed 5% of the Fund's net assets.
The Fund will invest in these instruments only in markets believed by Nuveen
Advisory to be active and sufficiently liquid. The Fund does not intend to use
derivatives to increase leverage or to enhance current income. Successful
implementation of most hedging strategies would generate taxable income. For
further information regarding these investment strategies and risks presented
thereby, see Appendix D to this Statement of Additional Information.
FACTORS PERTAINING TO CALIFORNIA
Factors pertaining to California are set forth in Appendix E.
OTHER INVESTMENT POLICIES AND TECHNIQUES
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (i.e., securities that are
not readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than that which
prevailed when it decided to sell. Illiquid securities will be priced at a fair
value as determined in good faith by the Board of Trustees or its delegate.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment
objectives of the Fund in relation to actual and anticipated movements in
interest rates. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what
Nuveen Advisory believes to be a temporary price disparity between the two
securities. Temporary price disparities between two comparable securities may
result from supply and demand imbalances where, for example, a temporary
oversupply of certain bonds may cause a temporarily low price for such bonds, as
compared with other bonds of like quality and characteristics. The Fund may also
engage to a limited extent in short-term trading consistent with its investment
objectives. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold, but the Fund will not engage in trading solely
to recognize a gain.
S-11
Subject to the foregoing, the Fund will attempt to achieve its
investment objectives by prudent selection of municipal bonds with a view to
holding them for investment. While there can be no assurance thereof, the Fund
anticipates that its annual portfolio turnover rate will generally not exceed
100%. However, the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. Therefore, depending upon
market conditions, the annual portfolio turnover rate of the Fund may exceed
100% in particular years.
OTHER INVESTMENT COMPANIES
The Fund may invest in securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the types in
which the Fund may invest directly. The Fund generally expects to invest in
other investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its common shares or MuniPreferred shares, or during periods
when there is a shortage of attractive, high-yielding municipal bonds available
in the market. As a stockholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Nuveen Advisory will take expenses into account when evaluating the
investment merits of an investment in the investment company relative to
available municipal bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein. As described in the Fund's Prospectus in
the section entitled "Risk Factors," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Commission to maintain in a separate account liquid assets,
consisting of cash, cash equivalents or liquid securities having a market value
at all times of at least equal to the amount of the commitment. Income generated
by any such assets which provide taxable income for federal income tax purposes
is includable in the taxable income of the Fund. The Fund may enter into
contracts to purchase municipal bonds on a forward basis (i.e., where settlement
will occur more than 60 days from the date of the transaction) only to the
extent that the Fund specifically collateralizes such obligations with a
security that is expected to be called or mature within sixty days before or
after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an
element of risk because no interest accrues on the bonds prior to settlement and
at the time of delivery the market value may be less than cost.
MISCELLANEOUS INVESTMENTS
The Fund may invest up to 5% of its net assets in tax-exempt or taxable
fixed-income or equity securities for the purpose of acquiring control of an
issuer whose municipal bonds (a) the Fund already owns and (b) have deteriorated
or are expected shortly to deteriorate significantly in credit quality, provided
Nuveen Advisory determines that such investment should enable the Fund to better
maximize its existing investment in such issuer. Investment in such securities
would result in a portion of your dividend being subject to regular federal and
California income taxes or the alternative minimum tax applicable to
individuals.
S-12
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. Government securities or municipal bonds) agrees to repurchase
the same security at a specified price on a future date agreed upon by the
parties. The agreed-upon repurchase price determines the yield during the Fund's
holding period. Repurchase agreements are considered to be loans collateralized
by the underlying security that is the subject of the repurchase contract.
Income generated from transactions in repurchase agreements will be taxable. See
"Tax Matters" for information relating to the allocation of taxable income
between common shares and MuniPreferred shares, if any. The Fund will only enter
into repurchase agreements with registered securities dealers or domestic banks
that, in the opinion of Nuveen Advisory, present minimal credit risk. The risk
to the Fund is limited to the ability of the issuer to pay the agreed-upon
repurchase price on the delivery date; however, although the value of the
underlying collateral at the time the transaction is entered into always equals
or exceeds the agreed-upon repurchase price, if the value of the collateral
declines there is a risk of loss of both principal and interest. In the event of
default, the collateral may be sold but the Fund might incur a loss if the value
of the collateral declines, and might incur disposition costs or experience
delays in connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will demand additional collateral
from the issuer to increase the value of the collateral to at least that of the
repurchase price, including interest.
ZERO COUPON BONDS
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond
that does not pay interest for its entire life. When held to its maturity, its
return comes from the difference between the purchase price and its maturity
value. The market prices of zero coupon bonds are affected to a greater extent
by changes in prevailing levels of interest rates and thereby tend to be more
volatile in price than securities that pay interest periodically and may be more
speculative than such securities. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the management agreement between Nuveen Advisory
and the Fund, is the responsibility of the Board of Trustees of the Fund. The
number of trustees of the Fund is currently set at seven. None of the trustees
who are not "interested" persons of the Fund has ever been a director or
employee of, or consultant to, Nuveen or its affiliates. The names and business
addresses of the trustees and officers of the Fund, their principal occupations
and other affiliations during the past five years, the number of portfolios each
oversees and other directorships they hold are set forth below.
S-13
POSITIONS AND
OFFICES WITH NUMBER OF
THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, BIRTHDATE FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
--------------- ------------- ----------------------------- -------------
Trustee who is an interested person of the Fund:
Timothy R. Schwertfeger* Chairman of the Chairman and Director (since 1996) of The 135
3/28/49 Board and Trustee John Nuveen Company, Nuveen Investments,
333 West Wacker Drive 2002 Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; prior
thereto, Executive Vice President and
Director of The John Nuveen Company and
Nuveen Investments; Director (since 1992)
and Chairman (since 1996) of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Chairman and Director
(since 1997) of Nuveen Asset Management
Inc.; Director (since 1996) of
Institutional Capital Corporation;
Chairman and Director (since 1999) of
Rittenhouse Financial Services Inc.;
Chief Executive Officer (since 1999) of
Nuveen Senior Loan Asset Management Inc.
Trustees who are not interested persons of the Fund:
Robert P. Bremner Trustee Private Investor and Management 117
8/22/40 2002 Consultant.
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown Trustee Retired (August 1989) as Senior Vice 117
7/29/34 2002 President of The Northern Trust Company.
201 Michigan Avenue
Highwood, IL 60040
Anne E. Impellizzeri Trustee Retired, formerly, Executive Director 117
1/26/33 2002 (since 1998) of Manitoga (Center for
3 West 29th Street Russel Wright's Design with Nature);
New York, NY 10001 formerly, President and Executive Officer
of Blanton-Peale Institutes Chief of
Religion and Health (since 1990); prior
thereto, Vice President, Metropolitan
Life Insurance Co.
----------
* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, because he is an officer and director of Nuveen
Advisory.
S-14
POSITIONS AND
OFFICES WITH NUMBER OF
THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, BIRTHDATE FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
--------------- ------------- ----------------------------- -------------
Peter R. Sawers Trustee Adjunct Professor of Business and 117
4/3/33 2002 Economics, University of Dubuque, Iowa;
22 The Landmark formerly (1991-2000) Adjunct Professor,
Northfield, IL 60093 Lake Forest Graduate School of
Management, Lake Forest, Illinois; prior
thereto, Executive Director, Towers Perrin
Australia, a management consulting firm;
Chartered Financial Analyst; Certified
Management Consultant.
William J. Schneider Trustee Senior Partner and Chief Operating 117
9/24/44 2002 Officer, Miller-Valentine Group, Vice
4000 Miller-Valentine Ct. President, Miller-Valentine Realty, a
P. O. Box 744 development and contract company; Chair,
Dayton, OH 45401 Miami Valley Hospital; Chair, Miami
Valley Economic Development Coalition;
formerly, Member, Community Advisory
Board, National City Bank, Dayton, Ohio
and Business Advisory Council, Cleveland
Federal Reserve Bank.
Judith M. Stockdale Trustee Executive Director, Gaylord and Dorothy 117
12/29/47 2002 Donnelley Foundation (since 1994); prior
35 E. Wacker Drive thereto, Executive Director, Great Lakes
Suite 2600 Protection Fund (from 1990 to 1994).
Chicago, IL 60601
S-15
POSITIONS AND
OFFICES WITH NUMBER OF
THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, BIRTHDATE FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
--------------- ------------- ----------------------------- -------------
Officers of the Fund:
Gifford R. Zimmerman Chief Managing Director (since 2002), Assistant 135
9/9/56 Administrative Secretary and Associate General Counsel,
333 W. Wacker Drive Officer formerly, Vice President and Assistant
Chicago, IL 60606 2002 General Counsel of Nuveen Investments;
Managing Director (since 2002), General
Counsel and Assistant Secretary,
formerly, Vice President of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Managing Director (since 2002),
Assistant Secretary, formerly, Vice President
(since 1999) of Nuveen Senior Loan Asset
Management Inc.; Managing Director (since
2002), Assistant Secretary and Associate
General Counsel, formerly, Vice President
(since 2000), of Nuveen Asset Management
Inc.; Vice President and Assistant Secretary
of The John Nuveen Company (since 1994);
Chartered Financial Analyst.
Michael T. Atkinson Vice President and Vice President (since January 2002), 135
2/3/66 Assistant Secretary formerly, Assistant Vice President (since
333 W. Wacker Drive 2002 2000), previously, Associate of Nuveen
Chicago, IL 60606 Investments.
Paul L. Brennan Vice President Vice President (since January 2002), 130
11/10/66 2002 formerly, Assistant Vice President (since
333 W. Wacker Drive 1997), of Nuveen Advisory Corp.; prior
Chicago, IL 60606 thereto, portfolio manager of Flagship
Financial Inc.; Chartered Financial
Analyst and Certified Public Accountant.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments 135
11/28/67 Treasurer (since 1999), prior thereto, Assistant
333 W. Wacker Drive 2002 Vice President (from 1997); Vice
Chicago, IL 60606 President and Treasurer (since 1999) of
Nuveen Senior Loan Asset Management Inc.;
Chartered Financial Analyst.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. 135
9/8/54 2002 (since 2001); previously, Vice President
333 W. Wacker Drive of Van Kampen Investment Advisory Corp.
Chicago, IL 60606 (since 1998); prior thereto, Assistant
Vice President of Van Kampen Investment
Advisory Corp. (since 1994).
S-16
POSITIONS AND
OFFICES WITH NUMBER OF
THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, BIRTHDATE FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
--------------- ------------- ----------------------------- -------------
Jessica R. Droeger Vice President and Vice President (since January 2002) and 135
9/24/64 Secretary Assistant General Counsel (since 1998);
333 W. Wacker Drive 2002 formerly, Assistant Vice President (since
Chicago, IL 60606 1998) of Nuveen Investments; Vice
President (since May 2002), formerly
Assistant Vice President and Assistant
Secretary (since 1998) of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; prior thereto, Associate at the
law firm D'Ancona Partners LLC.
Lorna C. Ferguson Vice President Vice President of Nuveen Investments; 135
10/24/45 2002 Vice President (since 1998) of Nuveen
333 W. Wacker Drive Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.
William M. Fitzgerald Vice President Managing Director (since 2002) of Nuveen 135
3/2/64 2002 Investments; Managing Director (since
333 W. Wacker Drive 2001), formerly Vice President of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional
Advisory Corp. (since 1995); Chartered
Financial Analyst.
Stephen D. Foy Vice President and Vice President of Nuveen Investments and 135
5/31/54 Controller The John Nuveen Company; Vice President
333 W. Wacker Drive 2002 (since 1999) of Nuveen Senior Loan
Chicago, IL 60606 Management Inc.; Certified Public
Accountant.
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; 130
7/5/55 2002 Chartered Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
Richard A. Huber Vice President Vice President of Nuveen Institutional 130
3/26/63 2002 Advisory Corp. (since 1998) and Nuveen
333 W. Wacker Drive Advisory Corp. (since 1997); prior
Chicago, IL 60606 thereto, Vice President and Portfolio
Manager of Flagship Financial, Inc.
Steven J. Krupa Vice President Vice President of Nuveen Advisory Corp. 130
8/21/57 2002
333 W. Wacker Drive
Chicago, IL 60606
David J. Lamb Vice President Vice President (since 2000) of Nuveen 135
3/22/63 2002 Investments, previously Assistant Vice
333 W. Wacker Drive President (since 1999); prior thereto,
Chicago, IL 60606 Associate of Nuveen Investments;
Certified Public Accountant.
S-17
POSITIONS AND
OFFICES WITH NUMBER OF
THE PORTFOLIOS IN
FUND AND YEAR PRINCIPAL OCCUPATIONS FUND COMPLEX
NAME, BIRTHDATE FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS OR APPOINTED DURING PAST FIVE YEARS TRUSTEE
--------------- ------------- ----------------------------- -------------
Tina M. Lazar Vice President Vice President (since 1999), previously, 135
8/27/61 2002 Assistant Vice President (since 1993) of
333 W. Wacker Drive Nuveen Investments.
Chicago, IL 60606
Larry W. Martin Vice President and Vice President, Assistant Secretary and 135
7/27/51 Assistant Secretary Assistant General Counsel of Nuveen
333 W. Wacker Drive 2002 Investments; Vice President and Assistant
Chicago, IL 60606 Secretary of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.;
Assistant Secretary of The John Nuveen
Company and (since 1997) Nuveen Asset
Management Inc.; Vice President and
Assistant Secretary (since 1999) of
Nuveen Senior Loan Asset Management Inc.
Edward F. Neild, IV Vice President Managing Director (since 2002) of Nuveen 135
7/7/65 2002 Investments; Managing Director (since
333 W. Wacker Drive 1997), formerly Vice President (since
Chicago, IL 60606 1996) of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Chartered
Financial Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), 130
9/4/60 2002 formerly, Assistant Vice President (since
333 W. Wacker Drive 1998), of Nuveen Advisory Corp.; prior
Chicago, IL 60606 thereto, portfolio manager.
Thomas C. Spalding Vice President Vice President of Nuveen Advisory Corp. 130
7/31/51 2002 and Nuveen Institutional Advisory Corp.;
333 W. Wacker Drive Chartered Financial Analyst.
Chicago, IL 60606
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the valuation committee. Because the Fund is newly
organized, none of the committees have met during the Fund's last fiscal year.
The executive committee met once prior to the commencement of the Fund's
operations.
Peter R. Sawers and Timothy R. Schwertfeger, Chair, serve as members of
the executive committee of the Board of Trustees of the Fund. The executive
committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are William J. Schneider, Chair, Robert P.
Bremner, Lawrence H. Brown, Anne E. Impellizzeri, Peter R. Sawers and Judith M.
Stockdale.
S-18
The nominating and governance committee is responsible for Board
selection and tenure; selection and review of committees; and Board education
and operations. In addition, the committee monitors performance of legal counsel
and other service providers; periodically reviews and makes recommendations
about any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities -- including retaining special
counsel and other experts or consultants at the expense of the Fund. In the
event of a vacancy on the Board, the nominating and governance committee
receives suggestions from various sources as to suitable candidates, including
from shareholders of the Fund. Suggestions should be sent in writing to Lorna
Ferguson, Vice President for Board Relations, Nuveen Investments, 333 West
Wacker Drive, Chicago, IL 60606. The nominating and governance committee sets
appropriate standards and requirements for nominations for new trustees and
reserves the right to interview all candidates and to make the final selection
of any new trustees. The members of the nominating and governance committee are
Anne E. Impellizzeri, Chair, Robert P. Bremner, Lawrence H. Brown, Peter R.
Sawers, William J. Schneider and Judith M. Stockdale.
The dividend committee is authorized to declare distributions on the
Fund's shares including, but not limited to regular and special dividends,
capital gains and ordinary income distributions. The members of the dividend
committee are Timothy R. Schwertfeger, Chair, and Lawrence H. Brown.
The valuation committee oversees the Fund's Pricing Procedures
including, but not limited to, the review and approval of fair value pricing
determinations made by Nuveen's Valuation Group. The members of the valuation
committee are Judith M. Stockdale and Lawrence H. Brown.
The trustees of the Fund are also directors or trustees, as the case
may be, of 30 Nuveen open-end funds and 87 Nuveen closed-end funds advised by
Nuveen Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may
be, of 18 Nuveen open-end and closed-end funds advised by Nuveen Institutional
Advisory Corp. None of the independent trustees, nor any of their immediate
family members, has ever been a director, officer, or employee of, or a
consultant to, Nuveen Advisory, Nuveen or their affiliates.
The holders of common shares of the Fund will elect trustees at the
next annual meeting of common shareholders, unless any MuniPreferred shares are
outstanding at that time, in which event holders of MuniPreferred shares, voting
as a separate class, will elect two trustees and the remaining trustees shall be
elected by common shareholders and holders of MuniPreferred shares, voting
together as a single class. Holders of MuniPreferred shares will be entitled to
elect a majority of the Fund's trustees under certain circumstances.
See "Description of Shares-- MuniPreferred shares-- Voting Rights."
S-19
The following table sets forth the dollar range of equity securities
beneficially owned by each trustee as of December 31, 2001:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
DOLLAR RANGE OF REGISTERED INVESTMENT
EQUITY COMPANIES OVERSEEN BY
SECURITIES TRUSTEE IN FAMILY OF
NAME OF TRUSTEE IN THE FUND INVESTMENT COMPANIES
--------------- --------------- -------------------------
Robert P. Bremner................... $0 over $100,000
Lawrence H. Brown................... $0 over $100,000
Anne E. Impellizzeri................ $0 over $100,000
Peter R. Sawers..................... $0 over $100,000
William J. Schneider................ $0 over $100,000
Timothy R. Schwertfeger............. $0 over $100,000
Judith M. Stockdale................. $0 over $100,000
No trustee who is not an interested person of the Fund owns
beneficially or of record, any security of Nuveen Advisory, Nuveen or any person
(other than a registered investment company) directly or indirectly controlling,
controlled by or under common control with Nuveen Advisory or Nuveen.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Fund
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
ESTIMATED AGGREGATE TOTAL COMPENSATION AMOUNT OF TOTAL
COMPENSATION FROM FROM FUND AND COMPENSATION THAT
NAME OF TRUSTEE THE FUND* FUND COMPLEX** HAS BEEN DEFERRED
--------------- ------------------- ------------------ -----------------
Robert P. Bremner.................... $74 $72,500 $ 8,280
Lawrence H. Brown.................... 76 78,500 0
Anne E. Impellizzeri................. 74 72,500 55,200
Peter R. Sawers...................... 74 73,000 54,788
William J. Schneider................. 74 72,500 55,200
Judith M. Stockdale.................. 74 72,500 13,800
----------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of the Fund's
first full fiscal year for services to the Fund.
** Based on the compensation paid to the trustees for the one year period
ending 12/31/01 for services to the open-end and closed-end funds
advised by Nuveen Advisory.
S-20
The Fund has no employees. Its officers are compensated by Nuveen
Advisory or an affiliate, or The John Nuveen Company.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to the Fund, with
responsibility for the overall management of the Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing the Fund's business affairs and providing day-to-day administrative
services to the Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in the
Fund's Prospectus.
Nuveen Advisory is a wholly owned subsidiary of The John Nuveen
Company. Founded in 1898, The John Nuveen Company brings over a century of
expertise to the municipal bond market. According to data from Thomson Wealth
Management, Nuveen is the leading sponsor of exchange-traded municipal bond
funds as measured by number of funds (92) and fund assets under management ($33
billion) as of September 30, 2002. Overall, The John Nuveen Company and its
affiliates had over $83 billion in assets under management or surveillance as of
August 31, 2002. The John Nuveen Company is approximately 77% owned by The St.
Paul Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded company located
in St. Paul, Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.
Nuveen Investments, a unit of the John Nuveen Company, provides
investment management services for advisors, serving high-net-worth clients and
institutional clients. The company today markets its capabilities--which include
tax-free investing, separately managed accounts and market neutral alternative
investment portfolios--under four distinct brands: Nuveen, NWQ, Rittenhouse and
Symphony. The John Nuveen Company and its affiliates have over $76 billion of
assets under management as of September 30, 2002. The John Nuveen Company, an
affiliate of The St. Paul Companies (NYSE: SPC), is listed on The New York Stock
Exchange and trades under the symbol "JNC."
Pursuant to an investment management agreement between Nuveen Advisory
and the Fund, the Fund has agreed to pay for the services and facilities
provided by Nuveen Advisory an annual management fee, payable on a monthly
basis, according to the following schedule:
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
---------------------------- --------------
Up to $125 million............................. .6500%
$125 million to $250 million................... .6375
$250 million to $500 million................... .6250
$500 million to $1 billion..................... .6125
$1 billion to $2 billion....................... .6000
$2 billion and over............................ .5750
In addition to the fee of Nuveen Advisory, the Fund pays all other
costs and expenses of its operations, including compensation of its trustees
(other than those affiliated with Nuveen Advisory), custodian, transfer agency
and dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing MuniPreferred shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies and taxes, if any. All
fees and expenses are accrued daily and deducted before payment of dividends to
investors.
S-21
For the first eight full years of the Fund's operation, Nuveen Advisory
has contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
(AS A PERCENTAGE (AS A PERCENTAGE
YEAR ENDING OF YEAR ENDING OF
NOVEMBER 30, MANAGED ASSETS) NOVEMBER 30, MANAGED ASSETS)
------------ ---------------- ------------ ----------------
2002(1) .32% 2008 .24%
2003 .32 2009 .16
2004 .32 2010 .08
2005 .32
2006 .32
2007 .32
----------
(1) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the common shareholders. Nuveen Advisory has not agreed
to reimburse the Fund for any portion of its fees and expenses beyond November
30, 2010.
Unless earlier terminated as described below, the Fund's investment
management agreement with Nuveen Advisory (the "management agreement") will
remain in effect until , 2003. The management agreement continues in effect from
year to year so long as such continuation is approved at least annually by (1)
the Board of Trustees or the vote of a majority of the outstanding voting
securities of the Fund, and (2) a majority of the trustees who are not
interested persons of any party to the investment management agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
investment management agreement may be terminated at any time, without penalty,
by either the Fund or Nuveen Advisory upon 60 days written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
The management agreement has been approved by a majority of the
independent trustees of the Fund and the sole shareholder of the Fund. The
independent trustees have determined that the terms of the Fund's management
agreement are fair and reasonable and that the agreement is in the Fund's best
interests. The independent trustees believe that the management agreement will
enable the Fund to obtain high quality investment management services at a cost
that they deem appropriate, reasonable, and in the best interests of the Fund
and its shareholders. In making such determination, the independent trustees met
independently from the interested trustee of the Fund and any officers of Nuveen
Advisory and its affiliates. The independent trustees also relied upon the
assistance of counsel to the independent trustees.
In evaluating the investment management agreement, the independent
trustees reviewed materials furnished by Nuveen Advisory at the annual advisory
contract renewal meeting held in April, 2002, including information regarding
Nuveen Advisory, its affiliates and its personnel, operations and financial
condition. The independent trustees also reviewed, among other things, the
nature and quality of services to be provided by Nuveen Advisory, the proposed
fees to be charged by Nuveen Advisory for investment management services, the
profitability to Nuveen Advisory of its relationships with the Fund, fall-out
benefits to Nuveen Advisory from that relationship, economies of scale achieved
by Nuveen Advisory, the experience of the investment advisory and other
personnel providing services to the Fund, the historical quality of the services
provided by Nuveen Advisory and comparative fees and expense ratios of
investment companies with similar objectives and strategies managed by other
investment advisers, and other factors that the independent trustees deemed
relevant.
S-22
The independent trustees discussed with representatives of Nuveen
Advisory the Fund's operations and Nuveen Advisory's ability to provide advisory
and other services to the Fund.
The Fund, Nuveen Advisory, Nuveen, Salomon Smith Barney, Inc., and
other related entities have adopted codes of ethics which essentially prohibit
certain of their personnel, including the Nuveen fund portfolio manager, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of a client's, including the Fund's, anticipated or actual
portfolio transactions, and are designed to assure that the interests of
clients, including Fund shareholders, are placed before the interests of
personnel in connection with personal investment transactions. Text-only
versions of the codes of ethics of the Fund, Nuveen Advisory and Nuveen can be
viewed online or downloaded from the EDGAR Database on the SEC's internet web
site at www.sec.gov. You may also review and copy those documents by visiting
the SEC's Public Reference Room in Washington, DC. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at 202-942-8090.
In addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities
for the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
On occasion, the Fund may clear portfolio transactions through Nuveen. It is the
policy of Nuveen Advisory to seek the best execution under the circumstances of
each trade. Nuveen Advisory evaluates price as the primary consideration, with
the financial condition, reputation and responsiveness of the dealer considered
secondary in determining best execution. Given the best execution obtainable, it
will be Nuveen Advisory's practice to select dealers which, in addition, furnish
research information (primarily credit analyses of issuers and general economic
reports) and statistical and other services to Nuveen Advisory. It is not
possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to Nuveen
Advisory's own research efforts, the receipt of research information is not
expected to reduce significantly Nuveen Advisory's expenses. While Nuveen
Advisory will be primarily responsible for the placement of the business of the
Fund, the policies and practices of Nuveen Advisory in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
S-23
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular session trading (normally 4:00 p.m. eastern time) on each day the New
York Stock Exchange is open for business. Net asset value is calculated by
taking the fair value of the Fund's total assets, including interest or
dividends accrued but not yet collected, less all liabilities, and dividing by
the total number of shares outstanding. The result, rounded to the nearest cent,
is the net asset value per share.
In determining net asset value, expenses are accrued and applied daily
and securities and other assets for which market quotations are available are
valued at market value. The prices of municipal bonds are provided by a pricing
service and based on the mean between the bid and asked price. When price quotes
are not readily available (which is usually the case for municipal bonds), the
pricing service establishes a fair market value based on prices of comparable
municipal bonds. All valuations are subject to review by the Fund's Board of
Trustees or its delegate, Nuveen Advisory.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR MUNIPREFERRED
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred. See "Broker-Dealers"
below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members (as defined below) with respect
to shares of each series of MuniPreferred. One certificate for all of the shares
of each series of MuniPreferred will be registered in the name of Cede, as
nominee of the Securities Depository. Such certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of shares of MuniPreferred contained in the Statement. The Fund will
also issue stop-transfer instructions to the transfer agent for shares of each
series of MuniPreferred. Prior to the commencement of the right of holders of
preferred shares to elect a majority of the Fund's trustees, as described under
"Description of MuniPreferred Shares -- Voting Rights" in the Prospectus, Cede
will be the holder of record of all shares of each series of MuniPreferred and
owners of such shares will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of MuniPreferred, whether for its own
account or as a nominee for another person.
S-24
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of MuniPreferred, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of MuniPreferred" in
the prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of MuniPreferred will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
S-25
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or to convert the Fund
to open-end status. Specifically, the Declaration requires a vote by holders of
at least two-thirds of the common shares and MuniPreferred shares, voting
together as a single class, except as described below, to authorize (1) a
conversion of the Fund from a closed-end to an open-end investment company, (2)
a merger or consolidation of the Fund, or a series or class of the Fund, with
any corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund or
(5) removal of trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's common shares and
MuniPreferred shares outstanding at the time, voting together as a single class,
is required, provided, however, that where only a particular class or series is
affected (or, in the case of removing a trustee, when the trustee has been
elected by only one class), the required vote only by the applicable class or
series will be required. Approval of shareholders is not required, however, for
any transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. None of the foregoing provisions may be amended
except by the vote of at least two-thirds of the common shares and MuniPreferred
shares, voting together as a single class. In the case of the conversion of the
Fund to an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred shares outstanding at the time, voting as a separate class, or, if
such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the
By-laws, the affirmative vote of the holders of at least a majority of the
Fund's MuniPreferred shares outstanding at the time, voting as a separate class.
The votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of MuniPreferred shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
Reference should be made to the Declaration on file with the Securities
and Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a
S-26
trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of common shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount.
Notwithstanding the foregoing, at any time when the Fund's
MuniPreferred shares are outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its common shares unless (1) all accrued MuniPreferred
shares dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the net asset value of the Fund's portfolio (determined after
deducting the acquisition price of the common shares) is at least 200% of the
liquidation value of the outstanding MuniPreferred shares (expected to equal the
original purchase price per share plus any accrued and unpaid dividends
thereon). The staff of the Securities and Exchange Commission currently requires
that any tender offer made by a closed-end investment company for its shares
must be at a price equal to the net asset value of such shares on the close of
business on the last day of the tender offer. Any service fees incurred in
connection with any tender offer made by the Fund will be borne by the Fund and
will not reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of common shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
common shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Fund a taxable entity, causing the
Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the American Stock Exchange, (c) declaration of a
banking moratorium by federal or state authorities or any suspension of payment
by United States or state banks in which the
S-27
Fund invests, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (e) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board of Trustees of
the Fund may in the future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's common shares and MuniPreferred
shares outstanding at the time, voting together as a single class, and of the
holders of at least two-thirds of the Fund's MuniPreferred shares outstanding at
the time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all MuniPreferred shares then outstanding, and the Fund's
common shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of the
Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its common shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its common shares at a time
when MuniPreferred shares are outstanding will increase the leverage applicable
to the outstanding common shares then remaining.
Before deciding whether to take any action if the Fund's common shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
TAX MATTERS
The following is intended to be a general summary of certain U.S.
federal income tax consequences of investing in shares of MuniPreferred. It is
not intended to be a complete discussion of all such federal
S-28
income tax consequences nor does it purport to deal with all categories of
investors. Investors are advised to consult with their own tax advisors before
investing in the Fund.
FEDERAL INCOME TAX MATTERS
The Fund intends to elect to be treated, and to qualify each year,
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
and to satisfy conditions which enable dividends on common shares or shares of
MuniPreferred which are attributable to interest on municipal obligations to be
exempt from federal income tax in the hands of owners of such stock, subject to
the possible application of the federal alternative minimum tax.
To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to its
shareholders each year at least 90% of the sum of (i) its investment company
taxable income (as that term is defined in the Code, determined without regard
to the deduction for dividends paid) and (ii) its net tax-exempt income (the
excess of its gross tax-exempt interest income over certain disallowed
deductions) and (b) diversify its holdings so that, at the end of each quarter
of the Fund's taxable year (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. government securities,
securities of other regulated investment companies, and other securities, with
these other securities limited, with respect to any one issuer, to an amount not
greater in value than 5% of the Fund's total assets, and to not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the market value of the Fund's assets is invested in the securities of any one
issuer (other than U.S. government securities or securities of other regulated
investment companies) or two or more issuers controlled by the Fund and engaged
in the same, similar or related trades or businesses. In meeting these
requirements, the Fund may be restricted in the utilization of certain of the
investment techniques described under "Investment Policies and Techniques" and
"Other Investment Policies and Techniques" above.
If, in any year, the Fund fails to qualify as a regulated investment
company, the Fund would incur a regular federal corporate income tax upon its
taxable income for that year, and distributions to its shareholders would be
taxable to such holders as ordinary income to the extent of the earnings and
profits of the Fund. A regulated investment company that fails to distribute, by
the close of each calendar year, an amount equal to the sum of 98% of its
ordinary taxable income for such year and 98% of its capital gain net income for
the one-year period ending October 31 in such year, plus any shortfalls from the
prior years' required distribution, is liable for a nondeductible 4% excise tax
on the excess of the required distribution for such calendar year over the
distributed amount for such calendar year. To avoid the imposition of this
excise tax, the Fund generally intends to make the required distributions of its
ordinary taxable income, if any, and its capital gain net income, to the extent
possible, by the close of each calendar year.
The Fund intends to qualify to pay "exempt-interest" dividends, as
defined in the Code, on its common shares and shares of MuniPreferred by
satisfying the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consist of tax-exempt
municipal bonds. Exempt-interest dividends are dividends or any part thereof
(other than a capital gain dividend) paid by the Fund which are attributable to
interest on municipal bonds and are so designated by the Fund. Exempt-interest
dividends will be exempt from federal income tax, subject to the possible
application of the federal alternative minimum tax. Insurance proceeds received
by the Fund under any insurance policies in respect of scheduled interest
payments on defaulted municipal bonds, as described herein, will generally be
excludable from federal gross income under Section 103(a) of the Code. In the
case of non-appropriation by a political subdivision, however, there can be no
assurance that payments made by the issuer representing interest on such
"non-appropriation" municipal lease obligations will be excludable from gross
income for federal income tax purposes. See "Investment Policies and Techniques"
above.
S-29
Gains of the Fund that are attributable to market discount on certain municipal
obligations are treated as ordinary income to the extent of accrued market
discount on the bond. Distributions to shareholders of net income received by
the Fund from taxable temporary investments, if any, and of net short-term
capital gains realized by the Fund, if any, will be taxable to its shareholders
as ordinary income. Distributions by the Fund of net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss), if any,
are taxable as long-term capital gain, regardless of the length of time the
shareholder has owned common shares or shares of MuniPreferred of the Fund. The
amount of taxable income allocable to the Fund's shares of MuniPreferred will
depend upon the amount of such income realized by the Fund, but is not generally
expected to be significant. Except for dividends paid on shares of MuniPreferred
which include an allocable portion of any net capital gain or other taxable
income, the Fund anticipates that all other dividends paid on shares of its
MuniPreferred will constitute exempt-interest dividends for federal income tax
purposes. Distributions, if any, in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a shareholder's shares and, after
that basis has been reduced to zero, will constitute capital gain to the
shareholder (assuming the shares are held as a capital asset). As long as the
Fund qualifies as a regulated investment company under the Code, no part of its
distributions to shareholders will qualify for the dividends-received deduction
available to corporate shareholders.
The Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must designate to each
such class proportionate amounts of each type of its income for each tax year
based upon the percentage of total dividends distributed to each class for such
year. The Fund intends each year to allocate, to the fullest extent practicable,
net tax-exempt interest, net capital gain and other taxable income, if any,
between its common shares and shares of MuniPreferred in proportion to the total
dividends paid to each class with respect to such year. To the extent permitted
under applicable law, the Fund reserves the right to make special allocations of
income within a class, consistent with the objectives of the Fund. The Fund
will, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate
Period Days or fewer, and may, in the case of any other Special Rate Period,
notify the Auction Agent of the amount of any net capital gain or other income
taxable for regular federal income tax purposes to be included in any dividend
on shares of its MuniPreferred prior to the Auction establishing the Applicable
Rate for such dividend. If (a) in the case of any Minimum Rate Period or any
Special Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net
capital gain or other income taxable for regular federal income tax purposes to
a dividend paid on shares of MuniPreferred without having given advance notice
thereof to the Auction Agent as required by the Statement solely by reason of
the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of its MuniPreferred or
the liquidation of the Fund or (b) in the case of any Special Rate Period of
more than 28 Rate Period Days, the Fund allocates any net capital gain or other
taxable income for regular federal income tax purposes to shares of its
MuniPreferred without having given advance notice thereof as described above,
the Fund will make certain payments to owners of shares of its MuniPreferred to
which such allocation was made to offset the federal income tax effect thereof
as described under "Description of MuniPreferred shares -- Dividends and
Dividend Periods -- Gross-up Payments" in the prospectus.
In order for any distributions to owners of the shares of MuniPreferred
to be eligible to be treated as exempt-interest dividends, such shares of
MuniPreferred must be treated as stock for federal income tax purposes. Nuveen
Advisory believes the shares of MuniPreferred should be treated as stock for
federal income tax purposes.
If at any time when the Fund's shares of MuniPreferred are outstanding
the Fund fails to meet the MuniPreferred Basic Maintenance Amount or the 1940
Act MuniPreferred Asset Coverage, the Fund will be required to suspend
distributions to holders of its common shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
MuniPreferred shares -- Dividends and Dividend Periods -- Restrictions on
Dividends and Other Distributions" in the prospectus. This may
S-30
prevent the Fund from distributing at least 90% of the sum of its investment
company taxable income (as that term is defined in the Code, determined without
regard to the deduction for dividends paid) and its net tax-exempt income, and
may therefore jeopardize the Fund's qualification for taxation as a regulated
investment company or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on the undistributed taxable income (including
gain), or both. Upon failure to meet the MuniPreferred Basic Maintenance Amount
or the 1940 Act MuniPreferred Asset Coverage, the Fund will be required to
redeem its shares of MuniPreferred in order to maintain or restore such
maintenance amount or asset coverage and avoid the adverse consequences to the
Fund and its shareholders of failing to qualify as a regulated investment
company. There can be no assurance, however, that any such redemption would
achieve such objectives.
The Code provides that interest on indebtedness incurred or continued
to purchase or carry the Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.
The interest on private activity bonds in most instances is not
federally tax-exempt to a person who is a "substantial user" of a facility
financed by such bonds or a "related person" of such "substantial user." As a
result, the Fund may not be an appropriate investment for a shareholder who is
considered either a "substantial user" or a "related person" within the meaning
of the Code. In general, a "substantial user" of a facility includes a
"nonexempt person who regularly uses a part of such facility in his trade or
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and certain members of their families), an S corporation and each of its
shareholders (and certain members of their families) and various combinations of
these and other relationships. The foregoing is not a complete description of
all of the provisions of the Code covering the definitions of "substantial user"
and "related person."
The Fund may, at its option, redeem shares of its MuniPreferred in
whole or in part, and is required to redeem shares of its MuniPreferred to the
extent required to maintain the MuniPreferred Basic Maintenance Amount and the
1940 Act MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a
redemption of the shares of MuniPreferred will be taxed as gain or loss from the
sale or exchange of the shares of MuniPreferred under Section 302 of the Code
rather than as a dividend, but only if the redemption distribution (a) is deemed
not to be essentially equivalent to a dividend, (b) is in complete redemption of
an owner's interest in the Fund, (c) is substantially disproportionate with
respect to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
ownership of common shares will be taken into account. In determining whether
the above conditions are satisfied, shares owned by certain persons related to
the owner will be treated as held by such owner.
Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S. federal
income tax withholding at the rate of 30% (or possibly a lower rate provided by
an applicable tax treaty) on distributions of taxable net investment income and
net short-term capital gain. To the extent received by foreign investors,
exempt-interest dividends, distributions of net long-term capital gain and gain
from the sale or other disposition of the shares of MuniPreferred generally are
exempt from U.S. federal income taxation. Different tax consequences may result
if the owner is engaged in a trade or business in the United States or, in the
case of an individual, is
S-31
present in the United States for more than 182 days during a taxable year and
certain other conditions are met.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year declared.
Certain of the Fund's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Fund, affect the holding period of securities held
by the Fund, and alter the character of the gains or losses realized by the
Fund. These provisions may also require the Fund to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary
to satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
The sale or other disposition of common shares or shares of
MuniPreferred of the Fund (other than redemptions, the rules for which are
described above) will normally result in capital gain or loss to shareholders
who hold their shares as capital assets. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, long-term capital gains are
generally subject to reduced rates of taxation. Losses realized by a shareholder
on the sale or exchange of shares of the Fund held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of
long-term capital gain received (or designated amounts of undistributed capital
gain that are treated as received) with respect to such shares. Under certain
circumstances, a shareholder's holding period may have to restart after, or may
be suspended for, any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any loss
realized on a sale or exchange of shares of the Fund will be disallowed to the
extent those shares of the Fund are replaced by other substantially identical
shares of the Fund within a period of 61 days beginning 30 days before and
ending 30 days after the date of disposition of the original shares. In that
event, the basis of the replacement shares of the Fund will be adjusted to
reflect the disallowed loss.
Federal tax law imposes an alternative minimum tax with respect to
corporations, individuals, trusts and estates. Interest on certain municipal
obligations, such as bonds issued to make loans for housing purposes or to
private entities (but not to certain tax-exempt organizations such as
universities and non-profit hospitals) is included as an item of tax preference
in determining the amount of an individual taxpayer's alternative minimum
taxable income. However, interest received on "qualified 501(c)(3) bonds" (as
such term is defined in the Code) is not generally included as an item of tax
preference in determining an individual taxpayer's alternative minimum taxable
income. To the extent that the Fund receives income from municipal obligations
subject to the federal alternative minimum tax, a portion of the dividends paid
by the Fund, although otherwise exempt from federal income tax, will be taxable
to its shareholders to the extent that their tax liability is determined under
the alternative minimum tax. The Fund will annually supply a report indicating
the percentage of the Fund's income attributable to municipal obligations
subject to the federal alternative minimum tax. In addition, for certain
corporations, alternative minimum taxable income is increased by 75% of the
difference between an alternative measure of income ("adjusted current
earnings") and the amount otherwise determined to be the alternative minimum
taxable income. Interest on all municipal obligations, and therefore all
distributions by the Fund that would otherwise be tax-exempt, is included in
calculating a corporation's adjusted current earnings. Certain small
corporations are not subject to the alternative minimum tax.
S-32
Tax-exempt income, including exempt-interest dividends paid by the
Fund, is taken into account in calculating the amount of social security and
railroad retirement benefits that may be subject to federal income tax.
The Fund is required in certain circumstances to withhold a portion of
taxable dividends and certain other payments paid to certain holders of the
Fund's shares who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited against such shareholder's
U.S. federal income tax liability, provided the required information is
furnished to the IRS.
The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of tax-exempt
interest received during the taxable year, including any exempt-interest
dividends received from the Fund.
The value of common shares acquired pursuant to the Fund's Dividend
Reinvestment Plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income.
The foregoing is a general summary of certain provisions of the Code
and regulations thereunder presently in effect as they directly govern the
federal income taxation of the Fund and its shareholders. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive. Moreover, the foregoing does not address many of the factors
that may be determinative of whether an investor will be liable for the
alternative minimum tax. Shareholders are advised to consult their own tax
advisors for more detailed information concerning the federal income tax
consequences of purchasing, holding and disposing of Fund shares.
STATE TAX MATTERS
Tax matters pertaining to California are set forth in Appendix E.
EXPERTS
The Financial Statements of the Fund as of , 2002, appearing
in this Statement of Additional Information have been audited by Ernst & Young
LLP, 233 South Wacker Drive, Chicago, Illinois 60602, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP provides accounting and auditing
services to the Fund.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The custodian performs
custodial, fund accounting and portfolio accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Securities and Exchange Commission (the "Commission"), Washington, D.C.
The Fund's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Fund's Registration Statement. Statements contained in the Fund's Prospectus and
this Statement of Additional Information as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or
S-33
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
S-34
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Nuveen Insured California Tax-Free Advantage Municipal Fund
[TO COME]
F-1
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
Nuveen Insured California Tax-Free Advantage Municipal Fund
Statement of Assets and Liabilities
[TO COME]
F-2
APPENDIX A
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
TABLE OF CONTENTS
PAGE
----
Definitions
"AA" Composite Commercial Paper Rate...........................................................................1
Accountant's Confirmation......................................................................................2
Affiliate......................................................................................................2
Agent Member...................................................................................................2
All Hold Order.................................................................................................2
Anticipation Notes.............................................................................................2
Applicable Rate................................................................................................2
Auction........................................................................................................2
Auction Agency Agreement.......................................................................................2
Auction Agent..................................................................................................2
Auction Date...................................................................................................2
Auction Procedures.............................................................................................2
Available MuniPreferred........................................................................................2
Benchmark Rate.................................................................................................2
Beneficial Owner...............................................................................................3
Bid and Bids...................................................................................................3
Bidder and Bidders.............................................................................................3
Board of Trustees..............................................................................................3
Broker-Dealer..................................................................................................3
Broker-Dealer Agreement........................................................................................3
Business Day...................................................................................................3
Code...........................................................................................................3
Commercial Paper Dealers.......................................................................................3
Common Shares..................................................................................................3
Cure Date......................................................................................................3
Date of Original Issue.........................................................................................3
Declaration....................................................................................................3
Deposit Securities.............................................................................................3
Discounted Value...............................................................................................3
Dividend Payment Date..........................................................................................4
Dividend Period................................................................................................4
Existing Holder................................................................................................4
Failure to Deposit.............................................................................................4
Federal Tax Rate Increase......................................................................................4
Fund...........................................................................................................4
Gross-Up Payment...............................................................................................4
Hold Order and Hold Orders.....................................................................................4
i
Holder.........................................................................................................4
Independent Accountant.........................................................................................5
Initial Rate Period............................................................................................5
Interest Equivalent............................................................................................5
Issue Type Category............................................................................................5
Kenny Index....................................................................................................5
Late Charge....................................................................................................5
Liquidation Preference.........................................................................................5
Market Value...................................................................................................5
Maximum Potential Gross-Up Payment Liability...................................................................5
Maximum Rate...................................................................................................5
Minimum Rate Period............................................................................................6
Moody's........................................................................................................6
Moody's Discount Factor........................................................................................6
Moody's Eligible Asset.........................................................................................6
Moody's Exposure Period........................................................................................6
Moody's Volatility Factor......................................................................................6
Municipal Obligations..........................................................................................7
MuniPreferred..................................................................................................7
MuniPreferred Basic Maintenance Amount.........................................................................7
MuniPreferred Basic Maintenance Cure Date......................................................................8
MuniPreferred Basic Maintenance Report.........................................................................8
1940 Act.......................................................................................................9
1940 Act Cure Date.............................................................................................9
1940 Act MuniPreferred Asset Coverage..........................................................................9
Notice of Redemption...........................................................................................9
Notice of Special Rate Period..................................................................................9
Order and Orders...............................................................................................9
Original Issue Insurance.......................................................................................9
Other Issues...................................................................................................9
Outstanding....................................................................................................9
Permanent Insurance............................................................................................9
Person.........................................................................................................9
Portfolio Insurance............................................................................................9
Potential Beneficial Owner.....................................................................................9
Potential Holder..............................................................................................10
Preferred Shares..............................................................................................10
Quarterly Valuation Date......................................................................................10
Rate Period...................................................................................................10
Rate Period Days..............................................................................................10
Receivables for Municipal Obligations Sold....................................................................10
Redemption Price..............................................................................................10
Reference Rate................................................................................................10
Registration Statement........................................................................................10
S&P...........................................................................................................10
S&P Discount Factor...........................................................................................11
S&P Eligible Asset............................................................................................11
S&P Exposure Period...........................................................................................11
S&P Volatility Factor.........................................................................................11
Secondary Market Insurance....................................................................................11
Securities Depository.........................................................................................11
ii
Sell Order and Sell Orders...................................................................................11
Special Rate Period..........................................................................................11
Special Redemption Provisions................................................................................11
Submission Deadline..........................................................................................11
Submitted Bid and Submitted Bids.............................................................................11
Submitted Hold Order and Submitted Hold Orders...............................................................11
Submitted Order and Submitted Orders.........................................................................11
Submitted Sell Order and Submitted Sell Orders...............................................................11
Subsequent Rate Period.......................................................................................11
Substitute Commercial Paper Dealer...........................................................................12
Substitute U.S. Government Securities Dealer.................................................................12
Sufficient Clearing Bids.....................................................................................12
Taxable Allocation...........................................................................................12
Taxable Equivalent of the Short-Term Municipal Bond Rate.....................................................12
Taxable Income...............................................................................................12
Treasury Bill................................................................................................12
Treasury Bill Rate...........................................................................................12
Treasury Note................................................................................................13
Treasury Note Rate...........................................................................................13
U.S. Government Securities Dealer............................................................................13
Valuation Date...............................................................................................13
Volatility Factor............................................................................................13
Voting Period................................................................................................13
Winning Bid Rate.............................................................................................13
PART I..........................................................................................................14
1. Number Of Authorized Shares...................................................................14
2. Dividends.....................................................................................14
(a) Ranking..............................................................................14
(b) Cumulative Cash Dividends............................................................14
(c) Dividends Cumulative From Date of Original Issue.....................................14
(d) Dividend Payment Dates and Adjustment Thereof........................................14
(e) Dividend Rates and Calculation of Dividends..........................................15
(f) Curing a Failure to Deposit..........................................................17
(g) Dividend Payments by Fund to Auction Agent...........................................17
(h) Auction Agent as Trustee of Dividend Payments by Fund................................17
(i) Dividends Paid to Holders............................................................17
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends.................17
(k) Dividends Designated as Exempt-Interest Dividends....................................17
3. Gross-Up Payments.............................................................................17
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or Fewer........18
(b) Special Rate Periods of More Than 28 Rate Period Days................................18
(c) No Gross-Up Payments in the Event of a Reallocation..................................18
4. Designation of Special Rate Periods...........................................................18
(a) Length of and Preconditions for Special Rate Period..................................18
(b) Adjustment of Length of Special Rate Period..........................................18
(c) Notice of Proposed Special Rate Period...............................................19
(d) Notice of Special Rate Period........................................................19
(e) Failure to Deliver Notice of Special Rate Period.....................................20
5. Voting Rights.................................................................................20
iii
(a) One Vote Per Share of MuniPreferred..................................................20
(b) Voting for Additional Trustees.......................................................20
(c) Holders of MuniPreferred to Vote on Certain Other Matters............................22
(d) Board May Take Certain Actions Without Shareholder Approval..........................23
(e) Voting Rights Set Forth Herein Are Sole Voting Rights................................23
(f) No Preemptive Rights or Cumulative Voting............................................23
(g) Voting For Trustees Sole Remedy For Fund's Failure To Pay Dividends..................24
(h) Holders Entitled To Vote.............................................................24
6. 1940 Act MuniPreferred Asset Coverage.........................................................24
7. MuniPreferred Basic Maintenance Amount........................................................24
8. [Reserved]....................................................................................26
9. Restrictions on Dividends and Other Distributions.............................................26
(a) Dividends on Preferred Shares Other Than MuniPreferred...............................26
(b) Dividends and Other Distributions With Respect to Common Shares Under the 1940
Act..................................................................................26
(c) Other Restrictions on Dividends and Other Distributions..............................26
10. Rating Agency Restrictions....................................................................27
11. Redemption....................................................................................28
(a) Optional Redemption..................................................................28
(b) Mandatory Redemption.................................................................29
(c) Notice of Redemption.................................................................30
(d) No Redemption Under Certain Circumstances............................................30
(e) Absence of Funds Available For Redemption............................................30
(f) Auction Agent as Trustee of Redemption Payments by Fund..............................31
(g) Shares For Which Notice of Redemption Has Been Given Are No Longer Outstanding.......31
(h) Compliance With Applicable Law.......................................................31
(i) Only Whole Shares of MuniPreferred May Be Redeemed...................................31
12. Liquidation Rights............................................................................31
(a) Ranking..............................................................................31
(b) Distributions Upon Liquidation.......................................................31
(c) Pro Rata Distributions...............................................................32
(d) Rights of Junior Shares..............................................................32
(e) Certain Events Not Constituting Liquidation..........................................32
13. Miscellaneous.................................................................................32
(a) Amendment of Appendix A to Add Additional Series.....................................32
(b) Appendix A Incorporated By Reference.................................................32
(c) No Fractional Shares.................................................................32
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise Acquired by
the Fund.............................................................................33
(e) Board May Resolve Ambiguities........................................................33
(f) Headings Not Determinative...........................................................33
(g) Notices..............................................................................33
PART II.........................................................................................................33
1. Orders........................................................................................33
2. Submission of Orders by Broker-Dealers to Auction Agent.......................................35
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate...............37
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares........................................................................................38
5. Notification of Allocations...................................................................40
6. Auction Agent.................................................................................41
7. Transfer of Shares of MuniPreferred...........................................................41
8. Global Certificate............................................................................41
Appendix A.....................................................................................................A-1
Section 1. Designation as to Series.........................................................................A-1
Section 2. Number of Authorized Shares Per Series...........................................................A-1
Section 3. Exceptions to Certain Definitions................................................................A-1
Section 4. Certain Definitions..............................................................................A-1
Section 5. Initial Rate Periods.............................................................................A-6
Section 6. Date For Purposes of Paragraph (zzz) Contained Under the Heading "Definitions" in This
Statement........................................................................................A-6
Section 7. Party Named for Purposes of the Definition of "Rate Multiple" in This Statement..................A-6
Section 8. Additional Definitions...........................................................................A-6
Section 9. Dividend Payment Dates...........................................................................A-6
Section 10. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this Statement..............A-6
Section 11. Redemption Provisions Applicable To Initial Rate Periods.........................................A-6
Section 12. Applicable Rate For Purposes of Subparagraph (B)(III) of Section 3 of Part II of this
Statement........................................................................................A-7
Section 13. Certain Other Restrictions and Requirements......................................................A-7
iv
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND, a
Massachusetts business trust (the "Fund"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees
of the Fund by Article IV of the Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time is, together with this
Statement, herein called the "Declaration"), the Board of Trustees has, by
resolution, authorized the issuance of shares of the Fund's authorized Preferred
Shares liquidation preference $25,000 per share, having such designation or
designations as to series as is set forth in Section 1 of Appendix A hereto and
such number of shares per such series as is set forth in Section 2 of Appendix A
hereto.
Second: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each series of MuniPreferred described in Section 1 of Appendix A hereto are
as follows (each such series being referred to herein as a series of
MuniPreferred, and shares of all such series being referred to herein
individually as a share of MuniPreferred and collectively as shares of
MuniPreferred):
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Appendix A
hereto, as used in Parts I and II of this Statement, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
(a) "AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate
Period of shares of a series of MuniPreferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by S&P or the
equivalent of such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day next preceding such date; or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a
1
discount basis (a "discount rate") for commercial paper of a given days'
maturity shall be equal to the quotient (rounded upwards to the next higher
one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction, the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors, or executive officers of which is a trustee of the
Fund be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Fund.
(d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "ALL HOLD ORDER" shall have the meaning specified in Section 12 of
Appendix A of this Statement.
(f) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs),
Grant Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation
Notes (BANs) that are rated by S&P.
(g) "APPLICABLE RATE" shall have the meaning specified in subparagraph
(e)(i) of Section 2 of Part I of this Statement.
(h) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(i) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of a series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
(j) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part II of
this Statement.
(k) "AUCTION DATE" with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(l) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.
(m) "AVAILABLE MUNIPREFERRED" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(n) "BENCHMARK RATE" shall have the meaning specified in Section 12 of
Appendix A hereto.
2
(o) "BENEFICIAL OWNER" with respect to shares of a series of
MuniPreferred, means a customer of a Broker-Dealer who is listed on the records
of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of
shares of such series.
(p) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement; provided, however,
that neither the Fund nor any affiliate thereof shall be permitted to be a
Bidder in an Auction, except that any Broker-Dealer that is an affiliate of the
Fund may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
(r) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Fund or
any duly authorized committee thereof.
(s) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of this Statement, that is a member of, or a
participant in, the Securities Depository or is an affiliate of such member or
participant, has been selected by the Fund and has entered into a Broker-Dealer
Agreement that remains effective.
(t) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund,
the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of this Statement.
(u) "BUSINESS DAY" shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday, Sunday nor any
other day on which banks in The City of New York, New York, are authorized by
law to close.
(v) "CODE" means the Internal Revenue Code of 1986, as amended.
(w) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer.
(x) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.01 per share, of the Fund.
(y) "CURE DATE" shall mean the MuniPreferred Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.
(a) "DATE OF ORIGINAL ISSUE" with respect to shares of a series of
MuniPreferred, shall mean the date on which the Fund initially issued such
shares.
(aa) "DECLARATION" shall have the meaning specified on the first page
of this Statement.
