PROSPECTUS
[NUVEEN INVESTMENTS LOGO] $118,000,000
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED(R)")
2,360 SHARES, SERIES T
2,360 SHARES, SERIES F
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen Insured California Dividend 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
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 are exempt from regular federal and California income taxes and that
are covered by insurance guaranteeing the timely payment of principal and
interest thereon. The Fund also may 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. Under normal circumstances, the Fund expects to be fully invested
in such tax-exempt municipal bonds. Through March 31, 2003, the Fund may invest
in municipal bonds that are exempt from regular federal income tax 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
will invest at least 80% of its net assets in investment grade quality municipal
bonds. The Fund may invest up to 20% of its net assets in municipal bonds that
are rated Ba/BB or B by Moody's Investors Service Inc., Standard and Poor's
Ratings Group or Fitch, Inc. or that are unrated but judged to be of comparable
quality by the Fund's investment adviser. The Fund cannot assure you that it
will achieve its investment objectives.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7700. Investors are
advised to read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A Statement of Additional Information dated May
15, 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 37 of
this prospectus, may be obtained without charge by calling the Fund at (800)
257-8787. In addition, the SEC maintains a web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information filed electronically with the SEC.
---------------------
INVESTING IN MUNIPREFERRED SHARES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 15.
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 $118,000,000
Sales Load $ 250 $ 1,180,000
Proceeds to Fund(1) (before expenses) $24,750 $116,820,000
------------
(1) Not including offering expenses payable by the Fund estimated to be
$144,756.
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 May 17, 2002.
---------------------
SALOMON SMITH BARNEY NUVEEN INVESTMENTS
A.G. EDWARDS & SONS, INC. PRUDENTIAL SECURITIES
UBS WARBURG
May 15, 2002
The Fund is offering 2,360 shares of Series T and 2,360 shares of Series F
MuniPreferred. The shares are referred to in this prospectus as "MuniPreferred."
The MuniPreferred have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The MuniPreferred also have priority over the
Fund's common shares as to distribution of assets as described in this
prospectus. The dividend rate for the initial dividend rate period will be 1.40%
and 1.40% for MuniPreferred Series T and Series F, respectively. The initial
rate period is from the date of issuance through May 28 for Series T and May 27
for Series F, 2002. For subsequent rate periods, MuniPreferred shares pay
dividends based on a rate set at auction, usually held weekly. Prospective
purchasers should carefully review the auction procedures described in the
prospectus and should note: (1) a buy order (called a "bid order") or sell order
is a commitment to buy or sell MuniPreferred shares based on the results of an
auction; (2) auctions will be conducted by telephone; and (3) purchases and
sales will be settled on the next business day after the auction. MuniPreferred
shares are not listed on an exchange. You may only buy or sell MuniPreferred
shares through an order placed at an auction with or through a broker-dealer
that has entered into an agreement with the auction agent and the Fund, or in a
secondary market maintained by certain broker-dealers. These broker-dealers are
not required to maintain this market, and it may not provide you with liquidity.
The MuniPreferred do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 5
The Fund.................................................... 6
Use of Proceeds............................................. 6
Capitalization.............................................. 7
Portfolio Composition....................................... 7
The Fund's Investments...................................... 8
Risk Factors................................................ 15
How the Fund Manages Risk................................... 17
Management of the Fund...................................... 18
Description of MuniPreferred................................ 20
The Auction................................................. 28
Description of Common Shares................................ 31
Certain Provisions in the Declaration of Trust.............. 32
Repurchase of Common Shares; Conversion to Open-End Fund.... 32
Tax Matters................................................. 33
Custodian, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent.......................................... 34
Underwriting................................................ 35
Legal Opinions.............................................. 36
Available Information....................................... 36
Table of Contents for the Statement of Additional
Information............................................... 37
Taxable Equivalent Yield Table.............................. A-1
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this prospectus and the Fund's
Statement Establishing and Fixing the Rights and Preferences of Municipal
Auction Rate Cumulative Preferred Shares (the "Statement") attached as Appendix
A to the Statement of Additional Information. Capitalized terms used but not
defined in this prospectus shall have the meanings given to such terms in the
Statement.
The Fund................... Nuveen Insured California Dividend Advantage
Municipal Fund (the "Fund") is a 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 NKL. See
"Description of Common Shares." As of May 7, 2002,
the Fund had 15,257,000 Common Shares outstanding
and net assets of $222,249,379.
Investment Objectives...... The Fund's investment objectives are to provide
current income exempt from regular federal 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 are exempt from regular federal and California
income taxes and that are covered by insurance
guaranteeing the timely payment of principal and
interest thereon. The Fund also may 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 are rated, at the time of
investment, within the four highest grades (Baa or
BBB or better by Moody's Investor Service, Inc.
("Moody's"), Standard & Poor's, a division of The
McGraw-Hill Companies ("S&P") or Fitch, Inc.