(bb) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least A-1+ or SP-1+ by S&P, except that, for purposes of subparagraph
(a)(v) of Section 11 of Part I of this Statement, such Municipal Obligations
shall be considered "Deposit Securities" only if they are also rated P-1, MIG-1
or VMIG-1 by Moody's.
(cc) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i) with
respect to an S&P Eligible Asset, the quotient of the Market Value thereof
divided by the applicable S&P Discount Factor
3
and (ii)(a) with respect to a Moody's Eligible Asset that is not currently
callable as of such Valuation Date at the option of the issuer thereof, the
quotient of the Market Value thereof divided by the applicable Moody's Discount
Factor, or (b) with respect to a Moody's Eligible Asset that is currently
callable as of such Valuation Date at the option of the issuer thereof, the
quotient of (1) the lesser of the Market Value or call price thereof, including
any call premium, divided by (2) the applicable Moody's Discount Factor.
(dd) [Reserved]
(ee) [Reserved]
(ff) "DIVIDEND PAYMENT DATE," with respect to shares of a series of
MuniPreferred, shall mean any date on which dividends are payable on shares of
such series pursuant to the provisions of paragraph (d) of Section 2 of Part I
of this Statement.
(gg) "DIVIDEND PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the period from and including the Date of Original
Issue of shares of such series to but excluding the initial Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series.
(hh) "EXISTING HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Fund) that is listed on the records of the Auction Agent as a
holder of shares of such series.
(ii) "FAILURE TO DEPOSIT," with respect to shares of a series of
MuniPreferred, shall mean a failure by the Fund to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the Redemption
Price to be paid on such redemption date for any share of such series after
notice of redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of this Statement; provided, however, that the foregoing clause (B) shall not
apply to the Fund's failure to pay the Redemption Price in respect of shares of
MuniPreferred when the related Notice of Redemption provides that redemption of
such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
(jj) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Moody's Volatility Factor."
(kk) "FUND" shall mean the entity named on the first page of this
Statement, which is the issuer of the shares of MuniPreferred.
(ll) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4
of Appendix A hereto.
(mm) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(nn) "HOLDER," with respect to shares of a series of MuniPreferred,
shall mean the registered holder of such shares as the same appears on the
record books of the Fund.
4
(oo) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
(pp) "INITIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified with respect to shares of such
series in Section 5 of Appendix A hereto.
(qq) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.
(rr) "ISSUE TYPE CATEGORY," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(ss) "KENNY INDEX" shall have the meaning specified in the definition
of "Taxable Equivalent of the Short-Term Municipal Bond Rate."
(tt) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of this Statement.
(uu) "LIQUIDATION PREFERENCE," with respect to a given number of shares
of MuniPreferred, means $25,000 times that number.
(vv) "MARKET VALUE" of any asset of the Fund shall mean the market
value thereof determined by the pricing service designated from time to time by
the Board of Trustees. Market Value of any asset shall include any interest
accrued thereon. The pricing service values portfolio securities at the mean
between the quoted bid and asked price or the yield equivalent when quotations
are readily available. Securities for which quotations are not readily available
are valued at fair value as determined by the pricing service using methods
which include consideration of: yields or prices of municipal bonds of
comparable quality, type of issue, coupon, maturity and rating; indications as
to value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques or a matrix system, or both, to
determine valuations.
(ww) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any
Valuation Date, shall mean the aggregate amount of Gross-up Payments that would
be due if the Fund were to make Taxable Allocations, with respect to any taxable
year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Gross-up Payments are fully taxable.
(xx) "MAXIMUM RATE," for shares of a series of MuniPreferred on any
Auction Date for shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction
Date immediately prior to the first day of any proposed Special Rate
Period designated by the Fund pursuant to Section 4 of Part I of this
Statement, the product of (A) the Reference Rate on such Auction Date
for the next Rate Period of shares of such series and (B) the Rate
Multiple on such Auction Date, unless shares of such series have or had
a Special Rate Period (other than a Special Rate Period of 28 Rate
Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period of shares of
such series after such Special Rate Period, in which case the higher
of:
5
(A) the dividend rate on shares of such series for
the then-ending Rate Period; and
(B) the product of (1) the higher of (x) the
Reference Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate
Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series,
if such Special Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (2)
the Rate Multiple on such Auction Date; or (ii) in the case of
any Auction Date which is the Auction Date immediately prior
to the first day of any proposed Special Rate Period
designated by the Fund pursuant to Section 4 of Part I of this
Statement, the product of (A) the highest of (1) the Reference
Rate on such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of
such series, if such then-ending Rate Period was more than 364
Rate Period Days, (2) the Reference Rate on such Auction Date
for the Special Rate Period for which the Auction is being
held if such Special Rate Period is 364 Rate Period Days or
fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days,
and (3) the Reference Rate on such Auction Date for Minimum
Rate Periods and (B) the Rate Multiple on such Auction Date.
(yy) [Reserved]
(zz) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days.
(aaa) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(bbb) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(ccc) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(ddd) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
(eee) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date,
(i) in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but
6
fewer than 57 Rate Period Days, a multiplicative factor equal to 235%. If, as a
result of the enactment of changes to the Code, the greater of the maximum
marginal Federal individual income tax rate applicable to ordinary income and
the maximum marginal Federal corporate income tax rate applicable to ordinary
income will increase, such increase being rounded up to the next five percentage
points (the "Federal Tax Rate Increase"), until the effective date of such
increase, the Moody's Volatility Factor in the case of any Rate Period described
in (i) above in this definition instead shall be determined by reference to the
following table:
FEDERAL TAX VOLATILITY
RATE INCREASE FACTOR
---------------- ----------
5%.............. 295%
10%............. 317%
15%............. 341%
20%............. 369%
25%............. 400%
30%............. 436%
35%............. 477%
40%............. 525%
(fff) "MUNICIPAL OBLIGATIONS" shall mean debt obligations issued by
states, cities and local authorities, and certain possessions and territories of
the United States, to obtain funds for various public purposes, including the
construction and maintenance of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Obligations may be
issued include the refinancing of outstanding obligations and the obtaining of
funds for general operating expenses and for loans to other public institutions
and facilities. In addition, certain industrial development, private activity
and pollution control bonds may be included within the term Municipal
Obligations if the interest paid thereon qualifies as exempt from regular
Federal income tax. The two principal classifications of Municipal Obligations
are "general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds (e.g., industrial
development bonds) are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Also included within the
general category of Municipal Obligations are participations in lease
obligations or installment purchase contract obligations of municipal
authorities or entities. The Fund will invest its net assets in a diversified
portfolio of municipal bonds that pay interest that is exempt from regular
Federal and California income taxes and the alternative minimum tax applicable
to individuals. Under normal circumstances, the Fund expects to be fully
invested (at least 95% of its assets) in such municipal bonds.
(ggg) "MUNIPREFERRED" shall have the meaning set forth on the first
page of this Statement.
(hhh) "MUNIPREFERRED BASIC MAINTENANCE AMOUNT," as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of shares of MuniPreferred outstanding on such date multiplied by $25,000
(plus the product of the number of shares of any other series of Preferred
Shares outstanding on such date multiplied by the liquidation preference of such
shares), plus any redemption premium applicable to shares of MuniPreferred (or
other Preferred Shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the respective Applicable Rates (whether
or not earned or declared) to (but not including) the first respective Dividend
Payment Dates for shares of MuniPreferred outstanding that follow such Valuation
Date (plus the aggregate amount of dividends, whether or not earned or declared,
that will have accumulated in respect of other outstanding Preferred Shares to,
but not including, the first respective dividend payment dates for such other
shares that follow such Valuation Date); (C) the aggregate amount of dividends
that
7
would accumulate on shares of each series of MuniPreferred outstanding from such
first respective Dividend Payment Date therefor through the 56th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were
the Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing, that if on such
Valuation Date the Fund shall have delivered a Notice of Special Rate Period to
the Auction Agent pursuant to Section 4(d)(i) of this Part I with respect to
shares of such series, such Maximum Rate shall be the higher of (a) the Maximum
Rate for the Special Rate Period of shares of such series to commence on such
Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate Period of
shares of such series to commence on such Dividend Payment Date, multiplied by
the Volatility Factor applicable to a Minimum Rate Period, or, in the event the
Fund shall have delivered a Notice of Special Rate Period to the Auction Agent
pursuant to Section 4(d)(i) of this Part I with respect to shares of such series
designating a Special Rate Period consisting of 56 Rate Period Days or more, the
Volatility Factor applicable to a Special Rate Period of that length (plus the
aggregate amount of dividends that would accumulate at the maximum dividend rate
or rates on any other Preferred Shares outstanding from such respective dividend
payment dates through the 56th day after such Valuation Date, as established by
or pursuant to the respective statements establishing and fixing the rights and
preferences of such other Preferred Shares) (except that (1) if such Valuation
Date occurs at a time when a Failure to Deposit (or, in the case of Preferred
Shares other than MuniPreferred, a failure similar to a Failure to Deposit) has
occurred that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of Preferred Shares other than MuniPreferred, in respect of
which the dividend rate or rates in effect immediately prior to such respective
dividend payment dates will remain in effect), the dividend for purposes of
calculation would accumulate at such Applicable Rate (or other rate or rates, as
the case may be) in respect of those days); (D) the amount of anticipated
expenses of the Fund for the 90 days subsequent to such Valuation Date; (E) the
amount of the Fund's Maximum Potential Gross-up Payment Liability in respect of
shares of MuniPreferred (and similar amounts payable in respect of other
Preferred Shares pursuant to provisions similar to those contained in Section 3
of Part I of this Statement) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any liabilities incurred for
the purpose of clearing securities transactions) less (ii) the value (i.e., for
purposes of current Moody's guidelines, the face value of cash, short-term
Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term securities that
are the direct obligation of the U.S. government, provided in each case that
such securities mature on or prior to the date upon which any of (i)(A) through
(i)(F) become payable, otherwise the Moody's Discounted Value) (i.e., for the
purposes of the current S&P guidelines, the face value of cash, short-term
Municipal Obligations rated SP-1 or A-1 or Municipal Obligations rated A,
provided in each case that such securities mature on or prior to the date upon
which any of (i)(A) through (i)(F) become payable, otherwise the S&P Discounted
Value) of any of the Fund's assets irrevocably deposited by the Fund for the
payment of any of (i)(A) through (i)(F).
(iii) "MUNIPREFERRED BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Fund to satisfy the MuniPreferred Basic Maintenance Amount (as
required by paragraph (a) of Section 7 of Part I of this Statement) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.
(jjj) "MUNIPREFERRED BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer or any Senior Vice President or Vice
President of the Fund which sets forth, as of the related Valuation Date, the
assets of the Fund, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), and the MuniPreferred Basic Maintenance Amount.
8
(kkk) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.
(lll) "1940 ACT CURE DATE," with respect to the failure by the Fund to
maintain the 1940 Act MuniPreferred Asset Coverage (as required by Section 6 of
Part I of this Statement) as of the last Business Day of each month, shall mean
the last Business Day of the following month.
(mmm) "1940 ACT MUNIPREFERRED ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Fund which are shares of
beneficial interest, including all outstanding shares of MuniPreferred (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares or stock of
a closed-end investment company as a condition of declaring dividends on its
common shares or stock).
(nnn) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of shares of MuniPreferred pursuant to paragraph (c) of Section 11 of
Part I of this Statement.
(ooo) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with
respect to a Special Rate Period of shares of MuniPreferred pursuant to
subparagraph (d)(i) of Section 4 of Part I of this Statement.
(ppp) "ORDER" and "ORDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of this Statement.
(qqq) "ORIGINAL ISSUE INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(rrr) "OTHER ISSUES," if defined in Section 4 of Appendix A hereto,
shall have the meaning specified in that section.
(sss) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of MuniPreferred, the number of shares of such series
theretofore issued by the Fund except, without duplication, (i) any shares of
such series theretofore cancelled or delivered to the Auction Agent for
cancellation or redeemed by the Fund, (ii) any shares of such series as to which
the Fund or any Affiliate thereof shall be an Existing Holder and (iii) any
shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Fund.
(ttt) "PERMANENT INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(uuu) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(vvv) "PORTFOLIO INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(www) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series
of MuniPreferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
9
(xxx) "POTENTIAL HOLDER," with respect to shares of a series of
MuniPreferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Fund) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become the
Existing Holder of additional shares of such series.
(yyy) "PREFERRED SHARES" shall mean the preferred shares of the Fund,
and includes the shares of MuniPreferred.
(zzz) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each February, May, August and November of each year, commencing on the date set
forth in Section 6 of Appendix A hereto.
(aaaa) "RATE MULTIPLE" shall have the meaning specified in Section 4 of
Appendix A hereto.
(bbbb) "RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the Initial Rate Period, and any Transitional Rate
Period, of shares of such series and any Subsequent Rate Period, including any
Special Rate Period, of shares of such series.
(cccc) "RATE PERIOD DAYS," for any Rate Period or Dividend Period,
means the number of days that would constitute such Rate Period or Dividend
Period but for the application of paragraph (d) of Section 2 of Part I of this
Statement or paragraph (b) of Section 4 of Part I of this Statement.
(dddd) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A) for
purposes of calculation of Moody's Eligible Assets as of any Valuation Date, no
more than the aggregate of the following: (i) the book value of receivables for
Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date, and if the
trades which generated such receivables are (x) settled through clearing house
firms with respect to which the Fund has received prior written authorization
from Moody's or (y) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations
sold as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculation of S&P Eligible Assets as of any Valuation Date, the
book value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.
(eeee) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.
(ffff) "REFERENCE RATE" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer, (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
(gggg) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(hhhh) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
10
(iiii) "S&P DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(jjjj) "S&P ELIGIBLE ASSET" shall have the meaning specified in Section
4 of Appendix A hereto.
(kkkk) "S&P EXPOSURE PERIOD" shall mean the maximum period of time
following a Valuation Date that the Fund has under this Statement to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the MuniPreferred Basic Maintenance Amount (as
described in paragraph (a) of Section 7 of Part I of this Statement).
(llll) "S&P VOLATILITY FACTOR" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
(mmmm) "SECONDARY MARKET INSURANCE," if defined in Section 4 of
Appendix A hereto, shall have the meaning specified in that section.
(nnnn) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company
and its successors and assigns or any other securities depository selected by
the Fund which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of MuniPreferred.
(oooo) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.
(pppp) "SPECIAL RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall have the meaning specified in paragraph (a) of Section 4 of
Part I of this Statement.
(qqqq) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified
in subparagraph (a)(i) of Section 11 of Part I of this Statement.
(rrrr) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York City time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.
(ssss) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(tttt) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(uuuu) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(vvvv) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have
the respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(wwww) "SUBSEQUENT RATE PERIOD," with respect to shares of a series of
MuniPreferred, shall mean the period from and including the first day following
the Initial Rate Period of shares of such series to but excluding the next
Dividend Payment Date for shares of such series and any period thereafter from
and including one Dividend Payment Date for shares of such series to but
excluding the next succeeding Dividend Payment Date for shares of such series;
provided, however, that if any Subsequent Rate Period
11
is also a Special Rate Period, such term shall mean the period commencing on the
first day of such Special Rate Period and ending on the last day of the last
Dividend Period thereof.
(xxxx) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean The First Boston
Company or Morgan Stanley & Co. Incorporated or their respective affiliates or
successors, if such entity is a commercial paper dealer; provided, however, that
none of such entities shall be a Commercial Paper Dealer.
(yyyy) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean The
First Boston Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.
(zzzz) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(aaaaa) "TAXABLE ALLOCATION" shall have the meaning specified in
Section 3 of Part I of this Statement.
(bbbbb) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE," on
any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Kenny S&P 30 day High
Grade Index or any successor index (the "Kenny Index") (provided, however, that
any such successor index must be approved by Moody's (if Moody's is then rating
the shares of MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred)), made available for the Business Day immediately preceding such
date but in any event not later than 8:30 A.M., New York City time, on such date
by Kenny S&P Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds the interest on which is excludable
for regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny S&P Evaluation Services or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57 (a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
(ccccc) "TAXABLE INCOME" shall have the meaning specified in Section 12
of Appendix A hereto.
(ddddd) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
(eeeee) "TREASURY BILL RATE," on any date for any Rate Period, shall
mean (i) the bond equivalent yield, calculated in accordance with prevailing
industry convention, of the rate on the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
12
quoted in The Wall Street Journal on such date for the Business Day next
preceding such date; or (ii) in the event that any such rate is not published in
The Wall Street Journal, then the bond equivalent yield, calculated in
accordance with prevailing industry convention, as calculated by reference to
the arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of such
Rate Period, as determined by bid price quotations as of the close of business
on the Business Day immediately preceding such date obtained from the U.S.
Government Securities Dealers to the Auction Agent.
(fffff) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days.
(ggggg) "TREASURY NOTE RATE," on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall Street
Journal on such date for the Business Day next preceding such date; or (ii) in
the event that any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the Auction
Agent. If any U.S. Government Securities Dealer does not quote a rate required
to determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government Securities
Dealers selected by the Fund to provide such rate or rates not being supplied by
any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
(hhhhh) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc
and Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer.
(iiiii) "VALUATION DATE" shall mean, for purposes of determining
whether the Fund is maintaining the MuniPreferred Basic Maintenance Amount, each
Business Day.
(jjjjj) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility Factor.
(kkkkk) "VOTING PERIOD" shall have the meaning specified in paragraph
(b) of Section 5 of Part I of this Statement.
(lllll) "WINNING BID RATE" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 8 of
Appendix A hereto shall be incorporated herein and made Part hereof by reference
thereto.
13
PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting a series of MuniPreferred shall be as set forth with respect to
such series in Section 2 of Appendix A hereto.
2. DIVIDENDS.
(a) RANKING. The shares of a series of MuniPreferred shall
rank on a parity with each other, with shares of any other series of
MuniPreferred and with shares of any other series of Preferred Shares as to the
payment of dividends by the Fund.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of
MuniPreferred of any series shall be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor in
accordance with the Declaration and applicable law, cumulative cash dividends at
the Applicable Rate for shares of such series, determined as set forth in
paragraph (e) of this Section 2, and no more (except to the extent set forth in
Section 3 of this Part I), payable on the Dividend Payment Dates with respect to
shares of such series determined pursuant to paragraph (d) of this Section 2.
Holders of shares of MuniPreferred shall not be entitled to any dividend,
whether payable in cash, property or shares, in excess of full cumulative
dividends, as herein provided, on shares of MuniPreferred. No interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on shares of MuniPreferred which may be in arrears, and,
except to the extent set forth in subparagraph (e)(i) of this Section 2, no
additional sum of money shall be payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE.
Dividends on shares of MuniPreferred of any series shall accumulate at the
Applicable Rate for shares of such series from the Date of Original Issue
thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The
Dividend Payment Dates with respect to shares of a series of MuniPreferred shall
be as set forth with respect to shares of such series in Section 9 of Appendix A
hereto; provided, however, that:
(i) (A) in the case of a series of MuniPreferred
designated as "Series F MuniPreferred" or "Series M MuniPreferred" in
Section 1 of Appendix A hereto, if the Monday or Tuesday, as the case
may be, on which dividends would otherwise be payable on shares of such
series is not a Business Day, then such dividends shall be payable on
such shares on the first Business Day that falls after such Monday or
Tuesday, as the case may be, and (B) in the case of a series of
MuniPreferred designated as "Series T MuniPreferred," "Series W
MuniPreferred" or "Series TH MuniPreferred" in Section 1 of Appendix A
hereto, if the Wednesday, Thursday or Friday, as the case may be, on
which dividends would otherwise be payable on shares of such series is
not a Business Day, then such dividends shall be payable on such shares
on the first Business Day that falls prior to such Wednesday, Thursday
or Friday, as the case may be; and
(ii) notwithstanding Section 9 of Appendix A hereto,
the Fund in its discretion may establish the Dividend Payment Dates in
respect of any Special Rate Period of shares of a series of
MuniPreferred consisting of more than 28 Rate Period Days; provided,
however, that such dates shall be set forth in the Notice of Special
Rate Period relating to such Special Rate Period, as delivered to the
Auction Agent, which Notice of Special Rate Period shall be filed with
the Secretary of the Fund; and further provided that (1) any such
Dividend Payment Date shall be a Business Day and (2) the last Dividend
Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last
day is determined in accordance with paragraph (b) of Section 4 of this
Part I.
14
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) Dividend Rates. The dividend rate on shares of
MuniPreferred of any series during the period from and after the Date
of Original Issue of shares of such series to and including the last
day of the Initial Rate Period of shares of such series shall be equal
to the rate per annum set forth with respect to shares of such series
under "Designation" in Section 1 of Appendix A hereto. For each
Subsequent Rate Period of shares of such series thereafter, the
dividend rate on shares of such series shall be equal to the rate per
annum that results from an Auction for shares of such series on the
Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate
Period is not held for any reason other than as described
below, the dividend rate on shares of such series for such
Subsequent Rate Period will be the Maximum Rate for shares of
such series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred
with respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period consisting of more
than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not
been cured), but, prior to 12:00 Noon, New York City time, on
the third Business Day next succeeding the date on which such
Failure to Deposit occurred, such Failure to Deposit shall
have been cured in accordance with paragraph (f) of this
Section 2 and the Fund shall have paid to the Auction Agent a
late charge ("Late Charge") equal to the sum of (1) if such
Failure to Deposit consisted of the failure timely to pay to
the Auction Agent the full amount of dividends with respect to
any Dividend Period of the shares of such series, an amount
computed by multiplying (x) 200% of the Reference Rate for the
Rate Period during which such Failure to Deposit occurs on the
Dividend Payment Date for such Dividend Period by (y) a
fraction, the numerator of which shall be the number of days
for which such Failure to Deposit has not been cured in
accordance with paragraph (f) of this Section 2 (including the
day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which
shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of
such series and (2) if such Failure to Deposit consisted of
the failure timely to pay to the Auction Agent the Redemption
Price of the shares, if any, of such series for which Notice
of Redemption has been mailed by the Fund pursuant to
paragraph (c) of Section 11 of this Part I, an amount computed
by multiplying (x) 200% of the Reference Rate for the Rate
Period during which such Failure to Deposit occurs on the
redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit
is not cured in accordance with paragraph (f) of this Section
2 (including the day such Failure to Deposit occurs and
excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the
outstanding shares of such series to be redeemed, no Auction
will be held in respect of shares of such series for the
Subsequent Rate Period thereof and the dividend rate for
shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date
for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred
with respect to shares of such series during any Rate Period
thereof (other than any Special Rate Period
15
consisting of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period consisting of more
than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured), and, prior to 12:00 Noon,
New York City time, on the third Business Day next succeeding
the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance
with paragraph (f) of this Section 2 or the Fund shall not
have paid the applicable Late Charge to the Auction Agent, no
Auction will be held in respect of shares of such series for
the first Subsequent Rate Period thereof thereafter (or for
any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (2) the
Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures
such Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares
of such series for each such Subsequent Rate Period shall be a
rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be
"Below "ba3"/BB2"); or
(D) any Failure to Deposit shall have occurred
with respect to shares of such series during a Special Rate
Period thereof consisting of more than 364 Rate Period Days,
or during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during
which a Failure to Deposit occurred that has not been cured,
and, prior to 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, such Failure to Deposit shall
not have been cured in accordance with paragraph (f) of this
Section 2 or, in the event Moody's is then rating such shares,
the Fund shall not have paid the applicable Late Charge to the
Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference
Rate, the Reference Rate applicable to a Rate Period (x)
consisting of more than 182 Rate Period Days but fewer than
365 Rate Period Days and (y) commencing on the date on which
the Rate Period during which Failure to Deposit occurs
commenced), no Auction will be held in respect of shares of
such series for such Subsequent Rate Period (or for any Rate
Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (2) the
Fund pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the
event Moody's is rating such shares at the time the Fund cures
such Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares
of such series for each such Subsequent Rate Period shall be a
rate per annum equal to the Maximum Rate for shares of such
series on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be
"Below "ba3"/BB2") (the rate per annum at which dividends are
payable on shares of a series of MuniPreferred for any Rate
Period thereof being herein referred to as the "Applicable
Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of
dividends per share payable on shares of a series of MuniPreferred on
any date on which dividends shall be payable on shares of such series
shall be computed by multiplying the Applicable Rate for shares of such
series in effect for such Dividend Period or Dividend Periods or Part
thereof for which dividends have not
16
been paid by a fraction, the numerator of which shall be the number of
days in such Dividend Period or Dividend Periods or Part thereof and
the denominator of which shall be 365 if such Dividend Period consists
of 7 Rate Period Days and 360 for all other Dividend Periods, and
applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with
respect to shares of a series of MuniPreferred shall have been cured (if such
Failure to Deposit is not solely due to the willful failure of the Fund to make
the required payment to the Auction Agent) with respect to any Rate Period of
shares of such series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Fund shall have paid to the Auction
Agent (A) all accumulated and unpaid dividends on shares of such series and (B)
without duplication, the Redemption Price for shares, if any, of such series for
which Notice of Redemption has been mailed by the Fund pursuant to paragraph (c)
of Section 11 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of shares of MuniPreferred when the related Redemption Notice provides
that redemption of such shares is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time or
times and in the manner specified in such Notice of Redemption.
(g) DIVIDEND PAYMENTS BY FUND TO AUCTION AGENT. The Fund shall
pay to the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series of
MuniPreferred, an aggregate amount of funds available on the next Business Day
in The City of New York, New York, equal to the dividends to be paid to all
Holders of shares of such series on such Dividend Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY FUND. All
moneys paid to the Auction Agent for the payment of dividends (or for the
payment of any Late Charge) shall be held in trust for the payment of such
dividends (and any such Late Charge) by the Auction Agent for the benefit of the
Holders specified in paragraph (i) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the extent
permitted by law, be repaid to the Fund at the end of 90 days from the date on
which such moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of
MuniPreferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Fund on the Business
Day next preceding such Dividend Payment Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DIVIDENDS. Any dividend payment made on shares of MuniPreferred shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the record books of the Fund on
such date, not exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Trustees.
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
Dividends on shares of MuniPreferred shall be designated as exempt-interest
dividends up to the amount of tax-exempt income of the Fund, to the extent
permitted by, and for purposes of, Section 852 of the Code.