("Fitch")), or bonds that are unrated but judged to
be of comparable quality by the Fund's investment
adviser. Under normal circumstances, the Fund
expects to be fully invested in the tax-exempt
municipal bonds noted above. Through March 31,
2003, the Fund may invest in municipal bonds that
are exempt from regular federal income tax 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 Out of State Bonds. The Fund cannot assure you
that it will attain its investment objectives. See
"The Fund's Investments."
Investment Adviser......... Nuveen Advisory Corp. ("Nuveen Advisory" or the
"Adviser") acts as the Fund's investment adviser.
The Adviser is a wholly owned subsidiary of The
John Nuveen Company ("Nuveen"). See "Management of
the Fund" and "Underwriting."
The Offering............... The Fund is offering 2,360 shares of Series T and
2,360 shares of Series F MuniPreferred each at a
purchase price of $25,000 per share. Shares of
MuniPreferred are being offered by the underwriters
listed under "Underwriting."
1
Risk Factors Summary....... Risk is inherent in all investing. Therefore,
before investing in the Fund you should consider
certain risks carefully. The primary risks of
investing in MuniPreferred shares are:
- if an auction fails you may not be able to sell
some or all of your shares;
- because of the nature of the market for
MuniPreferred shares, you may receive less than
the price you paid for your shares if you sell
them outside of the auction, especially when
market interest rates are rising;
- a rating agency could downgrade MuniPreferred
shares, which could affect liquidity;
- the Fund may be forced to redeem your shares to
meet regulatory or rating agency requirements or
may voluntarily redeem your shares in certain
circumstances;
- in extraordinary circumstances the Fund may not
earn sufficient income from its investments to
pay dividends;
- if long-term interest rates rise, the value of
the Fund's investment portfolio will decline,
reducing the asset coverage for the MuniPreferred
shares;
- if an issuer of a municipal bond in which the
Fund invests is downgraded or defaults, there may
be a negative impact on the income and/or asset
value of the Fund's portfolio;
- the Fund is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political or
regulatory occurrence; and
- the Fund's policy of investing primarily in
municipal obligations of issuers located in
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 a broker-dealer that has
entered into an agreement with the auction agent
and the Fund (a "Broker-Dealer"), or to a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer. In addition to the
auctions, Broker-Dealers and other broker-dealers
may maintain a secondary trading market in
MuniPreferred shares outside of auctions, but may
discontinue this activity at any time. There is no
assurance that a secondary market will provide
shareholders with liquidity. You may transfer
shares outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has entered
into a separate agreement with a Broker-Dealer.
The table below shows the first auction date for
each series of MuniPreferred and the day on which
each subsequent action will
2
normally be held for each series of MuniPreferred.
The first auction date for each series of
MuniPreferred will be the business day before the
dividend payment date for the initial rate period
for each series of MuniPreferred. The start date
for subsequent rate periods normally will be the
business day following the 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.
FIRST AUCTION SUBSEQUENT
SERIES DATE* AUCTION*
------ ------------- ----------
T...................................... May 28 Tuesday
F...................................... May 24 Friday
-----------------------------------------
* All dates are 2002.
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 -- Dividends and
Dividend Periods -- General."
The table below also shows the date from which
dividends on the MuniPreferred shares will
accumulate at the initial rate, the dividend
payment date for the initial rate period and the
day on which dividends will normally be paid. If
dividends are payable on a Monday or Tuesday and
that day is not a business day, then your dividends
will be paid on the first business day that falls
after that day. If dividends are payable on a
Wednesday, Thursday or Friday and that day is not a
business day, then your dividends will be paid on
the first business day prior to that day.
Finally, the table below shows the number of days
of the initial rate period for the MuniPreferred.
Subsequent rate periods generally will be seven
days. The dividend payment date for special rate
periods of more than 28 days will be set out in the
notice designating a special rate period. See
"Description of MuniPreferred -- Dividends and
Dividend Periods -- Designation of Special Rate
Periods."
DIVIDEND
DATE OF PAYMENT SUBSEQUENT NUMBER OF
INITIAL ACCUMULATION DATE FOR DIVIDEND DAYS OF
DIVIDEND AT INITIAL INITIAL RATE PAYMENT INITIAL RATE
SERIES RATE RATE* PERIOD* DAY PERIOD
--------------------- -------- ------------ ------------ ---------- ------------
T.................... 1.40% May 17 May 29 Wednesday 12
F.................... 1.40% May 17 May 28 Monday 11
-----------------------------------------
* 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 California income tax, the income
you receive will ordinarily be similarly exempt. To
the extent the Fund invests in Out of State Bonds,
your income may be subject to California income
taxes. All or a portion of the income from these
bonds will be subject to the
3
federal alternative minimum tax, so MuniPreferred
shares may not be a suitable investment if you are
subject to this tax or would become subject to such
tax by investing in MuniPreferred shares. Taxable
income or gain earned by the Fund will be allocated
proportionately to holders of MuniPreferred shares
and Common Shares, based on the percentage of total
dividends paid to each class for that year.