3. GROSS-UP PAYMENTS. Holders of shares of MuniPreferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor, dividends in an amount equal to the aggregate
Gross-up Payments as follows:
17
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE
PERIOD DAYS OR FEWER. If, in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net capital
gains or other income taxable for Federal income tax purposes to a dividend paid
on shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as provided in Section 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of MuniPreferred or the
liquidation of the Fund, the Fund shall, prior to the end of the calendar year
in which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Fund's dividend disbursing agent to send such notice with a Gross-up
Payment to each Holder of such shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or last
appeared on the record books of the Fund.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If,
in the case of any Special Rate Period of more than 28 Rate Period Days, the
Fund makes a Taxable Allocation to a dividend paid on shares of MuniPreferred,
the Fund shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each Holder of
shares that was entitled to such dividend payment during such calendar year at
such Holder's address as the same appears or last appeared on the record books
of the Fund.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The
Fund shall not be required to make Gross-up Payments with respect to any net
capital gains or other taxable income determined by the Internal Revenue Service
to be allocable in a manner different from that allocated by the Fund.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The
Fund, at its option, may designate any succeeding Subsequent Rate Period of
shares of a series of MuniPreferred as a Special Rate Period consisting of a
specified number of Rate Period Days evenly divisible by seven and not more than
1,820, subject to adjustment as provided in paragraph (b) of this Section 4. A
designation of a Special Rate Period shall be effective only if (A) notice
thereof shall have been given in accordance with paragraph (c) and subparagraph
(d)(i) of this Section 4, (B) an Auction for shares of such series shall have
been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction, and (C) if any Notice of Redemption
shall have been mailed by the Fund pursuant to paragraph (c) of Section 11 of
this Part I with respect to any shares of such series, the Redemption Price with
respect to such shares shall have been deposited with the Auction Agent. In the
event the Fund wishes to designate any succeeding Subsequent Rate Period for
shares of a series of MuniPreferred as a Special Rate Period consisting of more
than 28 Rate Period Days, the Fund shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Fund wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event
the Fund wishes to designate a Subsequent Rate Period as a Special Rate Period,
but the day following what would otherwise be the last day of such Special Rate
Period is not (a) a Tuesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series M MuniPreferred" in Section 1 of Appendix A
hereto, (b) a Wednesday that is a Business Day in the case of a series of
MuniPreferred designated as "Series T
18
MuniPreferred" in Section 1 of Appendix A hereto, (c) a Thursday that is a
Business Day in the case of a series of MuniPreferred designated as "Series W
MuniPreferred" in Section 1 of Appendix A hereto, (d) a Friday that is a
Business Day in the case of a series of MuniPreferred designated as "Series TH
MuniPreferred" in Section 1 of Appendix A hereto, or (e) a Monday that is a
Business Day in the case of a series of MuniPreferred designated as "Series F
MuniPreferred" in Section 1 of Appendix A hereto, then the Fund shall designate
such Subsequent Rate Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately preceding Rate
Period and ending (a) on the first Monday that is followed by a Tuesday that is
a Business Day preceding what would otherwise be such last day, in the case of
Series M MuniPreferred, (b) on the first Tuesday that is followed by a Wednesday
that is a Business Day preceding what would otherwise be such last day, in the
case of Series T MuniPreferred, (c) on the first Wednesday that is followed by a
Thursday that is a Business Day preceding what would otherwise be such last day,
in the case of Series W MuniPreferred, (d) on the first Thursday that is
followed by a Friday that is a Business Day preceding what would otherwise be
such last day, in the case of Series TH MuniPreferred, and (e) on the first
Sunday that is followed by a Monday that is a Business Day preceding what would
otherwise be such last day, in the case of Series F MuniPreferred.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund
proposes to designate any succeeding Subsequent Rate Period of shares of a
series of MuniPreferred as a Special Rate Period pursuant to paragraph (a) of
this Section 4, not less than 20 (or such lesser number of days as may be agreed
to from time to time by the Auction Agent) nor more than 30 days prior to the
date the Fund proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Fund in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Fund will, by 11:00
A.M., New York City time, on the second Business Day next preceding such date
(or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M.,
New York City time, on the second Business Day next preceding the first day of
any proposed Special Rate Period of shares of a series of MuniPreferred as to
which notice has been given as set forth in paragraph (c) of this Section 4 (or
such later time or date, or both, as may be agreed to by the Auction Agent), the
Fund shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period")
stating (A) that the Fund has determined to designate the next
succeeding Rate Period of shares of such series as a Special Rate
Period, specifying the same and the first day thereof, (B) the Auction
Date immediately prior to the first day of such Special Rate Period,
(C) that such Special Rate Period shall not commence if (1) an Auction
for shares of such series shall not be held on such Auction Date for
any reason or (2) an Auction for shares of such series shall be held on
such Auction Date but Sufficient Clearing Bids for shares of such
series shall not exist in such Auction, (D) the scheduled Dividend
Payment Dates for shares of such series during such Special Rate Period
and (E) the Special Redemption Provisions, if any, applicable to shares
of such series in respect of such Special Rate Period, such notice to
be accompanied by a MuniPreferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P Eligible Assets
19
(if S&P is then rating such series) each have an aggregate Discounted
Value at least equal to the MuniPreferred Basic Maintenance Amount as
of such Business Day (assuming for purposes of the foregoing
calculation that (a) the Maximum Rate is the Maximum Rate on such
Business Day as if such Business Day were the Auction Date for the
proposed Special Rate Period, and (b) the Moody's Discount Factors
applicable to Moody's Eligible Assets are determined by reference to
the first Exposure Period longer than the Exposure Period then
applicable to the Fund, as described in the definition of Moody's
Discount Factor herein); or
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Rate Period of shares
of such series and that the next succeeding Rate Period of shares of
such series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the
Fund fails to deliver either of the notices described in subparagraphs (d)(i) or
(d)(ii) of this Section 4 (and, in the case of the notice described in
subparagraph (d)(i) of this Section 4, a MuniPreferred Basic Maintenance Report
to the effect set forth in such subparagraph (if either Moody's or S&P is then
rating the series in question)) with respect to any designation of any proposed
Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this Section 4. In the event the Fund delivers to the
Auction Agent a notice described in subparagraph (d)(i) of this Section 4, it
shall file a copy of such notice with the Secretary of the Fund, and the
contents of such notice shall be binding on the Fund. In the event the Fund
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Fund will provide Moody's (if Moody's is then rating the series
in question) and S&P (if S&P is then rating the series in question) a copy of
such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF MUNIPREFERRED. Except as otherwise
provided in the Declaration of Trust or as otherwise required by law, (i) each
Holder of shares of MuniPreferred shall be entitled to one vote for each share
of MuniPreferred held by such Holder on each matter submitted to a vote of
shareholders of the Fund, and (ii) the holders of outstanding Preferred Shares,
including each share of MuniPreferred, and of Common Shares shall vote together
as a single class; provided, however, that, at any meeting of the shareholders
of the Fund held for the election of trustees, the holders of outstanding
Preferred Shares, including MuniPreferred, represented in person or by proxy at
said meeting, shall be entitled, as a class, to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of the Fund,
to elect two trustees of the Fund, each Preferred Share, including each share of
MuniPreferred, entitling the holder thereof to one vote. Subject to paragraph
(b) of this Section 5, the holders of outstanding Common Shares and Preferred
Shares, including MuniPreferred, voting together as a single class, shall elect
the balance of the trustees.
(b) VOTING FOR ADDITIONAL TRUSTEES.
(i) Voting Period. During any period in which any one
or more of the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein
as a "Voting Period"), the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that,
when added to the two trustees elected exclusively by the holders of
Preferred Shares, including shares of MuniPreferred, would constitute a
majority of the Board of Trustees as so increased by such smallest
number; and the holders of Preferred Shares, including MuniPreferred,
shall be entitled, voting as a class on a one-vote-per-share basis (to
the exclusion of the holders of all other
20
securities and classes of shares of beneficial interest of the Fund),
to elect such smallest number of additional trustees, together with the
two trustees that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any
dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share,
including MuniPreferred, equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or
specified securities shall not have been deposited with the
Auction Agent for the payment of such accumulated dividends;
or
(B) if at any time holders of Preferred Shares
are entitled under the 1940 Act to elect a majority of the
trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as
practicable after the accrual of any right of the holders of Preferred
Shares to elect additional trustees as described in subparagraph (b)(i)
of this Section 5, the Fund shall notify the Auction Agent and the
Auction Agent shall call a special meeting of such holders, by mailing
a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 20 days after the date of mailing
of such notice. If the Fund fails to send such notice to the Auction
Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such
special meeting shall be the close of business on the fifth Business
Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of Preferred Shares held
during a Voting Period at which trustees are to be elected, such
holders, voting together as a class (to the exclusion of the holders of
all other securities and classes of shares of beneficial interest of
the Fund), shall be entitled to elect the number of trustees prescribed
in subparagraph (b)(i) of this Section 5 on a one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms
of office of all persons who are trustees of the Fund at the time of a
special meeting of Holders and holders of other Preferred Shares to
elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees
that they are entitled to elect, and the persons so elected by the
Holders and such other holders, together with the two incumbent
trustees elected by the Holders and such other holders of Preferred
Shares and the remaining incumbent trustees elected by the holders of
the Common Shares and Preferred Shares, shall constitute the duly
elected trustees of the Fund.
(iv) Terms of Office of Certain Trustees to Terminate
Upon Termination of Voting Period. Simultaneously with the termination
of a Voting Period, the terms of office of the additional trustees
elected by the Holders and holders of other Preferred Shares pursuant
to subparagraph (b)(i) of this Section 5 shall terminate, the remaining
trustees shall constitute the trustees of the Fund and the voting
rights of the Holders and such other holders to elect additional
trustees pursuant to subparagraph (b)(i) of this Section 5 shall cease,
subject to the provisions of the last sentence of subparagraph (b)(i)
of this Section 5.
21
(c) HOLDERS OF MUNIPREFERRED TO VOTE ON CERTAIN OTHER MATTERS.
(i) Increases in Capitalization. So long as any
shares of MuniPreferred are outstanding, the Fund shall not, without
the affirmative vote or consent of the Holders of at least a majority
of the shares of MuniPreferred outstanding at the time, in person or by
proxy, either in writing or at a meeting, voting as a separate class:
(a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with shares of MuniPreferred with respect to
the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, or
authorize, create or issue additional shares of any series of
MuniPreferred (except that, notwithstanding the foregoing, but subject
to the provisions of paragraph (c) of Section 10 of this Part I, the
Board of Trustees, without the vote or consent of the Holders of
MuniPreferred, may from time to time authorize and create, and the Fund
may from time to time issue additional shares of, any series of
MuniPreferred, or classes or series of Preferred Shares ranking on a
parity with shares of MuniPreferred with respect to the payment of
dividends and the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund; provided, however, that if
Moody's or S&P is not then rating the shares of MuniPreferred, the
aggregate liquidation preference of all Preferred Shares of the Fund
outstanding after any such issuance, exclusive of accumulated and
unpaid dividends, may not exceed the amount set forth in Section 10 of
Appendix A hereto) or (b) amend, alter or repeal the provisions of the
Declaration, or this Statement, whether by merger, consolidation or
otherwise, so as to affect any preference, right or power of such
shares of MuniPreferred or the Holders thereof; provided, however, that
(i) none of the actions permitted by the exception to (a) above will be
deemed to affect such preferences, rights or powers, (ii) a division of
a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect
the Holders of shares of MuniPreferred and (iii) the authorization,
creation and issuance of classes or series of shares ranking junior to
shares of MuniPreferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Fund, will be deemed to affect such preferences,
rights or powers only if Moody's or S&P is then rating shares of
MuniPreferred and such issuance would, at the time thereof, cause the
Fund not to satisfy the 1940 Act MuniPreferred Asset Coverage or the
MuniPreferred Basic Maintenance Amount. So long as any shares of
MuniPreferred are outstanding, the Fund shall not, without the
affirmative vote or consent of the Holders of at least 66 2/3% of the
shares of MuniPreferred outstanding at the time, in person or by proxy,
either in writing or at a meeting, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Fund is solvent
and does not foresee becoming insolvent. If any action set forth above
would adversely affect the rights of one or more series (the "Affected
Series") of MuniPreferred in a manner different from any other series
of MuniPreferred, the Fund will not approve any such action without the
affirmative vote or consent of the Holders of at least a majority of
the shares of each such Affected Series outstanding at the time, in
person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is
provided for in the Declaration, (A) the affirmative vote of the
Holders of at least a majority of the Preferred Shares, including
MuniPreferred, outstanding at the time, voting as a separate class,
shall be required to approve any conversion of the Fund from a
closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding Preferred
Shares," including MuniPreferred, voting as a separate class, shall be
required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares. The affirmative vote of
the Holders of a "majority of the outstanding Preferred Shares,"
including MuniPreferred, voting as a separate class, shall be required
to approve any action not described in
22
the first sentence of this Section 5(c)(ii) requiring a vote of
security holders of the Fund under Section 13(a) of the 1940 Act. For
purposes of the foregoing, "majority of the outstanding referred
Shares" means (i) 67% or more of such shares present at a meeting, if
the Holders of more than 50% of such shares are present or represented
by proxy, or (ii) more than 50% of such shares, whichever is less. In
the event a vote of Holders of MuniPreferred is required pursuant to
the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to
be taken, notify Moody's (if Moody's is then rating the shares of
MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred) that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken. The Fund shall,
not later than ten Business Days after the date on which such vote is
taken, notify Moody's (if Moody's is then rating the shares of
MuniPreferred) of the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER
APPROVAL. The Board of Trustees, without the vote or consent of the shareholders
of the Fund, may from time to time amend, alter or repeal any or all of the
definitions of the terms listed below, or any provision of this Statement viewed
by Moody's or S&P as a predicate for any such definition, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of MuniPreferred or the Holders thereof; provided,
however, that the Board of Trustees receives written confirmation from Moody's
(such confirmation being required to be obtained only in the event Moody's is
rating the shares of MuniPreferred and in no event being required to be obtained
in the case of the definitions of (x) Deposit Securities, Discounted Value,
Receivables for Municipal Obligations Sold, Issue Type Category and Other Issues
as such terms apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and S&P (such
confirmation being required to be obtained only in the event S&P is rating the
shares of MuniPreferred and in no event being required to be obtained in the
case of the definitions of (x) Discounted Value, Receivables for Municipal
Obligations Sold, Issue Type Category and Other Issues as such terms apply to
Moody's Eligible Assets, and (y) Moody's Discount Factor, Moody's Eligible
Asset, Moody's Exposure Period and Moody's Volatility Factor) that any such
amendment, alteration or repeal would not impair the ratings then assigned by
Moody's or S&P, as the case may be, to shares of MuniPreferred:
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act MuniPreferred Asset Coverage
Issue Type Category Other Issues
Market Value Quarterly Valuation Date
Maximum Potential Gross-up Payment Liability Receivables for Municipal Obligations Sold
MuniPreferred Basic Maintenance Amount S&P Discount Factor
MuniPreferred Basic Maintenance Cure Date S&P Eligible Asset
MuniPreferred Basic Maintenance Report S&P Exposure Period
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Asset Valuation Date
Moody's Exposure Period Volatility Factor
Section 13 of Appendix A hereto
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS.
Unless otherwise required by law, the Holders of shares of MuniPreferred shall
not have any relative rights or preferences or other special rights other than
those specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of
shares of MuniPreferred shall have no preemptive rights or rights to cumulative
voting.
23
(g) VOTING FOR TRUSTEES SOLE REMEDY FOR FUND'S FAILURE TO PAY
DIVIDENDS. In the event that the Fund fails to pay any dividends on the shares
of MuniPreferred, the exclusive remedy of the Holders shall be the right to vote
for trustees pursuant to the provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any
rights of the Holders to vote on any matter, whether such right is created by
this Statement, by the other provisions of the Declaration, by statute or
otherwise, no Holder shall be entitled to vote any share of MuniPreferred and no
share of MuniPreferred shall be deemed to be "outstanding" for the purpose of
voting or determining the number of shares required to constitute a quorum if,
prior to or concurrently with the time of determination of shares entitled to
vote or shares deemed outstanding for quorum purposes, as the case may be, the
requisite Notice of Redemption with respect to such shares shall have been
mailed as provided in paragraph (c) of Section 11 of this Part I and the
Redemption Price for the redemption of such shares shall have been deposited in
trust with the Auction Agent for that purpose. No share of MuniPreferred held by
the Fund or any affiliate of the Fund (except for shares held by a Broker-Dealer
that is an affiliate of the Fund for the account of its customers) shall have
any voting rights or be deemed to be outstanding for voting or other purposes.
6. 1940 ACT MUNIPREFERRED ASSET COVERAGE. The Fund shall maintain, as
of the last Business Day of each month in which any share of MuniPreferred is
outstanding, the 1940 Act MuniPreferred Asset Coverage.
7. MUNIPREFERRED BASIC MAINTENANCE AMOUNT.
(a) So long as shares of MuniPreferred are outstanding, the
Fund shall maintain, on each Valuation Date, and shall verify to its
satisfaction that it is maintaining on such Valuation Date, (i) S&P Eligible
Assets having an aggregate Discounted Value equal to or greater than the
MuniPreferred Basic Maintenance Amount (if S&P is then rating the shares of
MuniPreferred) and (ii) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the MuniPreferred Basic Maintenance Amount (if
Moody's is then rating the shares of MuniPreferred).
(b) On or before 5:00 P.M., New York City time, on the third
Business Day after a Valuation Date on which the Fund fails to satisfy the
MuniPreferred Basic Maintenance Amount, and on the third Business Day after the
MuniPreferred Basic Maintenance Cure Date with respect to such Valuation Date,
the Fund shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred), Moody's (if Moody's is then rating the shares of MuniPreferred)
and the Auction Agent (if either S&P or Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the date of such
failure or such MuniPreferred Basic Maintenance Cure Date, as the case may be,
which will be deemed to have been delivered to the Auction Agent if the Auction
Agent receives a copy or telecopy, telex or other electronic transcription
thereof and on the same day the Fund mails to the Auction Agent for delivery on
the next Business Day the full MuniPreferred Basic Maintenance Report. The Fund
shall also deliver a MuniPreferred Basic Maintenance Report to (i) the Auction
Agent (if either Moody's or S&P is then rating the shares of MuniPreferred) as
of (A) the fifteenth day of each month (or, if such day is not a Business Day,
the next succeeding Business Day) and (B) the last Business Day of each month,
(ii) Moody's (if Moody's is then rating the shares of MuniPreferred) and S&P (if
S&P is then rating the shares of MuniPreferred) as of any Quarterly Valuation
Date, in each case on or before the third Business Day after such day, and (iii)
S&P, if and when requested for any Valuation Date, on or before the third
Business Day after such request. A failure by the Fund to deliver a
MuniPreferred Basic Maintenance Report pursuant to the preceding sentence shall
be deemed to be delivery of a MuniPreferred Basic Maintenance Report indicating
the Discounted Value for all assets of the Fund is less than the MuniPreferred
Basic Maintenance Amount, as of the relevant Valuation Date.
24
(c) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to a Quarterly Valuation Date, the Fund shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other MuniPreferred Basic Maintenance
Report, randomly selected by the Independent Accountant, that was delivered by
the Fund during the quarter ending on such Quarterly Valuation Date), (ii) that,
in such Report (and in such randomly selected Report), the Fund determined in
accordance with this Statement whether the Fund had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly-selected Report), S&P
Eligible Assets (if S&P is then rating the shares of MuniPreferred) of an
aggregate Discounted Value at least equal to the MuniPreferred Basic Maintenance
Amount and Moody's Eligible Assets (if Moody's is then rating the shares of
MuniPreferred) of an aggregate Discounted Value at least equal to the
MuniPreferred Basic Maintenance Amount (such confirmation being herein called
the "Accountant's Confirmation"), (iii) with respect to the S&P ratings on
Municipal Obligations, the issuer name, issue size and coupon rate listed in
such Report, that the Independent Accountant has requested that S&P verify such
information and the Independent Accountant shall provide a listing in its letter
of any differences, (iv) with respect to the Moody's ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that such information has been verified by Moody's (in the event such
information is not verified by Moody's, the Independent Accountant will inquire
of Moody's what such information is, and provide a listing in its letter of any
differences), (v) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Fund's assets to the Fund for purposes of valuing securities in
the Fund's portfolio, the Independent Accountant has traced the price used in
such Report to the bid or mean price listed in such Report as provided to the
Fund and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) and (vi) with respect to such confirmation to Moody's and
S&P, that the Fund has satisfied the requirements of Section 13 of this
Statement (such confirmation is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a
MuniPreferred Basic Maintenance Report in accordance with paragraph (b) of this
Section 7 relating to any Valuation Date on which the Fund failed to satisfy the
MuniPreferred Basic Maintenance Amount, and relating to the MuniPreferred Basic
Maintenance Cure Date with respect to such failure to satisfy the MuniPreferred
Basic Maintenance Amount, the Fund shall cause the Independent Accountant to
provide to S&P (if S&P is then rating the shares of MuniPreferred), Moody's (if
Moody's is then rating the shares of MuniPreferred) and the Auction Agent (if
either S&P or Moody's is then rating the shares of MuniPreferred) an
Accountant's Confirmation as to such MuniPreferred Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to
paragraph (c) or (d) of this Section 7 shows that an error was made in the
MuniPreferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of MuniPreferred) or Moody's Eligible Assets
(if Moody's is then rating the shares of MuniPreferred), as the case may be, of
the Fund was determined by the Independent Accountant, the calculation or
determination made by such Independent Accountant shall be final and conclusive
and shall be binding on the Fund, and the Fund shall accordingly amend and
deliver the MuniPreferred Basic Maintenance Report to S&P (if S&P is then rating
the shares of MuniPreferred), Moody's (if Moody's is then rating the shares of
MuniPreferred) and the Auction Agent (if either S&P or Moody's is then rating
the shares of MuniPreferred) promptly following receipt by the Fund of such
Accountant's Confirmation.
25
(f) On or before 5:00 p.m., New York City time, on the first
Business Day after the Date of Original Issue of any shares of MuniPreferred,
the Fund shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) and Moody's (if Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Fund shall cause the Independent Accountant to confirm in
writing to S&P (if S&P is then rating the shares of MuniPreferred) (i) the
mathematical accuracy of the calculations reflected in such Report and (ii) that
the Discounted Value of S&P Eligible Assets reflected thereon equals or exceeds
the MuniPreferred Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third
Business Day after either (i) the Fund shall have redeemed Common Shares or (ii)
the ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value
of Moody's Eligible Assets to the MuniPreferred Basic Maintenance Amount is less
than or equal to 105% or (iii) whenever requested by Moody's and S&P, the Fund
shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) or Moody's (if Moody's is then rating the shares of
MuniPreferred), as the case may be, a MuniPreferred Basic Maintenance Report as
of the date of either such event.
8. [RESERVED].
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON PREFERRED SHARES OTHER THAN MUNIPREFERRED.
Except as set forth in the next sentence, no dividends shall be declared or paid
or set apart for payment on the shares of any class or series of shares of
beneficial interest of the Fund ranking, as to the payment of dividends, on a
parity with shares of MuniPreferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
each series of MuniPreferred through its most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of each series of MuniPreferred
through its most recent Dividend Payment Date or upon the shares of any other
class or series of shares of beneficial interest of the Fund ranking on a parity
as to the payment of dividends with shares of MuniPreferred through their most
recent respective dividend payment dates, all dividends declared upon shares of
MuniPreferred and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with shares of
MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares of beneficial interest shall in all cases bear to each other the same
ratio that accumulated dividends per share on the shares of MuniPreferred and
such other class or series of shares of beneficial interest bear to each other
(for purposes of this sentence, the amount of dividends declared per share of
MuniPreferred shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON
SHARES UNDER THE 1940 ACT. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an asset
coverage (as defined in and determined pursuant to the 1940 Act) of at least
200% (or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock) after deducting the amount of such
dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
For so long as any share of MuniPreferred is outstanding, and except as set
forth in paragraph (a) of this Section 9 and
26
paragraph (c) of Section 12 of this Part I, (A) the Fund shall not declare, pay
or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking junior
to the shares of MuniPreferred as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of the Common Shares or any other shares of the Fund ranking junior to or on a
parity with the shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to the shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), or any such parity shares (except by conversion into
or exchange for shares of the Fund ranking junior to or on a parity with
MuniPreferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends on
shares of each series of MuniPreferred through its most recently ended Dividend
Period shall have been paid or shall have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent and (ii) the Fund has
redeemed the full number of shares of MuniPreferred required to be redeemed by
any provision for mandatory redemption pertaining thereto, and (B) the Fund
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to shares of MuniPreferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
shares of MuniPreferred) and S&P Eligible Assets (if S&P is then rating the
shares of MuniPreferred) would each at least equal the MuniPreferred Basic
Maintenance Amount.
10. RATING AGENCY RESTRICTIONS. For so long as any shares of
MuniPreferred are outstanding and Moody's or S&P, or both, are rating such
shares, the Fund will not, unless it has received written confirmation from
Moody's or S&P, or both, as appropriate, that any such action would not impair
the ratings then assigned by such rating agency to such shares, engage in any
one or more of the following transactions:
(a) buy or sell futures or write put or call options except as
provided in Section 13 of Appendix A hereto;
(b) borrow money, except that the Fund may, without obtaining
the written confirmation described above, borrow money for the purpose of
clearing securities transactions if (i) the MuniPreferred Basic Maintenance
Amount would continue to be satisfied after giving effect to such borrowing and
(ii) such borrowing (A) is privately arranged with a bank or other person and is
evidenced by a promissory note or other evidence of indebtedness that is not
intended to be publicly distributed or (B) is for "temporary purposes," is
evidenced by a promissory note or other evidence of indebtedness and is in an
amount not exceeding 5 per centum of the value of the total assets of the Fund
at the time of the borrowing; for purposes of the foregoing, "temporary purpose"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) issue additional shares of any series of MuniPreferred or
any class or series of shares ranking prior to or on a parity with shares of
MuniPreferred with respect to the payment of
27
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any shares of MuniPreferred previously purchased or
redeemed by the Fund;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently J.J. Kenny) referred
to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of MuniPreferred of any series may be
redeemed, at the option of the Fund, as a whole or from time to time in
part, on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available therefor, at
a redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of a series of
MuniPreferred may not be redeemed in Part if after such partial
redemption fewer than 250 shares of such series remain outstanding; (2)
unless otherwise provided in Section 11 of Appendix A hereto, shares of
a series of MuniPreferred are redeemable by the Fund during the Initial
Rate Period thereof only on the second Business Day next preceding the
last Dividend Payment Date for such Initial Rate Period; and (3)
subject to subparagraph (ii) of this paragraph (a), the Notice of
Special Rate Period relating to a Special Rate Period of shares of a
series of MuniPreferred, as delivered to the Auction Agent and filed
with the Secretary of the Fund, may provide that shares of such series
shall not be redeemable during the whole or any Part of such Special
Rate Period (except as provided in subparagraph (iv) of this paragraph
(a)) or shall be redeemable during the whole or any Part of such
Special Rate Period only upon payment of such redemption premium or
premiums as shall be specified therein ("Special Redemption
Provisions").
(ii) A Notice of Special Rate Period relating to
shares of a series of MuniPreferred for a Special Rate Period thereof
may contain Special Redemption Provisions only if the Fund's Board of
Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of shares of such series, determines that
such Special Redemption Provisions are in the best interest of the
Fund.
(iii) If fewer than all of the outstanding shares of
a series of MuniPreferred are to be redeemed pursuant to subparagraph
(i) of this paragraph (a), the number of shares of such series to be
redeemed shall be determined by the Board of Trustees, and such shares
shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of any series of MuniPreferred may be
redeemed, at the option of the Fund, as a whole but not in part, out of
funds legally available therefor, on the first day following any
Dividend Period
28
thereof included in a Rate Period consisting of more than 364 Rate
Period Days if, on the date of determination of the Applicable Rate for
shares of such series for such Rate Period, such Applicable Rate
equaled or exceeded on such date of determination the Treasury Note
Rate for such Rate Period, at a redemption price per share equal to the
sum of $25,000 plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the
date fixed for redemption.
(v) The Fund may not on any date mail a Notice of
Redemption pursuant to paragraph (c) of this Section 11 in respect of a
redemption contemplated to be effected pursuant to this paragraph (a)
unless on such date (a) the Fund has available Deposit Securities with
maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of shares of
MuniPreferred by reason of the redemption of such shares on such
redemption date and (b) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the shares of MuniPreferred) and the
Discounted Value of S&P Eligible Assets (if S&P is then rating the
shares of MuniPreferred) each at least equal the MuniPreferred Basic
Maintenance Amount, and would at least equal the MuniPreferred Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date. For purposes of determining in
clause (b) of the preceding sentence whether the Discounted Value of
Moody's Eligible Assets at least equals the MuniPreferred Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Fund, as
described in the definition of Moody's Discount Factor herein.
(b) MANDATORY REDEMPTION. The Fund shall redeem, at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not including) the
date fixed by the Board of Trustees for redemption, certain of the shares of
MuniPreferred, if the Fund fails to have either Moody's Eligible Assets with a
Discounted Value or S&P Eligible Assets with a Discounted Value greater than or
equal to the MuniPreferred Basic Maintenance Amount or fails to maintain the
1940 Act MuniPreferred Asset Coverage, in accordance with the requirements of
the rating agency or agencies then rating the shares of MuniPreferred, and such
failure is not cured on or before the MuniPreferred Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be. The number of shares of
MuniPreferred to be redeemed shall be equal to the lesser of (i) the minimum
number of shares of MuniPreferred, together with all other Preferred Shares
subject to redemption or retirement, the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, would
have resulted in the Fund's having both Moody's Eligible Assets with a
Discounted Value and S&P Eligible Assets with a Discounted Value greater than or
equal to the MuniPreferred Basic Maintenance Amount or maintaining the 1940 Act
MuniPreferred Asset Coverage, as the case may be, on such Cure Date (provided,
however, that if there is no such minimum number of shares of MuniPreferred and
other Preferred Shares the redemption or retirement of which would have had such
result, all shares of MuniPreferred and Preferred Shares then outstanding shall
be redeemed), and (ii) the maximum number of shares of MuniPreferred, together
with all other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor in accordance
with the Declaration and applicable law. In determining the shares of
MuniPreferred required to be redeemed in accordance with the foregoing, the Fund
shall allocate the number required to be redeemed to satisfy the MuniPreferred
Basic Maintenance Amount or the 1940 Act MuniPreferred Asset Coverage, as the
case may be, pro rata among shares of MuniPreferred and other Preferred Shares
(and, then, pro rata among each series of MuniPreferred) subject to redemption
or retirement. The Fund shall effect such redemption on the date fixed by the
Fund therefor, which date shall not be earlier than 20 days nor later than 40
days after such Cure Date, except that if the Fund does not have funds legally
available for the redemption of all of the required number of shares of
29
MuniPreferred and other Preferred Shares which are subject to redemption or
retirement or the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those shares of
MuniPreferred and other Preferred Shares which it was unable to redeem on the
earliest practicable date on which it is able to effect such redemption. If
fewer than all of the outstanding shares of a series of MuniPreferred are to be
redeemed pursuant to this paragraph (b), the number of shares of such series to
be redeemed shall be redeemed pro rata from the Holders of shares of such series
in proportion to the number of shares of such series held by such Holders.
(c) NOTICE OF REDEMPTION. If the Fund shall determine or be
required to redeem shares of a series of MuniPreferred pursuant to paragraph (a)
or (b) of this Section 11, it shall mail a Notice of Redemption with respect to
such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Fund on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than 20
nor more than 45 days prior to the date fixed for redemption. Each such Notice
of Redemption shall state: (i) the redemption date; (ii) the number of shares of
MuniPreferred to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of MuniPreferred held
by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of shares of such series to be redeemed from such
Holder. The Fund may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Fund shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding
the provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of MuniPreferred (whether or not earned or declared) are in
arrears, no shares of such series shall be redeemed unless all outstanding
shares of such series are simultaneously redeemed, and the Fund shall not
purchase or otherwise acquire any shares of such series; provided, however, that
the foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent
that any redemption for which Notice of Redemption has been mailed is not made
by reason of the absence of legally available funds therefor in accordance with
the Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem shares
of MuniPreferred shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit in trust with the Auction Agent the Redemption
Price with respect to any shares for which such Notice of Redemption has been
mailed; provided, however, that the foregoing shall not apply in the case of the
Fund's failure to deposit in trust with the Auction Agent the Redemption Price
with respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed shares of
MuniPreferred for which a Notice of Redemption has been
30
mailed, dividends may be declared and paid on shares of MuniPreferred and shall
include those shares of MuniPreferred for which a Notice of Redemption has been
mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND.
All moneys paid to the Auction Agent for payment of the Redemption Price of
shares of MuniPreferred called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE
NO LONGER OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant
to paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the shares of MuniPreferred that are the subject of such
notice, dividends on such shares shall cease to accumulate and such shares shall
no longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I and in Section 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the Notice of Redemption shall so state), the Redemption
Price shall be paid by the Auction Agent to the Holders of shares of
MuniPreferred subject to redemption. In the case that fewer than all of the
shares represented by any such certificate are redeemed, a new certificate shall
be issued, representing the unredeemed shares, without cost to the Holder
thereof. The Fund shall be entitled to receive from the Auction Agent, promptly
after the date fixed for redemption, any cash deposited with the Auction Agent
in excess of (i) the aggregate Redemption Price of the shares of MuniPreferred
called for redemption on such date and (ii) all other amounts to which Holders
of shares of MuniPreferred called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of 90 days from such redemption date
shall, to the extent permitted by law, be repaid to the Fund, after which time
the Holders of shares of MuniPreferred so called for redemption may look only to
the Fund for payment of the Redemption Price and all other amounts to which they
may be entitled. The Fund shall be entitled to receive, from time to time after
the date fixed for redemption, any interest on the funds so deposited.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any
redemption pursuant to this Section 11, the Fund shall use its best efforts to
comply with all applicable conditions precedent to effecting such redemption
under the 1940 Act and any applicable Massachusetts law, but shall effect no
redemption except in accordance with the 1940 Act and any applicable
Massachusetts law.
(i) ONLY WHOLE SHARES OF MUNIPREFERRED MAY BE REDEEMED. In the
case of any redemption pursuant to this Section 11, only whole shares of
MuniPreferred shall be redeemed, and in the event that any provision of the
Declaration would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are redeemed.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of MuniPreferred shall
rank on a parity with each other, with shares of any other series of
MuniPreferred and with shares of any other series of Preferred Shares as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution,
liquidation or winding up of the affairs of the Fund, whether voluntary or
involuntary, the Holders of shares of MuniPreferred then outstanding shall be
entitled to receive and to be paid out of the assets of the Fund available for
31
distribution to its shareholders, before any payment or distribution shall be
made on the Common Shares or on any other class of shares of the Fund ranking
junior to the MuniPreferred upon dissolution, liquidation or winding up, an
amount equal to the Liquidation Preference with respect to such shares plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same day funds, together with any payments required to be made pursuant to
Section 3 of this Part I in connection with the liquidation of the Fund. After
the payment to the Holders of the shares of MuniPreferred of the full
preferential amounts provided for in this paragraph (b), the Holders of
MuniPreferred as such shall have no right or claim to any of the remaining
assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the
Fund available for distribution to the Holders of shares of MuniPreferred upon
any dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with the shares of MuniPreferred
with respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of MuniPreferred, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the
holders of shares of any series or class or classes of shares ranking on a
parity with the shares of MuniPreferred with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund,
after payment shall have been made in full to the Holders of the shares of
MuniPreferred as provided in paragraph (b) of this Section 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of MuniPreferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund shall, subject
to the respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the Holders
of the shares of MuniPreferred shall not be entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the
sale of all or substantially all the property or business of the Fund, nor the
merger or consolidation of the Fund into or with any Massachusetts business
trust or corporation nor the merger or consolidation of any Massachusetts
business trust or corporation into or with the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary, for the purposes of
this Section 12.
13. MISCELLANEOUS.
(a) AMENDMENT OF APPENDIX A TO ADD ADDITIONAL SERIES. Subject
to the provisions of paragraph (c) of Section 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval (except
as otherwise provided by this Statement or required by applicable law), amend
Appendix A hereto to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of MuniPreferred or additional
shares of a series of MuniPreferred (and terms relating thereto) to the series
and shares of MuniPreferred theretofore described thereon. Each such additional
series and all such additional shares shall be governed by the terms of this
Statement.
(b) APPENDIX A INCORPORATED BY REFERENCE. Appendix A hereto is
incorporated in and made a Part of this Statement by reference thereto.
(c) NO FRACTIONAL SHARES. No fractional shares of
MuniPreferred shall be issued.
32
(d) STATUS OF SHARES OF MUNIPREFERRED REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE FUND. Shares of MuniPreferred which are redeemed,
exchanged or otherwise acquired by the Fund shall return to the status of
authorized and unissued Preferred Shares without designation as to series.
(e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of MuniPreferred
prior to the issuance of shares of such series.
(f) HEADINGS NOT DETERMINATIVE. The headings contained in this
Statement are for convenience of reference only and shall not affect the meaning
or interpretation of this Statement.
(g) NOTICES. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or this Statement, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for
shares of a series of MuniPreferred:
(i) each Beneficial Owner of shares of such series
may submit to its Broker-Dealer by telephone or otherwise information
as to:
(A) the number of Outstanding shares, if any,
of such series held by such Beneficial Owner which such
Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for shares of such series for the next
succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any,
of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell if the Applicable Rate for
shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any,
of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on such lists to
determine the number of shares, if any, of such series which each such
Potential Beneficial Owner offers to purchase if the Applicable Rate
for shares of such series for the next succeeding Rate Period of shares
of such series shall not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in
33
clause (i)(A), (i), (B), (i), (C) or (ii) of this paragraph (a) is hereinafter
referred to as an "Order" and collectively as "Orders" and each Beneficial Owner
and each Potential Beneficial Owner placing an Order with a Broker-Dealer, and
such Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing the
information referred to in clause (i)(A) of this paragraph (a) is hereinafter
referred to as a "Hold Order" and collectively as "Hold Orders"; an Order
containing the information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of MuniPreferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series specified in such Bid if the Applicable Rate for shares
of such series determined on such Auction Date shall be less
than the rate specified therein;
(B) such number or a lesser number of
Outstanding shares of such series to be determined as set
forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding shares of such
series specified in such Bid if the rate specified therein
shall be higher than the Maximum Rate for shares of such
series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause
(iii) of paragraph (b) of Section 4 of this Part II if the
rate specified therein shall be higher than the Maximum Rate
for shares of such series and Sufficient Clearing Bids for
shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an
Existing Holder of shares of a series of MuniPreferred subject to an
Auction on any Auction Date shall constitute an irrevocable offer to
sell:
(A) the number of Outstanding shares of such
series specified in such Sell Order; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (iii)
of paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of MuniPreferred shall not be liable to any Person for
failing to sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Fund) with the provisions of Section 7 of this Part II or (2) such Broker-Dealer
has informed the Auction Agent pursuant to the terms of its Broker-Dealer
Agreement that, according to such Broker-Dealer's records, such Broker-Dealer
believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a
Potential Holder of shares of a series of MuniPreferred subject to an
Auction on any Auction Date shall constitute an irrevocable offer to
purchase:
34
(A) the number of Outstanding shares of such
series specified in such Bid if the Applicable Rate for shares
of such series determined on such Auction Date shall be higher
than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (v)
of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of shares of MuniPreferred other
than whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction
Agent prior to the Submission Deadline on each Auction Date all Orders for
shares of MuniPreferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series
that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing
Holder of shares of such series:
(A) the number of shares, if any, of such
series subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such
series subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such
series subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder
of shares of such series, the rate and number of shares of such series
specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of MuniPreferred of a series held by any Existing Holder is not submitted
to the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders
35
covering all of the Outstanding shares of such series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Rate Period consisting of more than 28 Rate
Period Days, the Auction Agent shall deem a Sell Order to have been submitted by
or on behalf of such Existing Holder covering the number of outstanding shares
of such series held by such Existing Holder and not subject to Orders submitted
to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted
to the Auction Agent covering in the aggregate more than the number of
Outstanding shares of MuniPreferred of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the following
order of priority:
(i) all Hold Orders for shares of such series shall
be considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) any Bid for shares of such series shall be
considered valid up to and including the excess of the number
of Outstanding shares of such series held by such Existing
Holder over the number of shares of such series subject to any
Hold Orders referred to in clause (i) above;
(A) subject to subclause (A), if more than one
Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such
Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject to
each Bid with the same rate shall be reduced pro rata to cover
the number of shares of such series equal to such excess;
(B) subject to subclauses (A) and (B), if more
than one Bid of an Existing Holder for shares of such series
is submitted to the Auction Agent with different rates, such
Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(C) in any such event, the number, if any, of
such Outstanding shares of such series subject to any portion
of Bids considered not valid in whole or in Part under this
clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall
be considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
MuniPreferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
36
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction
Date for shares of a series of MuniPreferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of
such series over the number of Outstanding shares of such series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available MuniPreferred" of such series);
(ii) from the Submitted Orders for shares of such
series whether:
(A) the number of Outstanding shares of such
series subject to Submitted Bids of Potential Holders
specifying one or more rates equal to or lower than the
Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such
series subject to Submitted Bids of Existing Holders
specifying one or more rates higher than the Maximum Rate for
shares of such series; and
(C) the number of Outstanding shares of such
series subject to Submitted Sell Orders in the event such
excess or such equality exists (other than because the number
of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), such Submitted Bids in
subclause (A) above being hereinafter referred to collectively
as "Sufficient Clearing Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to
hold the shares of such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Potential Holders specifying lower rates
were accepted;
would result in such Existing Holders described in subclause
(A) above continuing to hold an aggregate number of
Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be purchased by
such Potential Holders
37
described in subclause (B) above, would equal not less than
the Available MuniPreferred of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Fund of the Maximum Rate for shares of the series of
MuniPreferred for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for the
next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such
series exist, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be equal to the
Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such
series do not exist (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Maximum Rate for shares of
such series; or
(iii) if all of the Outstanding shares of such series
are subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be as set forth in Section 12 of Appendix A hereto.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
MuniPreferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph (a) of Section 3 of this Part II, the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the
Auction Agent and the Auction Agent shall take such other action as set forth
below:
(a) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of paragraphs
(d) and (e) of this Section 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is higher than the Winning Bid
Rate for shares of such series shall be accepted, thus requiring each
such Existing Holder to sell the shares of MuniPreferred subject to
such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares
of such series specifying a rate that is equal to the Winning Bid Rate
for shares of such series shall be rejected, thus entitling such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bid, unless the number of Outstanding shares of
MuniPreferred subject to all such Submitted Bids shall be greater than
the number of shares of MuniPreferred ("remaining
38
shares") in the excess of the Available MuniPreferred of such series
over the number of shares of MuniPreferred subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
shares of MuniPreferred subject to such Submitted Bid, but only in an
amount equal to the number of shares of MuniPreferred of such series
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding shares of
MuniPreferred held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the aggregate number of
Outstanding shares of MuniPreferred subject to such Submitted Bids made
by all such Existing Holders that specified a rate equal to the Winning
Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares
of such series specifying a rate that is equal to the Winning Bid Rate
for shares of such series shall be accepted but only in an amount equal
to the number of shares of such series obtained by multiplying the
number of shares in the excess of the Available MuniPreferred of such
series over the number of shares of MuniPreferred subject to Submitted
Bids described in clauses (ii) through (iv) of this paragraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares of MuniPreferred subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding
shares of MuniPreferred subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of paragraph (d) of this Section 4, Submitted Orders for shares of
such series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the shares of
MuniPreferred subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares
of such series specifying any rate that is higher than the Maximum Rate
for shares of such series and the Submitted Sell Orders for shares of
such series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted
any such Submitted Bid or Submitted Sell Order to sell the shares of
such series subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of
MuniPreferred are subject to Submitted Hold Orders, all Submitted Bids for
shares of such series shall be rejected.
39
(d) If, as a result of the procedures described in clause (iv)
or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
MuniPreferred on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of shares of
MuniPreferred of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of MuniPreferred.
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of MuniPreferred on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of MuniPreferred of such series for
purchase among Potential Holders so that only whole shares of MuniPreferred of
such series are purchased on such Auction Date as a result of such procedures by
any Potential Holder, even if such allocation results in one or more Potential
Holders not purchasing shares of MuniPreferred of such series on such Auction
Date.
(f) Based on the results of each Auction for shares of a
series of MuniPreferred, the Auction Agent shall determine the aggregate number
of shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, shares of
MuniPreferred of such series. Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event an
Existing Holder or Beneficial Owner of shares of a series of MuniPreferred with
respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for such
shares that was accepted in whole or in part, or submitted or is deemed to have
submitted a Sell Order for such shares that was accepted in whole or in part,
fails to instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of shares of MuniPreferred that have been made in
respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for
shares of such series that have been accepted in whole or in Part shall
constitute good delivery to such Potential Holders and Potential Beneficial
Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of
MuniPreferred of any series or to pay for shares of MuniPreferred of any series
sold or purchased pursuant to the Auction Procedures or otherwise.
5. NOTIFICATION OF ALLOCATIONS. Whenever the Fund intends to include
any net capital gains or other income taxable for Federal income tax purposes in
any dividend on shares of MuniPreferred, the Fund shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Fund,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of MuniPreferred believed by it to be interested in submitting an Order
in the Auction to be held on such Auction Date.
40
6. AUCTION AGENT. For so long as any shares of MuniPreferred are
outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its affiliates (which however, may engage or have
engaged in business transactions with the Fund or its affiliates) and at no time
shall the Fund or any of its affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any shares of MuniPreferred are
outstanding, the Board of Trustees shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Agent. The Auction Agent's registry
of Existing Holders of shares of a series of MuniPreferred shall be conclusive
and binding on the Broker- Dealers. A Broker-Dealer may inquire of the Auction
Agent between 3:00 p.m. on the Business Day preceding an Auction for shares of a
series of MuniPreferred and 9:30 a.m. on the Auction Date for such Auction to
ascertain the number of shares of such series in respect of which the Auction
Agent has determined such Broker-Dealer to be an Existing Holder. If such
Broker-Dealer believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-Dealer's inquiry,
such Broker-Dealer may so inform the Auction Agent of that belief. Such
Broker-Dealer shall not, in its capacity as Existing Holder of shares of such
series, submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's inquiry.
7. TRANSFER OF SHARES OF MUNIPREFERRED. Unless otherwise permitted by
the Fund, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of MuniPreferred only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with
the procedures described in this Part II or to a Broker-Dealer, provided,
however, that (a) a sale, transfer or other disposition of shares of
MuniPreferred from a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of this Section 7 if such Broker-Dealer remains
the Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to Auctions, the Broker-Dealer (or other Person,
if permitted by the Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period,
(i) all of the shares of a series of MuniPreferred outstanding from time to time
shall be represented by one global certificate registered in the name of the
Securities Depository or its nominee and (ii) no registration of transfer of
shares of a series of MuniPreferred shall be made on the books of the Fund to
any Person other than the Securities Depository or its nominee.
SIGNATURE PAGE FOLLOWS
41
IN WITNESS WHEREOF, NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE
MUNICIPAL FUND, has caused these presents to be signed on _______________, 2002
in its name and on its behalf by its Vice President and attested by its
Assistant Secretary. The Fund's Declaration of Trust is on file with the
Secretary of State of the Commonwealth of Massachusetts, and the said officers
of the Fund have executed this Statement as officers and not individually, and
the obligations and rights set forth in this Statement are not binding upon any
such officers, or the trustees or shareholders of the Fund, individually, but
are binding only upon the assets and property of the Fund.
NUVEEN INSURED CALIFORNIA TAX-FREE
ADVANTAGE MUNICIPAL FUND
By:
--------------------------------
Jessica R. Droeger
Vice President
ATTEST:
----------------------------------
Virginia O'Neal
Assistant Secretary
42
APPENDIX A
NUVEEN INSURED CALIFORNIA TAX-FREE ADVANTAGE MUNICIPAL FUND
SECTION 1. DESIGNATION AS TO SERIES.
SERIES ___: A series of ____ Preferred Shares, par value $.01 per
share, liquidation preference $25,000 per share, is hereby designated "Municipal
Auction Rate Cumulative Preferred Shares, Series __." Each of the ____ shares of
Series __ MuniPreferred issued on _________, 2002 shall, for purposes hereof, be
deemed to have a Date of Original Issue of _______, 2002; have an Applicable
Rate for its Initial Rate Period equal to _______% per annum; have an initial
Dividend Payment Date of _________, 2002; and have such other preferences,
limitations and relative voting rights, in addition to those required by
applicable law or set forth in the Declaration of Trust applicable to Preferred
Shares of the Fund, as set forth in Part I and Part II of this Statement. Any
shares of Series ___ MuniPreferred issued thereafter shall be issued on the
first day of a Rate Period of the then outstanding shares of Series ___
MuniPreferred, shall have, for such Rate Period, an Applicable Rate equal to the
Applicable Rate for shares of such series established in the first Auction for
shares of such series preceding the date of such issuance; and shall have such
other preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to Preferred Shares of the Fund, as set forth in Part I and Part II of this
Statement. The Series __ MuniPreferred shall constitute a separate series of
Preferred Shares of the Fund, and each share of Series __ MuniPreferred shall be
identical except as provided in Section 11 of Part I of this Statement.
SECTION 2. NUMBER OF AUTHORIZED SHARES PER SERIES. The number of
authorized shares constituting Series __ MuniPreferred is _____________.
SECTION 3. EXCEPTIONS TO CERTAIN DEFINITIONS. Notwithstanding the
definitions contained under the heading "Definitions" in this Statement, the
following terms shall have the following meanings for purposes of this
Statement:
Not applicable.
SECTION 4. CERTAIN DEFINITIONS. For purposes of this Statement, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"ESCROWED BONDS" shall mean Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating. In the event that a defeased obligation which is an S&P Eligible
Asset does not meet the criteria of an Escrowed Bond, such Municipal Obligation
will be deemed to remain in the Issue Type Category into which it fell prior to
such defeasance.
"GROSS-UP PAYMENT" means payment to a Holder of shares of MuniPreferred
of an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such Holder to which such Gross-up Payment relates, would
cause such Holder's dividends in dollars (after Federal and California income
tax consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such Holder if the amount of such aggregate Taxable
Allocations would have been excludable from the gross income of such Holder.
Such Gross-up Payment shall be calculated (i) without consideration being given
A-1
to the time value of money; (ii) assuming that no Holder of shares of
MuniPreferred is subject to the Federal alternative minimum tax with respect to
dividends received from the Fund; and (iii) assuming that each Taxable
Allocation and each Gross-up Payment (except to the extent such Gross-up Payment
is designated as an exempt-interest dividend under Section 852(b)(5) of the Code
or successor provisions) would be taxable in the hands of each Holder of shares
of MuniPreferred at the maximum marginal combined regular Federal and California
personal income tax rate applicable to ordinary income (taking into account the
Federal income tax deductibility of state and local taxes paid or incurred) or
net capital gains, as applicable, or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income or net capital gains, as
applicable, whichever is greater, in effect at the time such Gross-up Payment is
made.
"INVERSE FLOATER" shall mean trust certificates or other instruments
evidencing interests in one or more Municipal Obligations that qualify as S&P
Eligible Assets, the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating instruments have only one reset remaining until
maturity.
"ISSUE TYPE CATEGORY" shall mean, with respect to a Municipal
Obligation acquired by the Fund, (A) for purposes of calculating Moody's
Eligible Assets as of any Valuation Date, one of the following categories into
which such Municipal Obligation falls based upon a good faith determination by
the Fund: health care issues (including issues related to teaching and
non-teaching hospitals, public or private); housing issues (including issues
related to single- and multi-family housing projects) educational facilities
issues (including issues related to public and private schools); student loan
issues; resource recovery issues; transportation issues (including issues
related to mass transit, airports and highways); industrial development bond
issues (including issues related to pollution control facilities); utility
issues (including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not falling within one of the aforementioned categories; and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, one of the
following categories into which such Municipal Obligation falls based upon a
good faith determination by the Fund: health care issues (including issues
related to teaching and non-teaching hospitals, public or private); housing
issues (including issues related to single- and multi-family housing projects);
educational facilities issues (including issues related to public and private
schools); student loan issues; transportation issues (including issues related
to mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); public power
utilities issues (including issues related to the provision of electricity,
either singly or in combination with the provision of other utilities, and
issues related only to the provision of gas); water and sewer utilities issues
(including issues related to the provision of water and sewers as well as
combination utilities not falling within the public power utilities category);
special utilities issues (including issues related to resource recovery, solid
waste and irrigation as well as other utility issues not falling within the
public power and water and sewer utilities categories); general obligation
issues; lease obligations (including certificates of participation); Escrowed
Bonds; and other issues ("Other Issues") not falling within one of the
aforementioned categories. The general obligation issue category includes any
issues that is directly or indirectly guaranteed by the State of California or
its political subdivisions. Utility issues are included in the general
obligation issue category if the issue is directly or indirectly guaranteed by
the State of California or its political subdivisions. Municipal Obligations in
the utility issue category will be classified within one of the three following
sub-categories: (i) electric, gas and combination issues (if the combination
issue includes an electric issue); (ii) water and sewer utilities and
combination issues (if the combination issue does not include an electric
issue); and (iii) irrigation, resource recovery, solid waste and other
utilities, provided that Municipal Obligations included in this sub-category
(iii) must be rated by S&P in order to be included in S&P Eligible Assets.
Municipal Obligations in the transportation issue category will be classified
within one of the two following sub-categories: (i) streets and highways, toll
roads, bridges and tunnels, airports and multi-purpose port authorities
(multiple revenue streams generated by toll roads, airports, real estate,
bridges); (ii) mass transit, parking seaports and others.
"MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to (i) (A) in the event such Municipal Obligation is covered by an
Original Issue Insurance policy or a Portfolio Insurance policy which does not
provide the Fund with the option to obtain Permanent Insurance with respect to
such Municipal Obligation, or is not covered by bond insurance, the Moody's or
S&P rating on such Municipal Obligation, (B) in the event such Municipal
Obligation is covered by a Secondary Market Insurance policy, the Moody's
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 Fund with the option to obtain Permanent Insurance with
respect to such Municipal Obligation, at the Fund's option, the Moody's or S&P
rating on such Municipal Obligation or the Moody's insurance claims-paying
ability rating of the issuer of the Portfolio Insurance policy and (ii) the
rating on such asset and the shortest Exposure Period set forth opposite such
rating that is the same length as or is longer than the Moody's Exposure Period,
in accordance with the table set forth below:
RATING CATEGORY
---------------------------------------------------------------------------------
EXPOSURE PERIOD Aaa* AA* A* BAA* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
--------------- ---- --- --- ---- ------- ----------- --------- ------------
7 weeks......................... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than seven weeks..... 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight weeks..... 156 163 170 177 192 138 150 240
----------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have
a demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which
do not mature or have a demand feature at par exercisable in 30 days and
which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB
by S&P or not rated by Moody's or S&P.
If the Moody's Discount Factor used to discount a particular Municipal
Obligation is determined by reference to the insurance claims-paying ability
rating 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, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable,
A-2
suspended by Moody's, and (iii) is Part of an issue of Municipal Obligations of
at least $5,000,000 except for Municipal Obligations rated below A by Moody's
Municipal Obligations within the healthcare Issue Type Category, in which case
the minimum issue size is $10,000,000. Except for general obligation bonds,
Municipal Obligations issued by any one issuer and rated BBB or lower by S&P, Ba
or B by Moody's or not rated by S&P and Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by the same
issuer and rated Baa by Moody's or A by S&P, may comprise no more than 6% of
total Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more than 10% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
the same issuer and rated Aa by Moody's or AAA by S&P, may comprise no more than
20% of total Moody's Eligible Assets. For purposes of the foregoing sentence,
any Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Obligation. Other Securities falling within a particular Issue
Type Category may comprise no more than 12% of total Moody's Eligible Assets;
such Other Securities, if any, together with any Municipal Obligations falling
within a particular Issue Type Category and rated Baa by Moody's or A by S&P,
may comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
A by Moody's or AA by S&P, may comprise no more than 40% of total Moody's
Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within
particular Issue Type Category and rated Aa by Moody's or AAA by S&P, may
comprise no more than 60% of total Moody's Eligible Assets. For purposes of this
definition, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise no
more than 4% of Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations issued by issuers located within the same county
and rated Baa by Moody's or A by S&P, may comprise no more than 6% of Moody's
Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by issuers located within
the same county and rated A by Moody's or AA by S&P, may comprise no more than
10% of Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same county and rated Aa by Moody's or AAA by S&P,
may comprise no more than 20% of Moody's Eligible Assets; and (B) in no event
may (i) student loan Municipal Obligations comprise more than 10% of Moody's
Eligible Assets; (ii) resource recovery Municipal Obligations comprise more than
10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than 10% of
Moody's Eligible Assets. For purposes of applying the foregoing requirements, a
Municipal Obligation rated BBB- by S&P shall not be considered to be rated BBB
by S&P, Moody's Eligible Assets shall be calculated without including cash, and
Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-term rating
of A. When the Fund sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the MuniPreferred Basic
Maintenance Amount. When the Fund purchases a Moody's Eligible Asset and agrees
to sell it at a future date, such Eligible Asset shall be valued at the amount
of cash to be received by the Fund upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2 from
Moody's and the transaction has a term of no more than 30 days, otherwise such
Eligible Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Fund
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Fund by Nuveen Advisory Corp., JPMorgan Chase Bank or the
Auction Agent and (d) Liens by virtue of any repurchase agreement; or (ii)
deposited irrevocably for the payment of any liabilities for purposes of
determining the MuniPreferred Basic Maintenance Amount.