Accordingly, certain specified MuniPreferred
dividends may be subject to regular federal income
tax on income or gains attributed to the Fund. The
Fund intends to notify shareholders, before any
applicable auction for a rate period of 28 days or
less, of the amount of any taxable income and gain
for regular federal income tax purposes only, to be
paid for the period relating to that auction. For
longer periods, the Fund may notify shareholders.
In certain circumstances, the Fund will make
shareholders whole for taxes owing on dividends
paid to shareholders that include taxable income
and gain. See "Tax Matters."
Ratings.................... Shares of each series of MuniPreferred will be
issued with a rating of "Aaa" from Moody's and
"AAA" from S&P. Because the Fund is required to
maintain at least one of these ratings, it must own
portfolio securities of a sufficient value and with
adequate credit quality to meet the rating
agencies' guidelines. See "Description of
MuniPreferred -- 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 -- Redemption" and
"Description of MuniPreferred -- Rating Agency
Guidelines and Asset Coverage."
Liquidation Preference..... The liquidation preference of the shares of each
series of MuniPreferred will be $25,000 per share
plus accumulated but unpaid dividends, if any,
thereon. See "Description of
MuniPreferred -- Liquidation."
Voting Rights.............. The holders of the Fund's preferred shares, $.01
par value ("Preferred Shares") including
MuniPreferred, voting as a separate class, have the
right to elect at least two trustees at all times
and to elect a majority of the trustees in the
event two years' dividends on the Preferred Shares
are unpaid. In each case, the remaining trustees
will be elected by holders of Common Shares and
Preferred Shares, including MuniPreferred, voting
together as a single class. The holders of shares
of Preferred Shares, including MuniPreferred, will
vote as a separate class or classes on certain
other matters as required under the Declaration of
Trust, the Investment Company Act of 1940 (the
"1940 Act") and Massachusetts law. See "Description
of MuniPreferred -- Voting Rights" and "Certain
Provisions in the Declaration of Trust."
4
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 March 27, 2002 until April 23, 2002. Since the Fund commenced
operations on March 27, 2002, the table covers approximately four weeks of
operations, during which a substantial portion of the Fund's assets were held in
cash pending investment in municipal bonds that meet the Fund's investment
objectives and policies. Accordingly, the information presented may not provide
a meaningful picture of the Fund's operating performances.
MARCH 27-
APRIL 23, 2002
--------------
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period...................... $ 14.33
--------
Net Investment Income.................................. .02
Net Gains on Securities (Unrealized)................... .10
--------
Total from Investment Operations.................. .12
--------
Offering Costs............................................ (.03)
--------
Net Asset Value, End of Period............................ $ 14.42
========
Per Share Market Value, End of Period..................... $ 15.13
Total Return on Net Asset Value........................... .63%
Total Investment Return on Market Value................... .87%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $209,122
Ratio of Expenses to Average Net Assets Before
Reimbursement.......................................... .71%*
Ratio of Net Investment Income to Average Net Assets
Before Reimbursement................................... 1.65%*
Ratio of Expenses to Average Net Assets After
Reimbursement.......................................... .41%*
Ratio of Net Investment Income to Average Net Assets After
Reimbursement.......................................... 1.95%*
Portfolio Turnover Rate................................... --%
------------
* Annualized
5
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Massachusetts
business trust on July 12, 1999 pursuant to a Declaration of Trust (the
"Declaration of Trust") governed by the laws of the Commonwealth of
Massachusetts. On March 26, 2002, the Fund issued an aggregate of 13,500,000
Common Shares of beneficial interest, par value $.01 per share, pursuant to the
initial public offering thereof. On April 19, 2002 and May 7, 2002, the Fund
issued an additional 1,000,000 and 750,000 Common Shares, respectively, in
connection with partial exercises by the underwriters of the over-allotment
option. The Fund's Common Shares are traded on the Exchange under the symbol
NKL. The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (800) 257-8787.
The following provides information about the Fund's outstanding shares as
of May 7, 2002:
AMOUNT HELD
BY THE FUND OR AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ----------------- --------------- -----------
Common............................................ unlimited 0 15,257,000*
MuniPreferred..................................... unlimited 0 0
Series T........................................ 10,000 0 0
Series F........................................ 10,000 0 0
------------
* Includes 7,000 shares issued to Nuveen Advisory on March 7, 2002 in connection
with the initial capitalization of the Fund.
USE OF PROCEEDS
The net proceeds of this offering will be approximately $116,675,244 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
at or shortly (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.
6
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of May 7,
2002, and as adjusted to give effect to the issuance of the shares of
MuniPreferred offered hereby.
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED) (UNAUDITED)
SHAREHOLDERS' EQUITY:
Preferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized, no
shares issued and 4,720 shares issued, as adjusted,
respectively........................................... $ -- $118,000,000
Common Shares, $.01 par value per share; unlimited shares
authorized, 15,257,000 shares outstanding*............. 152,570 152,570
Paid-in surplus........................................... 217,946,456 216,621,700
Balance of undistributed net investment income............ 613,860 613,860
Net unrealized appreciation of investments................ 3,536,493 3,536,493
------------ ------------
Net assets................................................ $222,249,379 $338,924,623
============ ============
------------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of May 7, 2002, 86% 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 May 7, 2002.
CREDIT RATING** VALUE PERCENT
--------------- ------------ -------
Aaa/AAA........................................... $194,337,801 78.80%
Aa/AA............................................. 12,164,973 4.93
A/A............................................... 5,045,450 2.05
Short-Term........................................ 35,070,000 14.22
------------ ------
Total........................................... $246,618,224 100.00%
============ ======
------------
** Using the higher of S&P's or Moody's rating.
All of the bonds in the portfolio, excluding temporary investments in short-term
municipal securities, are either covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio Insurances, or are backed by an escrow or trust
containing sufficient U.S. Government or U.S. Government agency securities, any
of which ensure the timely payment of principal and interest.
7
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives are:
- to provide current income exempt from regular federal 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 holders of Common Shares and MuniPreferred.
Under normal circumstances, the Fund will invest at least 80% of its net
assets in a portfolio of municipal bonds that are exempt from regular federal
and California income taxes and that are covered by insurance guaranteeing the
timely payment of principal and interest thereon. The Fund also may 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 are rated, at the time of investment, within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated
but judged to be of comparable quality by Nuveen Advisory. Under normal
circumstances, the Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds. Until March 31, 2003 the Fund may
invest in Out of State Bonds, provided that no more than 10% of the Fund's
investment income during that time may be derived from Out of State Bonds. The
Fund will purchase Out of State Bonds if other suitable investments are not
available. Investment in Out of State Bonds would result in a portion of your
dividends being subject to California income taxes. For more information, see
the Statement of Additional Information. 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 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
8
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"). The Fund, as a non-fundamental policy that can be
changed by the Board of Trustees, will only buy Portfolio Insurance from
insurers whose claims-paying ability Moody's rates "Aaa" or S&P or Fitch rates
"AAA."
The Fund also may 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 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. Insurance generally will be
obtained from insurers with a claims-paying ability rated Aaa by Moody's or AAA
by S&P or Fitch. The insurance feature does not guarantee the market value of
the insured obligations or the net asset value of the Common Shares.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period during
which the net proceeds of the offering are being invested, the Fund may invest
up to 100% of its net assets in short-term investments including high quality,
short-term securities that may be either tax-exempt or taxable. The Fund intends
to invest in taxable short-term investments only in the event that suitable
tax-exempt short-term investments are not available at reasonable prices and
yields. Investment in taxable short-term investments would result in a portion
of your dividends being subject to regular federal and California income taxes.
For more information, see the Statement of Additional Information.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
shares voting together as a single class, and of the holders of a "majority of
the outstanding" MuniPreferred shares voting as a separate class. When used with
respect to particular shares of the Fund, a "majority of the outstanding" shares
means (i) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or (ii) more than
50% of the shares, whichever is less. See "Description of
MuniPreferred -- Voting Rights" for additional information with respect to the
voting rights of holders of MuniPreferred.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital gain
dividends will be subject to capital gains taxes. See "Tax Matters."
MUNICIPAL BONDS
General. Municipal bonds are either general obligation or revenue bonds
and typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and
9
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 (the "State"), a municipality in California, or a
political subdivision or agency or instrumentality of such State or
municipality, and pay interest that, in the opinion of bond counsel to the
issuer (or on the basis of other authority believed by Nuveen Advisory to be
reliable), is exempt from regular federal and California income taxes, although
the interest may be subject to the federal alternative minimum tax. The Fund may
invest in municipal bonds issued by United States territories (such as Puerto
Rico or Guam) that are exempt from regular federal and California income taxes.
Through March 31, 2003, the Fund also may invest in Out of State Bonds subject
to the limitations described under "-- Investment Objectives and Policies."
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of municipal bonds will
vary with changes in interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions. The Fund generally will select obligations which
may not be redeemed at the option of the issuer for approximately seven to nine
months.
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 following
information provides only a brief summary of the complex factors affecting the
financial situation in the State and is derived from sources that are generally
available to investors. The information is intended to give a recent historical
description and is not intended to indicate future or continuing trends in the
financial or other positions of 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 $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.
The State 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
10
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
Administration proposed to close this gap with a combination of expenditure
reductions and deferrals, limited revenue increases, and substantial interfund
loans and securitizations. Reduced revenues have also created a cash flow
shortfall for the State which will require the State Controller to issue a
proposed $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.
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 May 1, 2002, rated "A1" by Moody's, "A+" by S&P, 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
initiatives which affect their fiscal flexibility.