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 are
(i) covered by Portfolio Insurance policies which provide the Fund with the
option to obtain such Permanent Insurance and (ii) discounted by a Moody's
Discount Factor determined by reference to the insurance claims-paying ability
rating of the issuer of such Portfolio Insurance policy.
"OTHER ISSUES" shall have the respective meanings specified in the
definition of "Issue Type Category."
"RATE MULTIPLE," for shares of a series of MuniPreferred on any Auction
Date for shares of such series, shall mean the percentage, determined as set
forth below, based on the prevailing rating of shares of such series in effect
at the close of business on the Business Day next preceding such Auction Date:
A-3
PREVAILING RATING PERCENTAGE
----------------- ----------
"aa3"/AA-- or higher................... 110%
"a3"/A--............................... 125%
"baa3"/BBB--........................... 150%
"ba3"/BB--............................. 200%
Below "ba3"/BB--....................... 250%
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal combined regular Federal
and California personal income tax rate applicable to ordinary income (taking
into account the Federal income tax deductibility of local taxes paid or
incurred) or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater.
For purposes of this definition, the "prevailing rating" of shares of a
series of MuniPreferred shall be (i) "aa3"/AA-- or higher if such shares have a
rating of "aa3" or better by Moody's and AA-- or better by S&P or the equivalent
of such ratings by such agencies or a substitute rating agency or substitute
rating agencies selected as provided below, (ii) if not "aa3"/AA-- or higher,
then "a3"/A-- if such shares have a rating of "a3" or better by Moody's and A--
or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA-- or higher or "a3"/A--, then "baa3"/BBB-- if such
shares have a rating of "baa3" or better by Moody's and BBB-- or better by S&P
or the equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iv) if not "aa3"/AA--
or higher, "a3"/A-- or "baa3"/BBB--, then "ba3"/BB-- if such shares have a
rating of "ba3" or better by Moody's and BB-- or better by S&P or the equivalent
of such ratings by such agencies or a substitute rating agency or substitute
rating agencies selected as provided below, and (v) if not "aa3"/AA-- or higher,
"a3"/A--, "baa3"/BBB--, or "ba3"/BB--, then Below "ba3"/BB--; provided, however,
that if such shares are rated by only one rating agency, the prevailing rating
will be determined without reference to the rating of any other rating agency.
The Fund shall take all reasonable action necessary to enable either S&P or
Moody's to provide a rating for shares of MuniPreferred. If neither S&P nor
Moody's shall make such a rating available, the party set forth in Section 7 of
Appendix A or its successor shall select at least one nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of shares of the series of MuniPreferred set forth
opposite such party's name in Section 7 of Appendix A and the Fund shall take
all reasonable action to enable such rating agency to provide a rating for such
shares.
"S&P DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to (i) (A) in the event such Municipal Obligation is covered by an
Original Issue Insurance policy or a Portfolio Insurance policy which does not
provide the 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 Fund with the option to obtain Permanent Insurance with respect to
such Municipal Obligation, at the 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 rating on such asset
and the shortest Exposure Period set forth opposite such rating that is the same
length as or is longer than the S&P Exposure Period, in accordance with the
table set forth below:
RATING CATEGORY
------------------------------------------------------
HIGH
EXPOSURE PERIOD AAA* AA* A* BBB* YIELD
--------------- ---- --- --- ---- -----
45 Business Days....................... 210% 215% 230% 270% 240%
25 Business Days....................... 190 195 210 250 240
10 Business Days....................... 175 180 195 235 240
7 Business Days........................ 170 175 190 230 240
3 Business Days........................ 150 155 170 210 240
----------
* S&P rating.
A-4
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, or 120% so long as such Municipal
Obligations are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less or 125% if such Municipal Obligations are not
rated by S&P but are rated equivalent to A-1+ or SP-1+ by another nationally
recognized statistical rating organization, on a case by case basis; provided,
however, that any such non-S&P rated short-term Municipal Obligations which have
demand features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least A-1+ from S&P; and further
provided that such non-S&P rated short-term Municipal Obligations may comprise
no more than 50% of short-term Municipal Obligations that qualify as S&P
Eligible Assets; provided, however, that Municipal Obligations not rated by S&P
but rated equivalent to BBB or lower by another nationally recognized
statistical rating organization, rated BB+ or lower by S&P or non-rated (such
Municipal Obligations are hereinafter referred to as "High Yield Securities")
may comprise no more than 20% of the short-term Municipal Obligations that
qualify as S&P Eligible Assets; (ii) the S&P Discount Factor for Receivables for
Municipal Obligations Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the Municipal
Obligations sold; (iii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold if such receivables are due within
five Business Days of such Valuation Date; and (iv) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date. The Fund may adopt S&P
Discount Factors for Municipal Obligations other than Municipal Obligations
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the MuniPreferred. For purposes of
the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P,
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis, which do not mature or have a demand
feature at par exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash irrevocably
deposited by the Fund for the payment of any liabilities within the meaning of
MuniPreferred Basic Maintenance Amount), Receivables for Municipal Obligations
Sold or a Municipal Obligation owned by the Fund that (i) is interest bearing
and pays interest at least semi-annually; (ii) is payable with respect to
principal and interest in U.S. Dollars; (iii) is publicly rated BBB or higher by
S&P or, if not rated by S&P but rated equivalent or higher to an A by another
nationally recognized statistical rating organization, on a case by case basis;
(iv) is not subject to a covered call or put option written by the Fund; (v)
except for Inverse Floaters, is not Part of a private placement of Municipal
Obligations; and (vi) except for Inverse Floaters, is Part of an issue of
Municipal Obligations with an original issue size of at least $5 million. Any
Municipal Obligation that is a Part of an original issue size of less than $10
million must carry a rating of at least A by S&P or an equivalent rating by
another nationally recognized statistical rating organization and the Market
Value of such Municipal Obligations may not exceed 20% of the aggregate Market
Value of S&P Eligible Assets. Solely for purposes of this definition, the term
"Municipal Obligation" means any obligation the interest on which is exempt from
regular Federal income taxation and which is issued by any of the fifty United
States, the District of Columbia or any of the territories of the United States,
their subdivisions, counties, cities, towns, villages, school districts and
agencies (including authorities and
A-5
special districts created by the states), and federally sponsored agencies such
as local housing authorities. Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds and High
Yield Securities) of any one issuer or guarantor (excluding bond
insurers) shall be considered S&P Eligible Assets only to the extent
the Market Value of such Municipal Obligations (including short-term
Municipal Obligations) does not exceed 10% of the aggregate Market
Value of S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the Market Value
of such Municipal Obligations exceeds 5% of the aggregate Market Value
of S&P Eligible Assets. High Yield Securities of any one issuer shall
be considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Obligations does not exceed 5% of the aggregate
Market Value of S&P Eligible Assets;
(2) Municipal Obligations (excluding Escrowed Bonds) of any
one Issue Type Category shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations does not
exceed 25% of the aggregate Market Value of S&P Eligible Assets;
provided, however, that Municipal Obligations falling within the
utility Issue Type Category will be broken down into three
sub-categories and such Municipal Obligations will be considered S&P
Eligible Assets to the extent the Market Value of such Municipal
Obligations in each such sub-category does not exceed 25% of the
aggregate Market Value of S&P Eligible Assets per each sub-category
provided that the total utility Issue Type Category does not exceed 60%
of the Aggregate Market Value of S&P Eligible Assets; provided,
however, that Municipal Obligations falling within the transportation
Issue Type Category will be broken down into two sub-categories and
such Municipal Obligations will be considered S&P Eligible Assets to
the extent the Market Value of such Municipal Obligations in both
sub-categories combined does not exceed 40% of the aggregate Market
Value of S&P Eligible Assets (exposure to transportation sub-category
(i) described in the definition of Issue Type Category is limited to
25% of the aggregate Market Value of S&P Eligible Assets, provided,
however, exposure to transportation sub-category (ii) can exceed the
25% limit to the extent that exposure to transportation sub-category
(i) is reduced, for a total exposure up to and not exceeding 40% of the
aggregate Market Value of S&P Eligible Assets for the transportation
Issue Type Category); and provided, however, that the general
obligation issues will be considered S&P Eligible Assets only to the
extent the Market Value of such general obligation issues does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets;
(3) Municipal Obligations not rated by S&P shall be considered
S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 50% of the aggregate Market Value
of S&P Eligible Assets; provided, however, that High Yield Securities
shall be considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets; and
(4) Out of State Bonds shall be considered S&P Eligible Assets
only to the extent that the Market Value of such Municipal Obligations
does not exceed 20% of the aggregate Market Value of S&P Eligible
Assets.
For purposes of determining as of any Valuation Date whether the Fund
has S&P 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 S&P Eligible Assets that are (i) covered by
Portfolio Insurance policies which provide the Fund with the option to obtain
such Permanent Insurance and (ii) 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.
SECTION 5. INITIAL RATE PERIODS. The Initial Rate Period for shares of
Series __ MuniPreferred shall be the period from and including the Date of
Original Issue thereof to but excluding ___________, 2002.
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (ZZZ) CONTAINED UNDER THE
HEADING "DEFINITIONS" IN THIS STATEMENT. __________, 2002.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE
MULTIPLE" IN THIS STATEMENT.
PARTY SERIES OF MUNIPREFERRED
----- -----------------------
Salomon Smith Barney.......................... Series ___
SECTION 8. ADDITIONAL DEFINITIONS.
"OUT OF STATE BONDS" shall mean "Out of State Bonds" as defined in the
Fund's Registration Statement.
SECTION 9. DIVIDEND PAYMENT DATES. Except as otherwise provided in
paragraph (d) of Section 2 of Part I of this Statement, dividends shall be
payable on shares of:
Series __ MuniPreferred, for the Initial Rate Period on Thursday,
______________, 2002, and on each Thursday thereafter.
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c)(i) OF SECTION 5 OF
PART I OF THIS STATEMENT.
________________.
SECTION 11. REDEMPTION PROVISIONS APPLICABLE TO INITIAL RATE PERIODS.
Not applicable.
A-6
SECTION 12. APPLICABLE RATE FOR PURPOSES OF SUBPARAGRAPH (B)(III) OF
SECTION 3 OF PART II OF THIS STATEMENT. For purposes of subparagraph (b)(iii) of
Section 3 of Part II of this Statement, the Applicable Rate for shares of such
series for the next succeeding Rate Period of shares of such series shall be
equal to the lesser of the Kenny Index (if such Rate Period consists of fewer
than 183 Rate Period Days) or the product of (A)(I) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Rate Period, if such Rate
Period consists of fewer than 183 Rate Period Days; (II) the Treasury Bill Rate
on such Auction Date for such Rate Period, if such Rate Period consists of more
than 182 but fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on
such Auction Date for such Rate Period, if such Rate Period is more than 364
Rate Period Days (the rate described in the foregoing clause (A)(I), (II) or
(III), as applicable, being referred to herein as the "Benchmark Rate") and (B)
1 minus the maximum marginal combined regular Federal and California personal
income tax rate applicable to ordinary income (taking into account the Federal
income tax deductibility of state and local taxes paid or incurred) or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to shares of such series in
such Rate Period any net capital gains or other income taxable for Federal
income tax purposes ("Taxable Income"), the Applicable Rate for shares of such
series for such Rate Period will be (i) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if
the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal combined regular personal income tax rate
applicable to ordinary income (taking into account the Federal income tax
deductibility of state and local taxes paid or incurred) or the maximum marginal
regular Federal corporate income tax applicable to ordinary income, whichever is
greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing,
Taxable Yield Rate means the rate determined by (a) dividing the amount of
Taxable Income available for distribution per such share of MuniPreferred by the
number of days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in
the case of any other Dividend Period), and (c) dividing the amount determined
in (b) above by $25,000.
SECTION 13. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any MuniPreferred are rated by S&P, the
Fund will not purchase or sell futures contracts, write, purchase or
sell options on futures contracts or write put options (except covered
put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then assigned
to the MuniPreferred by S&P, except that the Fund may purchase or sell
futures contracts based on the Bond Buyer Municipal Bond Index (the
"Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any S&P Hedging
Transaction based on the Municipal Index (other than
transactions which terminate a futures contract or option held
by the fund by the Fund's taking an opposite position thereto
("Closing Transactions")), which would cause the Fund at the
time of such transaction to own or have sold the least of (A)
more than 1,000 outstanding futures contracts based on the
Municipal Index, (B) outstanding futures contracts based on
the Municipal Index exceeding in number 25% of the quotient of
the Market Value of the Fund's total assets divided by $1,000
or (C) outstanding futures contracts based on the Municipal
Index exceeding in number 10% of the average number of daily
traded futures contracts based
A-7
on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street
Journal;
(ii) the Fund will not engage in any S&P Hedging
Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of such
transaction to own or have sold the lesser of (A) outstanding
futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Fund's total
assets divided by $100,000 ($200,000 in the case of the
two-year United States Treasury Note) or (B) outstanding
futures contracts based on Treasury Bonds exceeding in number
10% of the average number of daily traded futures contracts
based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street
Journal.
(iii) the Fund will engage in Closing Transactions to
close out any outstanding futures contract which the Fund owns
or has sold or any outstanding option thereon owned by the
Fund in the event (A) the Fund does not have S&P Eligible
Assets with an aggregate Discounted Value equal to or greater
than the MuniPreferred Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Fund is required to
pay Variation Margin on the second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to
close out any outstanding futures contract or option thereon
in the month prior to the delivery month under the terms of
such futures contract or option thereon unless the Fund holds
the securities deliverable under such terms; and
(v) when the fund writes a futures contract or option
thereon, it will either maintain an amount of cash, cash
equivalents or high grade (rated A or better by S&P),
fixed-income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the
account of or on behalf of the Fund's broker with respect to
such futures contract or option equals the Market Value of the
futures contract or option, or, in the event the Fund writes a
futures contract or option thereon which requires delivery of
an underlying security, it shall hold such underlying security
in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the MuniPreferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
(b) For so long as any MuniPreferred are rated by Moody's, the
Fund will not buy or sell futures contracts, write, purchase or sell
call options on futures contracts or purchase put options on futures
contracts or write call options (except covered call options) on
portfolio securities unless it receives written confirmation from
Moody's that engaging in such transactions would not impair the ratings
then assigned to the MuniPreferred by Moody's, except that the Fund may
purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell
exchange-traded put options on such futures contracts and purchase,
write or sell exchange-traded call options on such futures contracts
(collectively, "Moody's Hedging Transactions"), subject to the
following limitations:
A-8
(i) the Fund will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions), which would cause the Fund at the time of such
transaction to own or have sold (A) outstanding futures
contracts based on the Municipal Index exceeding in number 10%
of the average number of daily traded futures contracts based
on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street
Journal or (B) outstanding futures contracts based on the
Municipal Index having a Market Value exceeding 50% of the
Market Value of all Municipal Bonds constituting Moody's
Eligible Assets owned by the Fund (other than Moody's Eligible
Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of such
transaction to own or have sold (A) outstanding futures
contracts based on Treasury Bonds having an aggregate Market
Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Fund and rated Aa by Moody's (or,
if not rated by Moody's but rated by S&P, rated AAA by S&P) or
(B) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 40% of the
aggregate Market Value of all Municipal Bonds constituting
Moody's Eligible Assets owned by the Fund (other than Moody's
Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated
by Moody's but rated by S&P, rated A or AA by S&P) (for
purposes of the foregoing clauses (i) and (ii), the Fund shall
be deemed to own the number of futures contracts that underlie
any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to
close out any outstanding futures contract based on the
Municipal Index if the amount of open interest in the
Municipal Index as reported by The Wall Street Journal is less
than 5,000;
(iv) the Fund will engage in a Closing Transaction to
close out any outstanding futures contract by no later than
the fifth Business Day of the month in which such contract
expires and will engage in a Closing Transaction to close out
any outstanding option on a futures contract by no later than
the first Business Day of the month in which such option
expires;
(v) the Fund will engage in Moody's Hedging
Transactions only with respect to futures contracts or options
thereon having the next settlement date or the settlement date
immediately thereafter;
(vi) the Fund will not engage in options and futures
transactions for leveraging or speculative purposes and will
not write any call options or sell any futures contracts for
the purpose of hedging the anticipated purchase of an asset
prior to completion of such purchase; and
(vii) the Fund will not enter into an option or
futures transaction unless, after giving effect thereto, the
Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the
MuniPreferred Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of Moody's Eligible
Assets which the Fund is obligated to deliver or receive pursuant to an
A-9
outstanding futures contract or option shall be as follows: (i) assets subject
to call options written by the Fund which are either exchange-traded and
"readily reversible" or which expire within 49 days after the date as of which
such valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Fund; (ii) assets
subject to call options written by the Fund not meeting the requirements of
clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Fund shall be valued at the lesser of (A) the exercise
price and (B) the Discounted Value of the subject security; (iv) futures
contracts shall be valued at the lesser of (A) settlement price and (B) the
Discounted Value of the subject security, provided that, if a contract matures
within 49 days after the date as of which such valuation is made, where the Fund
is the seller the contract may be valued at the settlement price and where the
Fund is the buyer the contract may be valued at the Discounted Value of the
subject securities; and (v) where delivery may be made to the Fund with any
security of a class of securities, the Fund shall assume that it will take
delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the following amounts shall be
subtracted from the aggregate Discounted Value of the Moody's Eligible Assets
held by the Fund: (i) 10% of the exercise price of a written call option; (ii)
the exercise price of any written put option; (iii) where the Fund is the seller
under a futures contract, 10% of the settlement price of the futures contract;
(iv) where the Fund is the purchaser under a futures contract, the settlement
price of assets purchased under such futures contract; (v) the settlement price
of the underlying futures contract if the Fund writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Fund writes call options on a futures contract and does not own the
underlying contract.
(c) For so long as any MuniPreferred are rated by Moody's, the
Fund will not enter into any contract to purchase securities for a
fixed price at a future date beyond customary settlement time (other
than such contracts that constitute Moody's Hedging Transactions that
are permitted under Section 13(b) of this Statement), except that the
Fund may enter into such contracts to purchase newly-issued securities
on the date such securities are issued ("Forward Commitments"),
subject to the following limitation:
(i) the Fund will maintain in a segregated account
with its custodian cash, cash equivalents or short-term,
fixed-income securities rated P-1, MTG-1 or VMIG-1 by Moody's
and maturing prior to the date of the Forward Commitment with
a Market Value that equals or exceeds the amount of the Fund's
obligations under any Forward Commitments to which it is from
time to time a party or long-term fixed income securities with
a Discounted Value that equals or exceeds the amount of the
Fund's obligations under any Forward Commitment to which it is
from time to time a party; and
(ii) the Fund will not enter into a Forward
Commitment unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the MuniPreferred
Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of all Forward
Commitments to which the Fund is a party and of all securities deliverable to
the Fund pursuant to such Forward Commitments shall be zero.
A-10
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P") rating symbols and their meanings (as published
by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days -- including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the
obligor to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA An obligation rated 'AAA' has the highest rating
assigned by Standard & Poor's. The obligor's capacity
to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated 'AA' differs from the
highest-rated obligations only in small degree. The
obligor's capacity to meet its financial commitment
on the obligation is very strong.
B-1
A An obligation rated 'A' is somewhat more susceptible
to the adverse effects of changes in circumstances
and economic conditions than obligations in
higher-rated categories. However, the obligor's
capacity to meet its financial commitment on the
obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate
protection parameters. However, adverse economic
conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
BB, B, CCC, CC, and C Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative
characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated 'BB' is less vulnerable to
nonpayment than other speculative issues. However, it
faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions,
which could lead to the obligor's inadequate capacity
to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to
nonpayment than obligations rated 'BB', but the
obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse
business, financial, or economic conditions will
likely impair the obligor's capacity or willingness
to meet its financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the
obligation.
CC An obligation rated 'CC' is currently highly
vulnerable to nonpayment.
C The 'C' rating may be used to cover a situation where
a bankruptcy petition has been filed or similar
action has been taken, but payments on this
obligation are being continued.
D An obligation rated 'D' is in payment default. The
'D' rating category is used when payments on an
obligation are not made on the date due even if the
applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be
made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an
obligation are jeopardized.
Plus (+) or minus (-) The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative
standing within the major rating categories.
B-2
C The 'c' subscript is used to provide additional
information to investors that the bank may terminate
its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are
deemed taxable.
P The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the project financed by the
debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent
upon the successful, timely completion of the
project. This rating, however, while addressing
credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The
investor should exercise his own judgment with
respect to such likelihood and risk.
* Continuance of the ratings is contingent upon
Standard & Poor's receipt of an executed copy of the
escrow agreement or closing documentation confirming
investments and cash flows.
R The 'r' highlights derivative, hybrid, and certain
other obligations that Standard & Poor's believes may
experience high volatility or high variability in
expected returns as a result of noncredit risks.
Examples of such obligations are securities with
principal or interest return indexed to equities,
commodities, or currencies; certain swaps and
options; and interest-only and principal-only
mortgage securities. The absence of an 'r' symbol
should not be taken as an indication that an
obligation will exhibit no volatility or variability
in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ('AAA', 'AA', 'A', 'BBB', commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule -- the larger the final maturity
relative to other maturities, the more likely it will be
treated as a note; and
B-3
o Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet
its financial commitment on these obligations is extremely
strong.
A-2 A short-term obligation rated 'A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
B-4
D A short-term obligation rated 'D' is in payment default. The
'D' rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poor's believes that such
payments will be made during such grace period.
The 'D' rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation are
jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc. -- A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their
meanings (as published by Moody's) follows:
MUNICIPAL BONDS
Aaa Bonds which are rated 'Aaa' are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated 'Aa' are judged to be of high quality by
all standards. Together with the 'Aaa' group they comprise
what are generally known as high grade bonds. They are rated
lower than the best bonds because margins of protection may
not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks
appear somewhat larger than in 'Aaa' securities.
A Bonds which are rated 'A' possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated 'Baa' are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated 'Ba' are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated 'B' generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
B-5
Caa Bonds which are rated 'Caa' are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca Bonds which are rated 'Ca' represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated 'C' are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Issues that are secured by escrowed funds held in trust, reinvested in
direct, non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes superior credit
quality. Excellent protection is afforded by
established cash flows, highly reliable
liquidity support, or demonstrated
broad-based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes strong credit
quality. Margins of protection are ample,
although not as large as in the preceding
group.
MIG 3/VMIG 3 This designation denotes acceptable credit
quality. Liquidity and cash-flow protection
may be narrow, and market access for
refinancing is likely to be less
well-established.
SG This designation denotes speculative-grade
credit quality. Debt instruments in this
category may lack sufficient margins of
protection.
COMMERCIAL PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
B-6
o Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Ratings -- A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. 'AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
B-7
SPECULATIVE GRADE
BB Speculative. 'BB' ratings
indicate that there is a
possibility of credit risk
developing, particularly as the
result of adverse economic change
over time; however, business or
financial alternatives may be
available to allow financial
commitments to be met. Securities
rated in this category are not
investment grade.
B Highly speculative. 'B' ratings
indicate that significant credit
risk is present, but a limited
margin of safety remains.
Financial commitments are
currently being met; however,
capacity for continued payment is
contingent upon a sustained,
favorable business and economic
environment.
CCC, CC, C High default risk Default is a real possibility.
Capacity for meeting financial
commitments is solely reliant
upon sustained, favorable
business or economic
developments. A 'CC' rating
indicates that default of some
kind appears probable. 'C'
ratings signal imminent default.
DDD, DD, and D Default The ratings of obligations in
this category are based on their
prospects for achieving partial
or full recovery in a
reorganization or liquidation of
the obligor. While expected
recovery values are highly
speculative and cannot be
estimated with any precision, the
following serve as general
guidelines. 'DDD' obligations
have the highest potential for
recovery, around 90%-100% of
outstanding amounts and accrued
interest. 'DD' indicates
potential recoveries in the range
of 50%-90%, and 'D' the lowest
recovery potential, i.e., below
50%. Entities rated in this
category have defaulted on some
or all of their obligations.
Entities rated 'DDD' have the
highest prospect for resumption
of performance or continued
operation with or without a
formal reorganization process.
Entities rated 'DD' and 'D' are
generally undergoing a formal
reorganization or liquidation
process; those rated 'DD' are
likely to satisfy a higher
portion of their outstanding
obligations, while entities rated
'D' have a poor prospect for
repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+"
to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
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F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes: "+" or "-" may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the 'AAA'
long-term rating category, to categories below 'CCC', or to short-term ratings
other than 'F1'.
'NR' indicates that Fitch does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
B-9
APPENDIX C
DESCRIPTION OF INSURERS
Set forth below is information about the various municipal bond
insurers with whom the Fund intends to maintain specific insurance policies for
particular municipal bonds or policies of portfolio insurance. The information
in this Appendix is based on information supplied by the insurers, and the Fund
cannot verify its accuracy and completeness.
AMBAC ASSURANCE CORPORATION ("AMBAC ASSURANCE")
PAYMENT PURSUANT TO FINANCIAL GUARANTY INSURANCE POLICY
Ambac Assurance has made a commitment to issue a financial guaranty
insurance policy (the "Financial Guaranty Insurance Policy") relating to the
bonds effective as of the date of issuance of the bonds. Under the terms of the
Financial Guaranty Insurance Policy, Ambac Assurance will pay to The Bank of New
York, in New York, New York or any successor thereto (the "Insurance Trustee")
that portion of the principal of and interest on the bonds which shall become
Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor (as
such terms are defined in the Financial Guaranty Insurance Policy). Ambac
Assurance will make such payments to the Insurance Trustee on the later of the
date on which such principal and interest becomes Due for Payment or within one
business day following the date on which Ambac Assurance shall have received
notice of Nonpayment from the Trustee/Paying Agent. The insurance will extend
for the term of the bonds and, once issued, cannot be canceled by Ambac
Assurance.
The Financial Guaranty Insurance Policy will insure payment only on
stated maturity dates and on mandatory sinking fund installment dates, in the
case of principal, and on stated dates for payment, in the case of interest. If
the bonds become subject to mandatory redemption and insufficient funds are
available for redemption of all outstanding bonds, Ambac Assurance will remain
obligated to pay principal of and interest on outstanding bonds on the
originally scheduled interest and principal payment dates including mandatory
sinking fund redemption dates. In the event of any acceleration of the principal
of the bonds, the insured payments will be made at such times and in such
amounts as would have been made had there not been an acceleration.