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 the Fund's Board of Trustees, 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.
Municipal bonds covered by Original Issue Insurance or Secondary Market
Insurance are themselves typically assigned a rating of "Aaa" or "AAA", as the
case may be, by virtue of the rating of the "Aaa" or "AAA" claims-paying ability
of the insurer and would generally be assigned a lower rating if the ratings
were based primarily upon the credit characteristics of the issuer without
regard to the insurance feature. By way of contrast, the ratings, if any,
assigned to municipal bonds insured under Portfolio Insurance will be based
primarily upon the credit characteristics of the issuer, without regard to the
insurance feature, and generally will carry a rating that is below "Aaa" or
"AAA." While in the portfolio of the Fund, however, a municipal bond backed by
Portfolio Insurance 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.
The Fund's policy of investing 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 this connection, it should be
noted that 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. 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.
11
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 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 and presently held 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.
12
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's Board of Trustees
generally will reserve the right to terminate each policy upon seven days'
written notice to an insurer if it determines that the cost of such policy is
not reasonable in relation to the value of the insurance to the Fund.
Each Portfolio Insurance policy 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
13
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. Depending upon the characteristics of the municipal bonds held
by the Fund, the annual premium rate for policies of Portfolio Insurance is
estimated to range from 12 to 18 basis points of the value of the municipal
bonds covered under the policy.
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 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.
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
the time of delivery may be less (or more) than cost. A separate account of the
Fund will be established with its custodian consisting of cash, cash
equivalents, or liquid securities having a market value at all times at least
equal to the amount of the commitment.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of its Common Shares or MuniPreferred
shares, or during periods when there is a shortage of attractive, high-yielding
municipal bonds available in the market. As a shareholder in an investment
company, the Fund will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's 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 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 of the Fund will tend to fluctuate more than the yield
generated by unleveraged shares.
14
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in MuniPreferred shares.
INTEREST RATE RISK
The Fund issues MuniPreferred shares, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal bonds, which
pay interest based on long-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest rates. Both
long-term and short-term interest rates may fluctuate. If short-term interest
rates rise, MuniPreferred rates may rise so that the amount of dividends paid to
MuniPreferred shareholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of MuniPreferred shares. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the MuniPreferred share offering) is
available to pay MuniPreferred dividends, however, MuniPreferred dividend rates
would need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay MuniPreferred dividends would be jeopardized. If long-term rates
rise, the value of the Fund's investment portfolio will decline, reducing the
amount of assets serving as asset coverage for the MuniPreferred shares.
AUCTION RISK
You may not be able to sell your MuniPreferred shares at an auction if the
auction fails; that is, if there are more MuniPreferred shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain MuniPreferred shares) at an auction only at a specified rate, and that
bid rate exceeds the rate set at the auction, you will not retain your
MuniPreferred shares. Finally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. See "Description of
MuniPreferred" and "The Auction -- Auction Procedures."
SECONDARY MARKET RISK
If you try to sell your MuniPreferred shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than 7 days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for MuniPreferred shares are not required to maintain this
market, and the Fund is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. MuniPreferred
shares are not registered on a stock exchange or the NASDAQ stock market. If you
sell your MuniPreferred shares to a broker-dealer between auctions, you may
receive less than the price you paid for them, especially when market interest
rates have risen since the last auction. Accrued MuniPreferred dividends,
however, should at least partially compensate for the increased market interest
rates.
RATINGS AND ASSET COVERAGE RISK
While Moody's and S&P assign ratings of "Aaa" or "AAA" to MuniPreferred
shares, the ratings do not eliminate or necessarily mitigate the risks of
investing in MuniPreferred shares. A rating agency could downgrade MuniPreferred
shares, which may make your shares less liquid at an auction or in the secondary
market, although the downgrade would probably result in higher dividend rates.
If a rating agency downgrades 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 -- Rating Agency Guidelines and Asset Coverage" for a description
of the asset maintenance tests the Fund must meet.
15
INFLATION RISK
Inflation is the reduction in the purchasing power of money resulting from
the increase in the price of goods and services. Inflation risk is the risk that
the inflation adjusted (or "real") value of your MuniPreferred investment or the
income from that investment will be worth less in the future. As inflation
occurs, the real value of the MuniPreferred shares and distributions declines.
In an inflationary period, however, it is expected that, through the auction
process, MuniPreferred dividend rates would increase, tending to offset this
risk.
CREDIT RISK
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of credit risk. If
rating agencies lower their ratings of municipal bonds in the Fund's portfolio,
the value of those bonds could decline, which could jeopardize the rating
agencies' ratings of the MuniPreferred. Because the primary source of income for
the Fund is the interest and principal payments on the municipal bonds in which
it invests, any default by an issuer of a municipal bond could have a negative
impact on the Fund's ability to pay dividends on the MuniPreferred shares and
could result in the redemption of some or all of the MuniPreferred shares. In
addition, the Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds rated Ba/BB or B
are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal, and these bonds are commonly
referred to as "junk bonds." The prices of these lower grade bonds are more
sensitive to negative developments, such as a decline in the issuer's revenues
or a general economic downturn, than are the prices of higher grade securities.
CONCENTRATION IN 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, particularly the
below investment grade bonds in which the Fund may invest, also tends to be less
well-developed or liquid than many other securities markets, which may adversely
affect the Fund's ability to sell its bonds at attractive prices or at prices
approximating those at which the Fund currently values them.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses. Any income derived from the Fund's ownership or operation of such
assets may not be tax-exempt.
16
INCOME RISK
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short-term and long-term. If
interest rates drop, the Fund's income available over time to make dividend
payments with respect to the MuniPreferred could drop as well if the Fund
purchases securities with lower interest coupons. This risk is magnified when
prevailing short-term interest rates increase and the Fund holds residual
interest municipal bonds.
PORTFOLIO INSURANCE
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.
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 will result in a decrease in the
portfolio's current earnings rate.
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 more widely diversified fund
to any single corporate, economic, political or regulatory occurrence. See "The
Fund's Investments." In addition, the Fund must satisfy certain asset
diversification rules in order to qualify as a regulated investment company for
federal income tax purposes.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and MuniPreferred shares voting
together as a single class, and the approval of the holders of a majority of the
outstanding MuniPreferred shares voting as a separate class. When used with
respect to particular shares of the Fund, a "majority of the outstanding" shares
means (i) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or (ii) more than
50% of the shares, whichever is less. Among other restrictions, the Fund may not
invest more than 25% of total Fund assets in securities of issuers in any one
industry, except that this limitation does not apply to municipal bonds backed
by the assets and revenues of governments or political subdivisions of
governments.
17
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. 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. See
"Investment Objectives -- Investment Restrictions" in the Statement of
Additional Information for a complete list of the fundamental and
non-fundamental investment policies of the Fund.
QUALITY INVESTMENTS
The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated by national rating agencies 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.
HEDGING STRATEGIES
The Fund may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on taxable
debt securities whose prices, in the opinion of Nuveen Advisory, correlate with
the prices of the Fund's investments. Successful implementation of most hedging
strategies would generate taxable income, and the Fund has no present intention
to use these strategies.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined in
the 1940 Act) and six of whom are not "interested persons." The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISER
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the 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
$39 billion in assets under management. See the Statement of Additional
Information under "Management of the Fund -- 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. He
currently manages investments for 14 Nuveen-sponsored investment companies.
Nuveen Advisory is a wholly owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have
over $76 billion of net assets under management or surveillance. Nuveen is a
majority-owned subsidiary of The St. Paul Companies, Inc., a publicly traded
company which is principally engaged in providing property-liability insurance
through subsidiaries.
18
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 NET 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 net assets attributable to MuniPreferred shares.
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
For the first ten years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
PERCENTAGE
REIMBURSED
YEAR (AS A PERCENTAGE
ENDING OF AVERAGE
MARCH 31, DAILY NET ASSETS)(1)
--------- --------------------
2002(2)............ .30%
2003............... .30
2004............... .30
2005............... .30
2006............... .30
2007............... .30
PERCENTAGE
REIMBURSED
YEAR (AS A PERCENTAGE
ENDING OF AVERAGE
MARCH 31, DAILY NET ASSETS)(1)
--------- --------------------
2008............... .25%
2009............... .20
2010............... .15
2011............... .10
2012............... .00
------------
(1) Including net assets attributable to MuniPreferred shares.
(2) From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond March 31, 2012.
LEGAL PROCEEDINGS
A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual holders of Common Shares of six leveraged closed-end
funds sponsored by Nuveen is currently pending in the federal district court for
the Seventh Circuit Court of Appeals. The suit was originally brought against
John Nuveen & Co. Incorporated, 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
19
auctioning of preferred stock and the basis of the calculation and payment of
management fees to Nuveen Advisory and Nuveen. Plaintiffs also filed a motion to
certify defendant and plaintiff classes.
The defendants filed motions to dismiss the entire lawsuit asserting that
the claims are without merit and to oppose certification of any classes. On
March 30, 1999, the court entered a memorandum opinion and order (1) granting
the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to
dismiss all of plaintiffs' counts against it other than breach of fiduciary duty
under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs' motion to
certify a plaintiff class and a defendant class. No appeal was made by
plaintiffs of this decision. 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, or more than $60 million.
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 partial motion for summary judgment as to
liability only. In a memorandum opinion and order dated September 6, 2001, the
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 and oral argument on the appeal is scheduled for May 15, 2002.
While the Fund cannot assure you that the litigation will be decided in
Nuveen Advisory's favor upon appeal, Nuveen Advisory believes a decision, if
any, against it would have no material adverse effect on the Fund, its Common
Shares, its MuniPreferred or the ability of Nuveen Advisory to perform its
duties under the investment management agreement.