In the event the Bond Registrar has notice that any payment of
principal of or interest on a bond which has become Due for Payment and which is
made to a Holder by or on behalf of the Obligor has been deemed a preferential
transfer and theretofore recovered from its registered owner pursuant to the
United States Bankruptcy Code in accordance with a final, nonappealable order of
a court of competent jurisdiction, such registered owner will be entitled to
payment from Ambac Assurance to the extent of such recovery if sufficient funds
are not otherwise available.
The Financial Guaranty Insurance Policy does not insure any risk other
than Nonpayment, as defined in the Policy. Specifically, the Financial Guaranty
Insurance Policy does not cover:
1. payment on acceleration, as a result of a call for redemption
(other than mandatory sinking fund redemption) or as a result
of any other advancement of maturity.
2. payment of any redemption, prepayment or acceleration premium.
3. nonpayment of principal or interest caused by the insolvency
or negligence of any Trustee or Paying Agent, if any.
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If it becomes necessary to call upon the Financial Guaranty Insurance
Policy, payment of principal requires surrender of bonds to the Insurance
Trustee together with an appropriate instrument of assignment so as to permit
ownership of such bonds to be registered in the name of Ambac Assurance to the
extent of the payment under the Financial Guaranty Insurance Policy. Payment of
interest pursuant to the Financial Guaranty Insurance Policy requires proof of
Holder entitlement to interest payments and an appropriate assignment of the
Holder's right to payment to Ambac Assurance.
Upon payment of the insurance benefits, Ambac Assurance will become the
owner of the bond, appurtenant coupon, if any, or right to payment of principal
or interest on such bond and will be fully subrogated to the surrendering
Holder's rights to payment.
AMBAC ASSURANCE
Ambac Assurance Corporation ("Ambac Assurance") 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, the Territory of Guam and the
Commonwealth of Puerto Rico, with admitted assets of approximately
$5,587,000,000 (unaudited) and statutory capital of approximately $3,453,000,000
(unaudited) as of June 30, 2002. Statutory capital consists of Ambac Assurance's
policyholders' surplus and statutory contingency reserve. Standard & Poor's
Credit Markets Services, a division of The McGraw-Hill Companies, Moody's
Investors Service and Fitch, Inc. have each assigned a triple-A financial
strength rating to Ambac Assurance. Ambac Assurance has obtained a ruling from
the Internal Revenue Service to the effect that the insuring of an obligation to
Ambac Assurance will not affect the treatment for federal income tax purposes of
interest on such obligation and that insurance proceeds representing maturing
interest paid by Ambac Assurance under policy provisions substantially identical
to those contained in its municipal bond insurance policy shall be treated for
federal income tax purposes in the same manner as if such payments were made by
the issuer of the bonds.
Ambac Assurance makes no representation regarding the bonds or the
advisability of investing in the bonds and makes no representation regarding,
nor has it participated in the preparation of, the Prospectus and Statement of
Additional Information, other than the information supplied by Ambac Assurance
and presented under this heading "Ambac Assurance Corporation."
AVAILABLE INFORMATION
The parent company of Ambac Assurance, Ambac Financial Group, Inc. (the
"Company"), is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These reports, proxy statements
and other information may be inspected and copied at the SEC's public reference
facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. The
SEC maintains an internet site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding companies that
file electronically with the SEC, including the Company. In addition, the
aforementioned material may also be inspected at the offices of the New York
Stock Exchange, Inc. (the "NYSE") at 20 Broad Street, New York, New York 10005.
Copies of Ambac Assurance's financial statements prepared in accordance
with statutory accounting standards are available from Ambac Assurance. The
address of Ambac Assurance's administrative offices and its telephone number are
One State Street Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340.
C-2
FINANCIAL SECURITY ASSURANCE INC. ("FINANCIAL SECURITY")
BOND INSURANCE POLICY
Concurrently with the issuance of the bonds, Financial Security
Assurance Inc. ("Financial Security") will issue its Municipal Bond Insurance
Policy for the bonds (the "Policy"). The Policy guarantees the scheduled payment
of principal of and interest on the bonds when due.
The Policy is not covered by any insurance security or guaranty fund
established under New York, California, Connecticut or Florida insurance law.
FINANCIAL SECURITY ASSURANCE INC.
Financial Security is a New York domiciled insurance company and a
wholly owned subsidiary of Financial Security Assurance Holdings Ltd.
("Holdings"). Holdings is an indirect subsidiary of Dexia, S.A., a publicly held
Belgian corporation. Dexia, S.A., through its bank subsidiaries, is primarily
engaged in the business of public finance in France, Belgium and other European
countries. No shareholder of Holdings or Financial Security is liable for the
obligations of Financial Security.
At June 30, 2002, Financial Security's total policyholders' surplus and
contingency reserves were approximately $1,710,044,000 and its total unearned
premium reserve was approximately $898,579,000 in accordance with statutory
accounting principles. At June 30, 2002, Financial Security's total
shareholders' equity was approximately $1,817,013,000 and its total net unearned
premium reserve was approximately $744,499,000 in accordance with generally
accepted accounting principles.
The financial statements included as exhibits to the annual and
quarterly reports filed by Holdings with the Securities and Exchange Commission
are hereby incorporated herein by reference. Also incorporated herein by
reference are any such financial statements so filed from the date of this
Statement of Additional Information until the termination of the offering of the
bonds. Copies of materials incorporated by reference will be provided upon
request to Financial Security Assurance Inc.: 350 Park Avenue, New York, New
York 10022, Attention: Communications Department (telephone (212) 826-0100).
The policy does not protect investors against changes in market value
of the bonds, which market value may be impaired as a result of changes in
prevailing interest rates, changes in applicable ratings or other causes.
Financial Security makes no representation regarding the bonds or the
advisability of investing in the bonds. Financial Security makes no
representation regarding the Prospectus or Statement of Additional Information,
nor has it participated in the preparation thereof, except that Financial
Security has provided to the Fund the information presented under this caption
for inclusion in the Statement of Additional Information.
MBIA INSURANCE CORPORATION ("MBIA")
THE MBIA INSURANCE CORPORATION INSURANCE POLICY
The following information has been furnished by MBIA Insurance
Corporation ("MBIA") for use in this Statement of Additional Information.
MBIA's policy unconditionally and irrevocably guarantees the full and
complete payment required to be made by or on behalf of the Issuer to the Paying
Agent or its successor of an amount equal to (i) the principal of (either at the
stated maturity or by an advancement of maturity pursuant to a mandatory sinking
fund payment) and interest on, the bonds as such payments shall become due but
shall
C-3
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
any owner of the bonds pursuant to a final judgment by a court of competent
jurisdiction that such payment constitutes an avoidable preference to such owner
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 be payable with respect to any bonds. 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 on the purchase
price of bonds upon tender by an owner 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 bonds resulting from the
insolvency, negligence or any other act or omission of the Paying Agent or any
other paying agent for the 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 any owner of a bond the payment of an insured amount for 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
State Street Bank and Trust Company, 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 bonds or presentment of such other
proof of ownership of the bonds, together with any appropriate instruments of
assignment to evidence the assignment of the insured amounts due to the bonds as
are paid by MBIA, and appropriate instruments to effect the appointment of MBIA
as agent for such owners of the bonds in any legal proceeding related to payment
of insured amounts on the bonds, such instruments being in a form satisfactory
to State Street Bank and Trust Company, N.A., State Street Bank and Trust
Company, N.A. shall disburse to such owners or the Paying Agent payment of the
insured amounts due on such bonds, less any amount held by the Paying Agent for
the payment of such insured amounts and legally available therefor.
MBIA
MBIA Insurance Corporation ("MBIA") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company (the
"Company"). The Company is not obligated to pay the debts of or claims against
MBIA. MBIA is domiciled in the State of New York and licensed to do business in
and subject to regulation under the laws of 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. MBIA has three branches, one in the Republic of France, one in the
Republic of Singapore and one in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or
completeness of this Prospectus or Statement of Additional Information or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of the information regarding the policy and MBIA set
C-4
forth under the heading "MBIA Insurance Corporation". Additionally, MBIA makes
no representation regarding the bonds or the advisability of investing in the
bonds.
The Financial Guarantee Insurance Policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
MBIA INFORMATION
The Company files annual, quarterly and special reports, information
statements and other information with the SEC under File No. 1-9583. Copies of
the SEC filings (including (1) the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, and, (2) the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002), are available (i) over the Internet
at the SEC's web site at http://www.sec.gov; (ii) at the SEC's public reference
room in Washington D.C.; (iii) over the Internet at the Company's web site at
http://www.mbia.com; and (iv) at no cost, upon request to MBIA Insurance
Corporation, 113 King Street, Armonk, New York 10504. The telephone number of
MBIA is (914) 273-4545.
As of December 31, 2001, MBIA had admitted assets of $8.5 billion
(audited), total liabilities of $5.6 billion (audited), and total capital and
surplus of $2.9 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of June 30, 2002, MBIA had admitted assets of $8.7 billion
(unaudited), total liabilities of $5.7 billion (unaudited), and total capital
and surplus of $3.0 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities.
FINANCIAL STRENGTH RATINGS OF MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA
"Aaa."
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates
the financial strength of MBIA "AAA."
Fitch Ratings. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
bonds, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the bonds. MBIA does
not guaranty the market price of the bonds nor does it guaranty that the ratings
on the bonds will not be revised or withdrawn.
FINANCIAL GUARANTY INSURANCE COMPANY ("FINANCIAL GUARANTY")
Concurrently with the issuance of the Bonds, Financial Guaranty
Insurance Company ("Financial Guaranty") will issue its Municipal Bond New Issue
Insurance Policy (the "Policy") for the Bonds described in the Policy (as used
under this heading, the "Bonds"). The Policy unconditionally guarantees the
payment of that portion of the principal or accreted value (if applicable) of
and interest on the Bonds which has become due for payment, but shall be unpaid
by reason of nonpayment by the issuer of the Bonds (the "Issuer"). Financial
Guaranty will make such payments to State Street Bank and Trust
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Company, N.A., or its successor as its agent (the "Fiscal Agent"), on the later
of the date on which such principal, accreted value or interest (as applicable)
is due or on the business day next following the day on which Financial Guaranty
shall have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice by registered or certified mail, from an owner of
Bonds or the Paying Agent of the nonpayment of such amount by the Issuer. The
Fiscal Agent will disburse such amount due on any Bond to its owner upon receipt
by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the owner's
right to receive payment of the principal, accreted value or interest (as
applicable) due for payment and evidence, including any appropriate instruments
of assignment, that all of such owner's rights to payment of such principal,
accreted value or interest (as applicable) shall be vested in Financial
Guaranty. The term "nonpayment" in respect of a Bond includes any payment of
principal, accreted value or interest (as applicable) made to an owner of a Bond
which has been recovered from such owner 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.
The Policy is non-cancellable and the premium will be fully paid at the
time of delivery of the Bonds. The Policy covers failure to pay principal or
accreted value (if applicable) of the Bonds on their respective stated maturity
dates or dates on which the same shall have been duly called for mandatory
sinking fund redemption, and not on any other date on which the Bonds may have
been otherwise called for redemption, accelerated or advanced in maturity, and
covers the failure to pay an installment of interest on the stated date for its
payment.
Generally, in connection with its insurance of an issue of municipal
securities, Financial Guaranty requires, among other things, (i) that it be
granted the power to exercise any rights granted to the holders of such
securities upon the occurrence of an event of default, without the consent of
such holders, and that such holders may not exercise such rights without
Financial Guaranty's consent, in each case so long as Financial Guaranty has not
failed to comply with its payment obligations under its insurance policy; and
(ii) that any amendment or supplement to or other modification of the principal
legal documents be subject to Financial Guaranty's consent. The specific rights,
if any, granted to Financial Guaranty in connection with its insurance of the
Bonds are set forth in the prospectus. Reference should be made as well to such
description for a discussion of the circumstances, if any, under which the Fund
will provide additional or substitute credit enhancement, and related matters.
The Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law or by the Florida
Insurance Guaranty Association (Florida Insurance Code, Sections 631.50 et
seq.).
Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation
(the "Corporation"), a Delaware holding company. The Corporation is a subsidiary
of General Electric Capital Corporation ("GE Capital"). Neither the Corporation
nor GE Capital is obligated to pay the debts of or the claims against Financial
Guaranty. Financial Guaranty is a monoline financial guaranty insurer domiciled
in the State of New York and subject to regulation by the State of New York
Insurance Department. As of March 31, 2002, the total capital and surplus of
Financial Guaranty was approximately $1.03 billion. Financial Guaranty prepares
financial statements on the basis of both statutory accounting principles and
generally accepted accounting principles. Copies of such financial statements
may be obtained by writing to Financial Guaranty at 125 Park Avenue, New York,
New York 10017, Attention: Communications Department (telephone number:
212-312-3000) or to the New York State Insurance Department at 25 Beaver Street,
New York, New York 10004-2319, Attention: Financial Condition Property/Casualty
Bureau (telephone number: 212-480-5187).
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RATINGS
The above municipal bond insurers have insurance claims-paying ability
ratings of AAA from S&P and Aaa from Moody's. Financial Guaranty also has an
insurance claims-paying ability rating of AAA from Fitch. 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 its 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 bonds insured by policies issued by AMBAC Assurance, 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 bonds insured by policies issued by AMBAC Assurance,
Financial Security, MBIA or Financial Guaranty.
S&P's ratings of AMBAC Assurance, Financial Security, MBIA and
Financial Guaranty should be evaluated independent of Moody's ratings. Any
further explanation as to the significance of the ratings may be obtained only
from the applicable rating agency. See Appendix A for more information about
ratings by Moody's and S&P.
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APPENDIX D
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various
defensive hedging techniques.
FUTURES AND INDEX TRANSACTIONS
FINANCIAL FUTURES
A financial future is an agreement between two parties to buy and sell
a security for a set price on a future date. They have been designed by boards
of trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging the
Fund's existing or anticipated holdings of long-term debt securities. When the
Fund purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to the Fund to settle the final determination and the Fund
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. For example, if
the Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the Fund's portfolio would decline, but the value of the
Fund's financial futures would be expected to increase at approximately the same
rate thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have.
Among the risks associated with the use of financial futures by the
Fund as a hedging device, perhaps the most significant is the imperfect
correlation between movements in the price of the financial futures and
movements in the price of the debt securities which are the subject of the
hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
D-1
OPTIONS ON FINANCIAL FUTURES
The Fund may also purchase put or call options on financial futures
which are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by the Fund on its
portfolio securities to hedge against the risk of rising interest rates. As with
options on debt securities, the holder of an option may terminate his position
by selling an option of the Fund. There is no guarantee that such closing
transactions can be effected.
INDEX CONTRACTS
INDEX FUTURES
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to a specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and
the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
INDEX OPTIONS
The Fund may also purchase put or call options on U.S. Government or
tax-exempt bond index futures and enter into closing transactions with respect
to such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
of the writer's futures margin account which represents the amount by which the
market price of the index futures contract, at exercise, is less than the
exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
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APPENDIX E
FACTORS PERTAINING TO CALIFORNIA
The information set forth below is derived from sources that are
generally available to investors. The information is intended to give recent
historical description and is not intended to indicate future or continuing
trends in the financial or other positions of California. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State of
California, and there is no obligation on the part of the State to make payment
on such local obligations in the event of default.
GENERAL
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances
improved significantly starting in 1995. After several years of very strong
growth, the State's financial condition started to worsen since the start of
2001, with the combination of a mild economic recession and a dramatic decline
in revenue from capital gains and stock option activity resulting from the
decline in stock market levels since mid-2000. The State faced a budget gap for
its 2002-03 fiscal year of more than $23 billion, over 25% of its General Fund
revenue. The 2002-03 Budget Act was not adopted until September 5, 2002, more
than two months into the fiscal year. See "Recent Financial Results--
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Fiscal year 2002-03 Budget" below. The ratings of certain related debt of other
issuers for which California has an outstanding lease purchase, guarantee or
other contractual obligation (such as for state-insured hospital bonds) are
generally linked directly to California's rating. Should the financial condition
of California deteriorate further, its credit ratings could be reduced, and the
market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
ECONOMIC FACTORS
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 35 million represents about
12-1/2% of the total United States population and grew by 26% in the 1980s, more
than double the national rate. Population growth slowed to less than 1% annually
in 1994 and 1995, but rose to almost 2% in the final years of the 1990's. The
bulk of population growth in the State is due to births and foreign immigration.
Total personal income in the State, at an estimated $1,116 billion in
2001, accounts for almost 13% of all personal income in the nation. Total
employment is over 16 million, the majority of which is in the service, trade
and manufacturing sectors.
Following a severe recession in the early 1990's, California began a
period of strong growth in 1994 in virtually all sectors, particularly in high
technology manufacturing and services, including computer software and other
services, entertainment, tourism, and construction, and also with very strong
growth in exports. The California economy outpaced the nation during this
period. By the end of 2000, unemployment in the State had dropped to under 5%,
its lowest level in three decades. In 2001 the State finally showed the impact
of the nationwide economic slowdown, coupled with a cyclical downturn in the
high technology sector (including Internet-related businesses) and entered a
mild recession, with unemployment rising above 6%. International trade also
slowed since the start of 2001 reflecting weakness in overseas economies
(particularly in Asia). The terrorist attacks on September 11, 2001 resulted in
a further, temporary economic decline in tourism-based areas, but this effect
appears to have ended by the spring of 2002. Modest job growth appears to have
begun by early 2002, but employment results during the summer of 2002 have
fluctuated month to month from small gains to small losses, and the State
Department of Finance described the State economy as "on a flat trajectory" as
of October, 2002. The largest gains have been in government and retail and
wholesale trade; manufacturing and construction continue to lose jobs.
California's economy is expected to continue a mild recovery in 2002 and 2003,
although the overall effects of the weak national economic picture on the State
are not yet clear. The recession, combined particularly with the decline in the
stock markets since mid-2000, will result in much weaker State revenues than
previously projected, as discussed further below under "Recent Financial
Results."
Widely publicized difficulties in California's energy supplies had been
seen in early 2001 to pose some risks to the economy, but during the summer of
2001 and through mid-August 2002 there were no electricity blackouts or
shortages of natural gas. Although energy prices have risen from the levels of
three years ago, they have now appeared to stabilize. Energy difficulties are
mitigated by the fact that California's economy is very energy-efficient. U.S.
Department of
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Energy statistics for 1999 revealed that California ranked 50th of the 50 states
in energy expenditures as a percentage of state domestic product.
RECENT DEVELOPMENTS REGARDING ENERGY
From mid-2000 through early 2001, the State faced occasional shortages
of electricity and dramatic increases in the spot market price for electricity,
as a result of many complex factors deriving generally from a deregulation plan
implemented in 1997. Natural gas prices also rose significantly. The three major
investor-owned utilities in the State ("IOUs") purchased electricity to meet
their needs above their own generating capacity and contracted supplies at
fluctuating short-term and spot market rates, which rose sharply, while the
retail prices they could charge their residential and small business customers
were capped at specified levels under the deregulation plan. By early January,
2001, the two largest IOUs had exhausted their cash reserves and could no longer
purchase electricity in the spot market.
The Governor declared a state of emergency under State law on January
17, 2001, and ordered the State's Department of Water Resources ("DWR") to begin
purchasing electricity for resale to retail end use customers, to fill the gap
in supplies resulting from the inability of the IOUs to continue to purchase
power. The DWR also entered into long-term power supply contracts to reduce
reliance on short-term and spot markets. DWR's purchases were initially funded
primarily by unsecured, interest-bearing loans from the State's General Fund
("State Loans"), which ultimately totaled $6.1 billion. DWR also received (and
continues to receive) repayment from a portion of retail end use customers'
payments, remitted through the IOUs, but these amounts cover only a portion of
the power purchase costs. Effective June 26, 2001, the DWR entered into an
Interim Loan Agreement with several banks totaling $4.1 billion ("Interim
Loans"), which moneys replaced the State Loans to fund power purchases. The
Interim Loans are repayable only from end use customer payments or other debt
sales, and are not an obligation of the State General Fund. The initial $4.1
billion of Interim Loans is being paid down in scheduled installments from
customer charges. As of August 1, 2002, the remaining principal balance of the
Interim Loans was $3.464 billion.
The State Loans, the Interim Loans and the balance of energy purchase
costs, are intended to be funded from the issuance of an estimated $12 billion
of DWR revenue bonds authorized by legislation. Issuance of the bonds depends on
adoption and final legal review of several orders by the California Public
Utilities Commission ("CPUC"). In February, 2002 the CPUC adopted an order
implementing DWR's "revenue requirement" to be collected from customer rates;
the procedure used by DWR to calculate its revenue requirement was, however,
challenged in a court proceeding, which remains to be resolved. The CPUC also
approved a "rate agreement" with the DWR governing the imposition of consumer
rates necessary to repay the bond issue and DWR's other power purchase costs.
While the CPUC had raised customer rates significantly in 2001 (average of 40%),
final calculation of the DWR's revenue requirement to repay bonds and meet its
other obligations may require additional rate actions. CPUC also approved an
order eliminating the right of retail customers to contract directly with
generators for energy.
As of mid-October, 2002, investment grade credit ratings had been
obtained for the revenue bonds, and a bond sale schedule for late October and
early November, 2002 was
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announced. However, as of the date of this Statement, the sale had not yet been
completed and intervening events, such as additional litigation, could delay the
sale. The DWR revenue bonds will be repaid from a dedicated revenue stream
derived from customer payments; they will not be backed in any way by the faith
and credit or taxing power of the State. Pending issuance of the DWR revenue
bonds, DWR projects it will have enough funds available from existing resources
and customer revenues to continue its power purchases and repay its obligations
(including principal payments on the Interim Loans which began in April 2002).
On April 6, 2001, the largest IOU, Pacific Gas & Electric Company,
filed for voluntary protection under the federal Bankruptcy Code. Its bankruptcy
proceeding remained far from resolution by August, 2002. The second-largest IOU,
Southern California Edison Company ("SCE") also defaulted on various obligations
in early 2001. In October, 2001, SCE announced the settlement of a lawsuit with
the CPUC over the rates which SCE could charge its customers. CPUC implemented
this settlement by allowing SCE to collect rates from its customers at current
levels for up to three years to repay its prior debts. Based on this agreement,
SCE used accumulated cash and proceeds of a new credit agreement to repay
substantially all of its prior defaulted debts in March, 2002.
The State is intensifying programs for energy conservation, load
management and improved energy efficiency in government, businesses and homes.
Approval for construction of new power generating facilities, especially smaller
and "peaking" power facilities, has been accelerated. A number of new power
plants have been completed and new larger power plants are under construction
and in permitting phase, and will come on line in 2002 and 2003. As noted, the
State has entered into a number of longer term power supply contracts, thereby
reducing the risks of reliance on the spot markets. The combination of these
elements has substantially lowered wholesale electricity costs.
Despite fears of significant disruptions during the summer of 2001, the
combination of cooler weather in 2001, significant conservation efforts, absence
of major unplanned power plant outages, and completion of several new power
plants permitted the State to avoid any blackouts since early May 2001, and spot
market power costs have decreased significantly, lessening the cost of the DWR
power purchase program. Natural gas prices have also decreased.
A number of lawsuits are pending dealing with many aspects of the
energy situation in California, including disputes over the rates which the CPUC
may charge retail customers, financial responsibility for purchases of power by
the IOUs, obligations and rights of independent power producers holding power
sales contracts with the IOUs, and various antitrust, fraud and refund claims
against energy suppliers.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
Limitation on Property Taxes. Certain California Municipal Obligations
may be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits the rate of ad valorem
property taxes to 1% of full cash value of real property and generally restricts
the reassessment
E-4
of property to 2% per year, except upon new construction or change of ownership
(subject to a number of exemptions). Taxing entities may, however, raise ad
valorem taxes above the 1% limit to pay debt service on voter-approved bonded
indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits were filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through
ad valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax."
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
E-5
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainty the outcome of such
determinations.
Appropriations Limits. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations to
comply with mandates of courts or the federal government, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5) appropriations made
in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
in the early 1990's because of the recession, few governments have been
operating near their spending limits, but this condition may change over time.
Local governments may by voter approval exceed their spending limits for up to
four years. Because of extraordinary revenue receipts in fiscal year 1999-2000,
State appropriations were estimated to be about $975 million above the limit.
However, since the State was $2.1 billion below its limit in fiscal year
2000-01, resulting in no excess over the two-year period, no refunds were made.
1999-2000 was the only fiscal year since the late 1980's when State
appropriations were above the limit. The State Department of Finance estimates
the State will be about $14.5 billion below its appropriation limit in fiscal
year 2001-02 and $6.3 billion under the limit in 2002-03.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID
of the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal obligations or on the ability of the
State or local
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governments to pay debt service on such California municipal obligations. It is
not possible, at the present time, to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or constitutionality of
these Articles or the impact of any such determinations upon State agencies or
local governments, or upon their ability to pay debt service on their
obligations. Further initiatives or legislative changes in laws or the
California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of October
1, 2002, the State had outstanding approximately $25.2 billion of long-term
general obligation bonds, plus $846 million of general obligation commercial
paper notes and $6.3 billion of lease-purchase debt supported by the State
General Fund. In October, the State issued an additional $800 million of
long-term general obligation bonds which primarily retired commercial paper
notes. As of October 1, the State also had about $15.5 billion of authorized and
unissued long-term general obligation bonds and lease-purchase debt. In FY
2001-02, debt service on general obligation bonds and lease purchase debt was
approximately 4.5% of General Fund revenues. State voters approved $2.8 billion
of new general bond authorizations on the ballot in March, 2002. About $18.6
billion in new bond authorizations will be on the ballot in November, 2002 for
voter approval, and at least another $22 billion, for education and high-speed
rail construction, will be on the ballot in 2004.
RECENT FINANCIAL RESULTS
The principal sources of General Fund tax revenues in 2000-01 were the
California personal income tax (59 percent of total tax revenues), the sales tax
(28 percent), corporation taxes (9 percent), and the gross premium tax on
insurance (2 percent). Preliminary estimates for 2000-01 indicate that almost
25% of total General Fund tax revenue was derived from capital gains
realizations and stock option income. While these sources have been
extraordinarily strong in the past few years, they are particularly volatile. In
preparing the 2001-02 budget, the State took account of the recent drop in stock
market levels and reduced its estimated receipts from these revenues as compared
to the prior year. However, with continued weak stock market levels into 2002 it
is now clear that revenue from capital gains and stock options will fall below
projections. Indeed, the Administration has projected that this source of
revenue will drop from 25% of all General Fund revenues in 2000-01 to 11% in
2001-02 and 9% in 2002-03; this represents the bulk of the total General Fund
revenue shortfall in these two fiscal years.
The State maintains a Special Fund for Economic Uncertainties (the
"SFEU"), derived from General Fund revenues, as a reserve to meet cash needs of
the General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance.
Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was
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enacted which (subject to suspension by a two-thirds vote of the Legislature and
the Governor) guarantees local school districts and community college districts
a minimum share of State General Fund revenues (currently about 35 percent).
RECENT BUDGETS
The economy, and especially the stock markets, grew strongly during the
second half of the 1990's, and as a result, the General Fund took in
substantially greater tax revenues (an aggregate of about $7.9 billion over the
four years 1995-96 through 1998-99, $8.2 billion in 1999-2000 and $4.1 billion
in 2000-01) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. In 1998-99 through 2000-01, new spending
programs were also enacted, particularly for education, new capital outlay
projects were funded from current receipts, and significant tax reductions were
enacted. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $8.7 billion at June 30, 2000 and $6.3 billion at June 30,
2001. However, the SFEU balance at June 30, 2001 included as an asset the $6.1
billion loan to the DWR for power purchases (see "Recent Developments Regarding
Energy" above), and the General Fund's available cash at that date was
considerably less.
The growth in General Fund revenues since 1994-95 resulted in
significant increases in State funding for local school districts under
Proposition 98. From the 1994-95 level of about $4,200 per pupil, annual State
funding has increased to over $7,000 per pupil in FY 2001-02. A significant
amount of the new moneys have been directed to specific educational reforms,
including reduction of class sizes in many grade levels. The improved budget
condition also allowed annual increases in support for higher education in the
State, permitting increased enrollment and reduction of student fees.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid. Generally, health and
welfare costs have been contained even during the recent period of economic
recovery, with the first real increases (after inflation) in welfare support
levels occurring in 1999-2000 and additional increases in 2000-01.
An important element of recent Budget Acts was agreement on substantial
tax cuts. The largest of these was a phased-in cut in the Vehicle License Fee
(an annual tax on the value of cars registered in the State, the "VLF").
Starting on January 1, 1999, the VLF was reduced by 25 percent, which was
increased to a 35% reduction effective January 1, 2000 and a 67.5% reduction
effective January 1, 2001. Under pre-existing law, VLF funds are automatically
transferred to cities and counties, so the new legislation provided for the
General Fund to make up the reductions. The full 67.5% percent VLF cut was
offset by about $2.6 billion from the General Fund in FY 2000-01, and $3.6
billion in FY 2001-02. Other miscellaneous business and personal tax cuts and
tax credits were of a much smaller overall amount. Finally, because the SFEU
balance was more than 4% of General Fund revenues for two consecutive years, the
State reduced its sales tax by 0.25% for one year, starting January 1, 2001
(pursuant to an existing
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statutory formula). This resulted in about $1.15 billion in lower revenues
during calendar year 2001. The 0.25% rate was restored as of January 1, 2002, as
the SFEU balance fell below 4%.
FISCAL YEAR 2001-02 BUDGET
The 2001-02 Budget Act (the "2001 Budget Act") was signed on July 26,
2001. The 2001 Budget Act included $78.8 billion in General Fund expenditures, a
reduction of $1.3 billion from the previous year. General Fund revenues in
fiscal year 2001-02 were projected to drop to $75.1 billion, a decline of almost
4 percent from the prior year, reflecting the economic slowdown and the sharp
drop in capital gains and stock option revenue. The excess of expenditures over
revenues was to be funded by using a part of the budget reserve from the prior
year, and assumed that the General Fund would be repaid in full for advances
made to purchase energy (see "Recent Developments Regarding Energy" above). The
State sold a record $5.7 billion in revenue anticipation notes ("RANs") for the
2001-02 fiscal year, to offset cash flow shortfalls during the fiscal year, as
part of the State's normal, annual cash management program. The State's cash
position has been adversely affected by the $6.1 billion advances made by the
General Fund to pay for electricity purchases in the first half of 2001.
The 2001 Budget Act provided full funding for K-14 education, and
certain additional funding for low-performing schools, child care and other
programs. Funding for higher education were increased, but less than in previous
years. No fee increases for higher education were imposed. Health care, social
services and prisons were funded for all expected caseload and inflation
increases. Assistance to local governments was reduced from the previous year.
The 2001 Budget Act was projected to be able to sustain the reduced
revenues without major program reductions because a large part of the 2000-01
Budget Act was for one-time spending, which did not have to be continued. The
2001 Budget Act contained much less one-time spending for capital outlay. The
2001 Budget Act also extended for two years the six-year transportation funding
program implemented in 2000-01, and used a total of $2.3 billion of those funds
for General Fund purposes in 2001-02 and 2002-03, to be repaid in 2006-08. The
shortfall in funding will be made up by temporary loans from other
transportation accounts, so that it is not expected any projects will be
delayed. Part of a compromise to permit this deferral was agreement to place a
constitutional amendment on the next statewide ballot to permanently dedicate
all sales taxes on gasoline and related fuels to transportation programs. This
amendment was approved in March, 2002.
General Fund revenues in 2001-02 ultimately proved to be far below
projections, totaling only about $66 billion (compared to the 2001-02 Budget Act
estimate of around $75 billion), largely due to reduced capital gains
realizations and weaker economic activity. To partially offset this reduction,
the Governor proposed, and the Legislature approved, mid-year spending cuts for
2001-02 totaling $2.3 billion. With the failure of the DWR to sell its energy
revenue bonds by June 30, 2002 to reimburse the General Fund, the State's cash
position became more critical as the fiscal year ended, and the State Controller
issued $7.5 billion of "revenue anticipation warrants" or "RAWs" in June, 2002,
to mature in three tranches between October 27, 2002 and January 30, 2003. The
RAWs assured the State could pay its obligations coming due in June 2002
(including the $5.7 billion RAN) and into the start of the next fiscal year. The
State
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ultimately ended the 2001-02 fiscal year with about $10 billion of available
cash resources, including the RAW proceeds.
FISCAL YEAR 2002-03 BUDGET
The 2002-03 Budget Act was finally enacted by the Legislature and
signed by the Governor on September 5, 2002, more than two months into the
fiscal year. Despite delay in approval of the Budget Act, most State operations
continued based on continuing appropriation legislation, constitutional
requirements or court orders. Debt service on State debt was paid, most health
and welfare programs and education payments were funded, and State employees,
other than elected officials and senior management employees, were paid.
The 2002 Budget Act closed a $23.6 billion gap between expenditures and
resources through a combination of program reductions, loans, fund shifts,
accelerations and transfers, and modest tax changes:
1. Program cost savings in the 2001-02 and 2002-03 fiscal years
totaling about $7.458 billion. This includes the proposals made by the Governor
in November 2001, which were substantially enacted by the Legislature. The
largest savings occurred in education, health, social services and State
operations, and include deferral or elimination of previously enacted program
expansions and elimination of workload and cost of living adjustments in
numerous programs. The cost savings include $750 million in unallocated
reductions to State operations, which the Administration must still implement;
additional legislative action may be required for some of these savings. The
reductions also include a projected saving of $285 million from early retirement
incentives and $75 million from the elimination of vacant positions.
2. The receipt of $4.5 billion in 2002-03 from the securitization
(sale) of a large portion of the State's future receipt of payment from tobacco
companies from the settlement of litigation against those companies. This sale
is scheduled to close in two segments, with $2.25 billion in February 2003 and
$2.25 billion in April 2003.
3. A total of $2.028 billion in loans from various funds, including
$1.218 billion from transportation funds.
4. The shift of $1.328 billion of expenditures from the General Fund to
other funding sources, such as special funds and proposed future bond funds.
5. The receipt of $1.2 billion additional revenues in 2002-03 from a
two-year suspension of the deductibility of net operating losses provided in
current law.
6. General Fund savings of $1.728 billion from the deferral of $1.047
billion of education expenditures from 2001-02 to early 2002-03 and $681 million
of education expenditures from 2002-03 to early 2003-04. These deferrals are not
expected to significantly impact underlying programs.
7. General Fund savings of $1.083 billion ($223 million in 2001-02 and
$860 million in 2002-03) from the Treasurer's Debt Restructuring Plan to
amortize the State's long-term debt to more closely approximate level annual
debt service costs rather than the level annual principal.
E-10
The plan also includes the issuance of refunding debt to pay selected maturities
of general obligation bonds due between February 2002 and June 2004.
8. Anticipated increases in federal funding for health and human
services programs, security/bioterrorism and other areas totaling about $1.081
billion. There can be no assurance whether these funds will be approved.
9. Additional revenue of $1.651 billion in 2002-03 due to Federal Tax
Conformity and Tax Compliance ($1.081 billion); increasing the withholding on
stock option and bonus income from 6 percent to 9.3 percent ($400 million); and
suspending the teacher retention credit for one year ($170 million). Federal Tax
Conformity and Tax Compliance includes revenue generated from the following: (a)
the conformity of California tax law with federal tax law regarding accounting
for bad debt reserves for large banks, (b) the pension and individual retirement
account conformity package included in the Governor's Budget, which was passed
by the Legislature and signed by the Governor on May 8, 2002, (c) waiving
penalties and interest on delinquent accounts, (d) increasing collections
activities, (e) ensuring proper auditing of tax credits and (f) improving the
effectiveness of the tax protest and settlement programs.
10. Accelerations and transfers from other funds to the General Fund
totaling $1.585 billion.
Despite the challenge represented by the severe revenue decline and the
budget gap, the 2002 Budget contains the following major components:
1. Total K-12 spending increases 2.8 percent from the revised 2001-02
estimates. Total K-12 spending per pupil increases from $6,610 in 2001-02 to
$7,067 in 2002-03.
2. Funding for higher education decreases by a modest 0.2 percent in
2002-03 compared to the revised 2001-02 estimates. Despite this decrease, the
2002 Budget fully funds enrollment increases at the University of California,
California State University and the Community Colleges. The 2002 Budget
continues funding for a new University of California campus in Merced.
3. The Budget includes $308 million for local public safety programs,
including the Citizens' Option for Public Safety, juvenile justice crime
prevention, high technology law enforcement, rural and small county law
enforcement, and booking fees.
4. The Budget continues to limit the growth in State government with
the elimination of positions and the reduction of State operations expenditures.
In addition to the 6,600 positions eliminated by the Administration since 1999,
7,000 State government positions will be eliminated (6,000 in 2002-03 and 1,000
by June 30, 2004). The first priority for elimination in each department will be
vacant positions not required to maintain critical public health and safety
functions. A process will be established for the elimination of filled positions
in accordance with State laws, regulations and Memoranda of Understanding with
represented employees. The Budget also reduces State operations expenditures by
as much as an additional $750 million in 2002-03.
E-11
5. Although funding for youth and adult corrections decreases by 4.7
percent from the previous year, the Budget sustains funding for public safety.
While total funding for health and human services decreases by 2.1 percent, the
Budget funds health insurance coverage for children and critical care programs
for seniors.
6. There were no significant tax increases, and no significant
reductions in support for local governments. A one-time shift of $75 million in
property taxes from redevelopment agencies to schools will reduce State aid to
schools by a like amount.
The May Revision assumed that the State would meet its cash flow
requirements in 2002-03 by a combination of the issuance of about $7 billion of
revenue anticipation notes in the fall of 2002, and reimbursement of the General
Fund for energy loans by October 2002. In addition, proceeds of the
securitization of future tobacco litigation settlement payments are assumed in
early 2003. Because of weaker receipts, delay in enactment of the budget, and
uncertainty about the schedule for issuance of the DWR power revenue bonds, in
September, 2002 the State Controller determined that it was prudent to issue
$12.5 billion of revenue anticipation notes for cash management purposes in the
2002-03 fiscal year. The first portion of this borrowing, totaling $9 billion,
was completed on October 16, 2002; the balance of $3.5 billion of notes is
scheduled to be issued in early November, 2002. If for any reason the DWR power
revenue bonds, or the tobacco securitization bonds, are delayed substantially,
and State faces a further cash flow shortfall, the State Controller can issue
additional revenue anticipation warrants as was done in June 2002.
Since the start of the 2002-03 fiscal year, tax revenues have been
below projections. The Controller reports that tax receipts for July through
September 2002 were about $715 million, or 4.6 percent, below the June 2002 cash
flow projections that were based on the revenue projections in May 2002. For the
period from June through September, receipts from the three largest tax sources
(personal income tax, sales tax and corporation tax) were about $948 million
below projections. Economic conditions in the summer of 2002 were mixed (see
"Economic Factors" above) making it unclear if the revenue projections in the
May Revision can be met for the full fiscal year.
Although the State's strong economy has produced record revenues to the
State government in recent years, the State's budget faces several years of
significant constraints due to weaker economic conditions and stock markets, and
it continues to be marked by mandated spending on education, a large prison
population, and social needs of a growing population with many immigrants. These
factors which limit State spending growth also put pressure on local
governments. There can be no assurances that, if economic conditions weaken, or
other factors intercede, the State will not experience budget gaps in the
future.
BOND RATING
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. After 1996, through the end of 2000, the three major rating agencies
raised their ratings of California's general obligation bonds as high as "AA"
from Standard & Poor's, "Aa2" from Moody's and "AA" from Fitch. As of October 1,
2002, Standard & Poor's had reduced California's senior ratings to "A+" and
E-12
Moody's had reduced its ratings to "A1" and both agencies maintained the State's
credit ratings on watch with negative implications. As of that date, Fitch had
placed California's ratings on watch with negative implications. These ratings
were, however, reconfirmed in October, 2002.
There can be no assurance that current ratings will be maintained in
the future. It should be noted that the creditworthiness of obligations issued
by local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. If the State eventually loses any of these cases, the final
remedies may not have to be implemented in one year.
OBLIGATIONS OF OTHER ISSUERS
Other Issuers of California Municipal Obligations. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs.
In 1997, a new program provided for the State to substantially take
over funding for local trial courts (saving cities and counties some $400
million annually). For 2001-02, the State has provided over $350 million to
support local law enforcement costs. The current fiscal crisis may result in
some reductions in these payments in 2002-03.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State,
E-13
was forced to make significant cuts in services and personnel, particularly in
the health care system, in order to balance its budget in FY1995-96 and
FY1996-97. Orange County, which emerged from Federal Bankruptcy Court protection
in June 1996, has significantly reduced county services and personnel, and faces
strict financial conditions following large investment fund losses in 1994 which
resulted in bankruptcy. The recent economic slowdown in the State, with its
corresponding reduction in State and local revenues, will put additional
pressure on local government finances in the coming years.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
E-14
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal Obligations
in which the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event has had any long-term negative economic impact.
Any California Municipal Obligation in the Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer
to perform on its contracts of insurance in the event of widespread
E-15
losses; or (iii) the federal or State government to appropriate sufficient funds
within their respective budget limitations.
CALIFORNIA TAX MATTERS
The following is based upon the advice of , special California counsel
to the Fund. The following is a general, abbreviated summary of certain
provisions of the applicable California tax law as presently in effect as it
directly governs the taxation of resident individual and corporate shareholders
of the Fund. This summary does not address the taxation of other shareholders
nor does it discuss any local taxes that may be applicable. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify
under Subchapter M of the Code as a regulated investment company, that it will
satisfy the conditions which will cause distributions of the Fund to qualify as
exempt-interest dividends to shareholders for federal and California purposes,
and that it will distribute all interest and dividends it receives to the
shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.
If at the close of each quarter of the Fund's taxable year at least 50%
of the value of its total assets consists of obligations that, when held by
individuals, pay interest that is exempt from tax by California under California
or federal law, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to capital
gains, will be includable in gross income for purposes of the California
personal income tax.
Interest on indebtedness incurred or continued for the purpose of
acquiring or maintaining an investment in the MuniPreferred Shares will not be
deductible for purposes of the California personal income tax.
All distributions of the Fund, regardless of source, to corporate
shareholders that are subject to the California corporate franchise tax will be
included in gross income for purposes of such tax.
Gain on the sale, exchange, or other disposition of MuniPreferred
Shares will be subject to the California personal income and corporate franchise
tax. In addition, any loss realized by a holder of MuniPreferred Shares upon the
sale of shares held for six months or less may be disallowed to the extent of
any exempt interest dividends received with respect to such shares. Moreover,
any loss realized upon the sale of MuniPreferred Shares within thirty days
before or after the acquisition of other MuniPreferred Shares may be disallowed
under the "wash sale" rules.
Common Shares may be subject to the California estate tax if held by a
California decedent at the time of death.
E-16
Shareholders are advised to consult with their own tax advisors for
more detailed information concerning California tax matters.
E-17
Nuveen Insured California Tax-Free Advantage Municipal Fund
------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------
, 2002
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Registrant has not conducted any business as of the date of this
filing, other than in connection with its organization. Financial Statements
indicating that the Registrant has met the net worth requirements of Section
14(a) of the 1940 Act will be filed by Pre-effective Amendment to the
Registration Statement.
2. Exhibits:
a Declaration of Trust dated July 29, 2002. Filed on October 4, 2002 as
exhibit a to Registrant's Registration Statement on Form N-2 (File No.
333-100323) and incorporated herein by reference.
b By-Laws of Registrant. Filed on October 4, 2002 as exhibit b to
Registrant's Registration Statement on Form N-2 (File No. 333-100323)
and incorporated herein by reference.*
c None.
d Form of Share Certificate.**
e Terms and Conditions of the Dividend Reinvestment Plan.**
f None.
g Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.**
h.1 Form of Underwriting Agreement.**
k.1 Transfer Agency and Service Agreement between Registrant and State
Street Bank and Trust Company dated , 2002.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.**
k.3 Form of Auction Agency Agreement between the Registrant and Deutsche
Bank Trust Company Americas as to the Registrant's MuniPreferred
shares.**
k.4 Form of Broker-Dealer Agreement as to the Registrant's MuniPreferred
shares.**
k.5 Form of DTC Representation Letter as to the Registrant's MuniPreferred
shares.**
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m None.
n.1 Consent of Ernst & Young LLP.**
n.2 Consent of Orrick, Herrington & Sutcliffe, LLP.**
o None.
p Subscription Agreement of Nuveen Advisory Corp. dated , 2002.**
q None.
r Code of Ethics of Nuveen Advisory Corp.**
s Power of Attorney. Filed on October 4, 2002 as exhibit s to
Registrant's Registration Statement on Form N-2 (File No. 333-100323)
and incorporated herein by reference.*
-----------
* Previously filed.
** To be filed by amendment.
Part C-1
ITEM 25: MARKETING ARRANGEMENTS
See Sections ______________ of the Form of Underwriting Agreement to be
filed as Exhibit h to this Registration Statement.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees................. $
Printing and engraving expenses......................... *
Legal Fees.............................................. *
Accounting expenses..................................... *
Miscellaneous expenses.................................. *
---------
Total................................................ $ *
=========
----------
* To be completed by amendment.
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At ____________, 2002:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares, $0.01 par value.......................... ____
ITEM 29: INDEMNIFICATION
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body
before which the proceeding was brought that he engaged in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
Part C-2
(b) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interests of
the Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a)
or (b)) and resulting in a payment by a Covered Person, unless
there has been either a determination that such Covered Person
did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the
settlement or other disposition or a reasonable determination,
based on a review of readily available facts (as opposed to a
full trial-type inquiry), that he did not engage in such
conduct:
(i) by a vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against
losses arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then
in office act on the matter) or independent legal counsel in a
written opinion shall determine, based upon a review of the
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
Part C-3
The trustees and officers of the Registrant are covered by Investment
Trust Directors and officers and Errors and Omission policies in the aggregate
amount of $50,000,000 against liability and expenses of claims of wrongful acts
arising out of their position with the Registrant, except for matters which
involve willful acts, bad faith, gross negligence and willful disregard of duty
(i.e., where the insured did not act in good faith for a purpose he or she
reasonably believed to be in the best interest of Registrant or where he or she
had reasonable cause to believe this conduct was unlawful). The policy has a
$500,000 deductible, which does not apply to individual trustees or officers.
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 to
this Registration Statement provides for each of the parties thereto, including
the Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Nuveen Advisory Corp. serves as investment adviser to the following
open- end management type investment companies: Nuveen Multistate Trust I,
Nuveen Multistate Trust II, Nuveen Multistate Trust III, Nuveen Multistate Trust
IV and Nuveen Municipal Trust. Nuveen Advisory Corp. also serves as investment
adviser to the following closed-end management type investment companies other
than the Registrant: Nuveen Municipal Value Fund, Inc., Nuveen California
Municipal Value Fund, Inc., Nuveen New York Municipal Value Fund, Inc., Nuveen
Municipal Income Fund, Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen
Performance Plus Municipal Fund, Inc., Nuveen California Performance Plus
Municipal Fund, Inc., Nuveen New York Performance Plus Municipal Fund, Inc.,
Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund,
Inc., Nuveen California Municipal Market Opportunity Fund, Inc., Nuveen New York
Municipal Market Opportunity Fund, Inc., Nuveen Investment Quality Municipal
Fund, Inc., Nuveen California Investment Quality Municipal Fund, Inc., Nuveen
New York Investment Quality Municipal Fund, Inc., Nuveen Insured Quality
Municipal Fund, Inc., Nuveen Florida Investment Quality Municipal Fund, Nuveen
New Jersey Investment Quality Municipal Fund, Inc., Nuveen Pennsylvania
Investment Quality Municipal Fund, Nuveen Select Quality Municipal Fund, Inc.,
Nuveen California Select Quality Municipal Fund, Inc., Nuveen New York Select
Quality Municipal Fund, Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen
Insured Municipal Opportunity Fund, Inc., Nuveen Florida Quality Income
Municipal Fund, Nuveen Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio
Quality Income Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund,
Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York Quality
Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc., Nuveen Insured California Premium
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal
Part C-4
Fund, Inc., Nuveen Insured Florida Premium Income Municipal Fund, Nuveen
Michigan Premium Income Municipal Fund, Inc., Nuveen Michigan Premium Income
Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen
Insured California Premium Income Municipal Fund 2, Inc., Nuveen Insured New
York Premium Income Municipal Fund 2, Nuveen Michigan Premium Income Municipal
Fund 2, Nuveen Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland
Premium Income Municipal Fund, Nuveen Massachusetts Premium Income Municipal
Fund, Nuveen Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium
Income Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen
Missouri Premium Income Municipal Fund, Nuveen North Carolina Premium Income
Municipal Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured
Premium Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal
Fund, Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend
Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund,
Nuveen Connecticut Dividend Advantage Municipal Fund, Nuveen Maryland Dividend
Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal
Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, Nuveen Virginia
Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2,
Nuveen California Dividend Advantage Municipal Fund 2, Nuveen New York Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund,
Nuveen Ohio Dividend Advantage Municipal Fund, Nuveen Pennsylvania Dividend
Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 3, Nuveen
California Dividend Advantage Municipal Fund 3, Nuveen Georgia Dividend
Advantage Municipal Fund, Nuveen Maryland Dividend Advantage Municipal Fund 2,
Nuveen Michigan Dividend Advantage Municipal Fund, Nuveen Ohio Dividend
Advantage Municipal Fund 2, Nuveen North Carolina Dividend Advantage Municipal
Fund 2, Nuveen Virginia Dividend Advantage Municipal Fund 2, Nuveen Insured
Dividend Advantage Municipal Fund, Nuveen Insured California Dividend Advantage
Municipal Fund, Nuveen Insured New York Dividend Advantage Municipal Fund,
Nuveen Arizona Dividend Advantage Municipal Fund 2, Nuveen Connecticut Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund
2, Nuveen Pennsylvania Dividend Advantage Municipal Fund 2, Nuveen Ohio Dividend
Advantage Municipal Fund 3, Nuveen Ohio Dividend Advantage Municipal Fund 3,
Nuveen Arizona Dividend Advantage Municipal Fund 3, Nuveen Connecticut Dividend
Advantage Municipal Fund 3, Nuveen Georgia Dividend Advantage Municipal Fund 2,
Nuveen Maryland Dividend Advantage Municipal Fund 3 and Nuveen North Carolina
Dividend Advantage Municipal Fund 3.
Nuveen Advisory Corp. has no other clients or business at the present
time. For a description of other business, profession, vocation or employment of
a substantial nature in which any director or officer of the investment adviser
has engaged during the last two years for his account or in the capacity of
director, officer, employee, partner or trustee, see the descriptions under
"Management of the Fund" in Part A of this Registration Statement. Such
information for the remaining senior officers of Nuveen Advisory Corp., all of
whom's business address is 333 West Wacker Drive, Chicago, Illinois 60606,
appears below:
Part C-5
OTHER BUSINESS PROFESSION, VOCATION
NAME AND POSITION WITH NAC OR EMPLOYMENT DURING PAST TWO YEARS
-------------------------- -----------------------------------
John P. Amboian,
President.................................. President, formerly Executive Vice President of The John Nuveen
Company, Nuveen Investments, Nuveen Institutional Advisory Corp.,
Nuveen Asset Management, Inc. and Nuveen Senior Loan Asset
Management, Inc. and Executive Vice President and Director of
Rittenhouse Financial Services, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel.............. Senior Vice President, General Counsel and Secretary of The John
Nuveen Company, Nuveen Investments, and Nuveen Institutional
Advisory Corp. Senior Vice President and Secretary (since 1999)
of Nuveen Senior Loan Asset Management Inc., prior thereto,
Partner in the law firm of Kirkland & Ellis.
Margaret E. Wilson,
Senior Vice President, Finance............. Senior Vice President, Finance, of the John Nuveen Company,
Nuveen Investments and Nuveen Institutional Advisory Corp. and
Senior Vice President and Controller of Nuveen Senior Loan Asset
Management, Inc.; formerly CFO of Sara Lee Corp., Bakery
Division.
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all advisory material
of the investment adviser.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Advisory Corp.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the
effective date of its Registration Statement, the net asset
value declines more than 10 percent from its net asset value
as of the effective date of the Registration Statement, or (2)
the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
Part C-6
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from
the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared
effective.
b. For the purpose of determining any liability under
the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to
the securities offered therein, and the offering of
the securities at that time shall be deemed to be the
initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information.
Part C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 30th day of
October, 2002.
NUVEEN INSURED CALIFORNIA TAX-
FREE ADVANTAGE MUNICIPAL FUND
/s/ Jessica R. Droeger
---------------------------------
Jessica R. Droeger,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller (Principal October 30, 2002
---------------------------------- Financial and Accounting Officer)
Stephen D. Foy
/s/ Gifford R. Zimmerman Chief Administrative Officer (Principal October 30, 2002
---------------------------------- Executive Officer)
Gifford R. Zimmerman
Timothy R. Schwertfeger* Chairman of the Board and Trustee
Robert P. Bremner* Trustee
Lawrence H. Brown Trustee
Anne E. Impellizzeri* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
By: /s/ Gifford R. Zimmerman
------------------------------
Gifford R. Zimmerman
Attorney-In-Fact
October 30, 2002
------------------
* Original powers of attorney authorizing Jessica R. Droeger and Gifford
R. Zimmerman, among others, to execute this Registration Statement, and
amendments thereto, for each of the trustees of Registrant on whose
behalf this Registration Statement is filed, have been executed and
filed as an exhibit.
Part C-8
INDEX TO EXHIBITS
a Declaration of Trust dated July 29, 2002. Filed on October 4, 2002 as
exhibit a to Registrant's Registration Statement on Form N-2 (File No.
333-100323) and incorporated herein by reference.
b By-Laws of Registrant. Filed on October 4, 2002 as exhibit b to
Registrant's Registration Statement on Form N-2 (File No. 333-100323)
and incorporated herein by reference.*
c None.
d Form of Share Certificate.**
e Terms and Conditions of the Dividend Reinvestment Plan.**
f None.
g Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.**
h.1 Form of Underwriting Agreement.**
i Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.**
j Master Custodian Agreement between Registrant and State Street Bank and
Trust Company dated August 19, 2002.**
k.1 Transfer Agency and Service Agreement between Registrant and State
Street Bank and Trust Company dated , 2002.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp. dated , 2002.**
k.3 Form of Auction Agency Agreement between the Registrant and Deutsche
Bank Trust Company Americas as to the Registrant's MuniPreferred
shares.**
k.4 Form of Broker-Dealer Agreement as to the Registrant's MuniPreferred
shares.**
k.5 Form of DTC Representation Letter as to the Registrant's MuniPreferred
shares.**
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m None.
n.1 Consent of Ernst & Young LLP.**
n.2 Consent of Orrick, Herrington & Sutcliffe, LLP.**
o None.
p Subscription Agreement of Nuveen Advisory Corp. dated , 2002.**
q None.
r Code of Ethics of Nuveen Advisory Corp.**
s Power of Attorney. Filed on October 4, 2002 as exhibit s to
Registrant's Registration Statement on Form N-2 (File No. 333-100320)
and incorporated herein by reference.*
-----------
* Previously filed.
** To be filed by amendment.
Part C-9