DESCRIPTION OF MUNIPREFERRED
The following is a brief description of the terms of the shares of
MuniPreferred. This description does not purport to be complete and is subject
to and qualified in its entirety by reference to the more detailed description
of the shares of MuniPreferred in the Fund's Statement Establishing and Fixing
the Rights and Preferences of Municipal Auction Rate Cumulative Preferred Shares
(the "Statement") attached as Appendix A to the Statement of Additional
Information.
GENERAL
The Fund's Declaration of Trust authorizes the issuance of an unlimited
number of preferred shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees without the approval
of holders of Common Shares. The Statement currently authorizes the issuance of
10,000 shares each of MuniPreferred Series T and Series F. All shares of
MuniPreferred will have a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
The shares of MuniPreferred of each series will rank on parity with shares
of any other series of MuniPreferred and with shares of any other series of
preferred shares of the Fund, as to the payment of dividends and the
distribution of assets upon liquidation. All shares of MuniPreferred carry one
vote per share on all matters on which such shares are entitled to be voted.
Shares of MuniPreferred are, when issued, fully paid and, 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 shares of MuniPreferred, Series T and
Series F will be a period consisting of 12 and 11 days, respectively. Any
Subsequent Rate Period of shares of a series of MuniPreferred
20
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 (a) MuniPreferred Series T, on May 29, 2002, and
thereafter on each Wednesday; and (b) MuniPreferred Series F, on May 28, 2002
and thereafter on each Monday; provided, however, that (i) if the Monday or the
Tuesday on which dividends would otherwise be payable as set forth above is not
a Business Day, then such dividends shall be payable on such shares on the first
Business Day that falls after such Monday or Tuesday, as the case may be; (ii)
if the Wednesday, Thursday or Friday on which dividends would otherwise be
payable as set forth above is not a Business Day, then such dividends shall be
payable on such shares on the first Business Day that falls prior to such
Wednesday, Thursday or Friday, as the case may be; and (iii) the 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 1.40% and 1.40% per annum for Series T and Series F, respectively. For
each Subsequent Rate Period of shares of MuniPreferred of a particular series,
the dividend rate for such shares will be the Applicable Rate for such shares
that the Auction Agent advises the Fund results from an Auction, except as
provided below. The Applicable Rate that results from an Auction for shares of
any series of MuniPreferred will not be greater than the Maximum Rate for shares
of such series, which is:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (ii) the Rate Multiple on such Auction
Date, unless shares of such series have or had a Special Rate Period (other
than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction
at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate
Period, in which case the higher of:
(A) the dividend rate on shares of such series for the then-ending
Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was more than 364
Rate Period Days, and (II) the Reference Rate on such Auction Date for a
Rate Period equal in length to such Special Rate Period of shares of
such series,
21
if such Special Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was more
than 364 Rate Period Days and (y) the Rate Multiple on such Auction
Date; or
(b) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the highest of (x) the Reference Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such series, if
such then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which
the Auction is being held if such Special Rate Period is 364 Rate Period
Days or fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate
on such Auction Date for Minimum Rate Periods and (ii) the Rate Multiple on
such Auction Date.
If an Auction for any Subsequent Rate Period of shares of any series of
MuniPreferred is not held for any reason other than as described below, the
dividend rate on shares of such series for such Subsequent Rate Period will be
the Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), but, prior to 12:00 Noon on the third
Business Day next succeeding the date such failure occurred, such failure shall
have been cured and the Fund shall have paid a late charge, as described more
fully in the Statement, no Auction will be held in respect of shares of such
series for the first Subsequent Rate Period thereof thereafter and the dividend
rate for shares of such series for such Subsequent Rate Period will be the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of any series
of MuniPreferred during any Rate Period thereof (other than any Special Rate
Period of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured), and, prior to 12:00 Noon on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Fund shall not have paid a late charge,
as described more fully in the Statement, no Auction will be held in respect of
shares of such series for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured and such late charge so paid) (such late
charge to be paid only in the event Moody's is rating such shares at the time
the Fund cures such failure), and the dividend rate for shares of such series
for each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for shares of such series, for
purposes of determining such Maximum Rate, being deemed to be "Below
'ba3'/BB2").
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
22
Auction Date for each such Subsequent Rate Period (but with the prevailing
rating for shares of such series, for purposes of determining such Maximum Rate,
being deemed to be "Below 'ba3'/BB2").
A failure to pay dividends on, or the redemption price of, shares of any
series of MuniPreferred shall have been cured with respect to any Rate Period
thereof if, within the respective time periods described in the Statement, the
Fund shall have paid to the Auction Agent (a) all accumulated and unpaid
dividends on the shares of such series and (b) without duplication, the
redemption price for shares, if any, of such series for which notice of
redemption has been mailed by the Fund; provided, however, that the foregoing
clause (b) shall not apply to the Fund's failure to pay the redemption price in
respect of shares of MuniPreferred when the related notice of redemption
provides that redemption of such shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such notice of redemption.
Gross-up Payments. Holders of shares of MuniPreferred are entitled to
receive, when, as and if declared by the Board, out of funds legally available
therefor in accordance with the Declaration of Trust, including the Statement,
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payments in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for regular federal income tax purposes to a dividend paid on
shares of MuniPreferred without having given advance notice thereof to the
Auction Agent as described below under "The Auction -- Auction Procedures" (a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of MuniPreferred or the liquidation of the Fund, the Fund
will, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares (initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the stock books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on shares of
MuniPreferred without having given advance notice thereof to the Auction Agent,
the Fund shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Fund's dividend
disbursing agent to send such notice with a Gross-up Payment to each holder of
shares that was entitled to such dividend payment during such calendar year at
such holder's address as the same appears or last appeared on the stock books of
the Fund.
A "Gross-up Payment" means payment to a holder of shares of MuniPreferred
of an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates, would
cause such holder's dividends in dollars (after federal and 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 the aggregate Taxable
Allocations would have been excludable from the gross income of such holder.
Such Gross-up Payment shall be calculated: (a) without consideration being given
to the time value of money; (b) assuming that no holder of shares of
MuniPreferred is subject to the federal alternative minimum tax with respect to
dividends received from the Fund; and (c) assuming that each Taxable Allocation
and each Gross-up Payment (except to the extent such Gross-up Payment is
designated as an exempt-interest dividend under Section 852(b)(5) of the
Internal Revenue Code or successor provisions) would be taxable in the hands of
each holder of shares of MuniPreferred at the maximum marginal 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 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
23
dividend or other distribution (other than a dividend or distribution paid in,
or in options, warrants or rights to subscribe for or purchase, its shares of
Common Shares) in respect of its Common Shares or any other shares of the Fund
ranking junior to, or on parity with, shares of MuniPreferred as to the payments
of dividends or the distribution of assets upon dissolution, liquidation or
winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or other such junior shares or other such parity
shares (except by conversion into or exchange for shares of the Fund ranking
junior to the shares of MuniPreferred as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up of the
affairs of the Fund), unless (a) full cumulative dividends on shares of each
series of MuniPreferred through its most recently ended Dividend Period shall
have been paid or shall have been declared and sufficient funds for the payment
thereof deposited with the Auction Agent and (b) the Fund shall have redeemed
the full number of shares of MuniPreferred required to be redeemed by any
provision for mandatory redemption pertaining thereto. Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to shares of MuniPreferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to shares of MuniPreferred as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or any other such junior shares (except by conversion into or exchange
for shares of the Fund ranking junior to shares of MuniPreferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of the Fund's portfolio would at least equal the MuniPreferred
Basic Maintenance Amount in accordance with guidelines of the rating agency or
agencies then rating the shares of MuniPreferred.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of Fund
shares ranking, as to the payment of dividends, on a parity with shares of
MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each series of
MuniPreferred through its most recent Dividend Payment Date. When dividends are
not paid in full upon the shares of each series of MuniPreferred through its
most recent Dividend Payment Date or upon the shares of any other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred through their most recent respective dividend payment dates,
all dividends declared upon shares of MuniPreferred and any such other class or
series of shares ranking on a parity as to the payment of dividends with shares
of MuniPreferred shall be declared pro rata so that the amount of dividends
declared per share on shares of MuniPreferred and such other class or series of
shares shall in all cases bear to each other the same ratio that accumulated
dividends per share on the shares of MuniPreferred and such other class or
series of shares bear to each other.
Designation of Special Rate Periods. The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a particular series
of MuniPreferred as a Special Rate Period consisting of a specified number of
Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to certain adjustments. A designation of a
Special Rate Period shall be effective only if, among other things, (a) the Fund
shall have given certain notices to the Auction Agent, (b) an Auction for shares
of such 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
24
requirements of the rating agency or agencies then rating the shares of
MuniPreferred, shares of MuniPreferred will be subject to mandatory redemption
on a date specified by the Board out of funds legally available therefor in
accordance with the Declaration of Trust, including the Statement, and
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption. Any such
redemption will be limited to the lesser of the number of shares of
MuniPreferred necessary to restore the required Discounted Value or the 1940 Act
MuniPreferred Asset Coverage, as the case may be, or the maximum number that can
be redeemed with funds legally available under the Declaration of Trust and
applicable law.
Optional Redemption. Shares of MuniPreferred of each series are
redeemable, at the option of the Fund:
(a) as a whole or from time to time in part, on the second Business
Day preceding any Dividend Payment Date for shares of such series, out of
funds legally available therefor in accordance with the Declaration of
Trust, including the Statement, and applicable law, at the redemption price
of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; provided, however, that (i)
shares of such series may not be redeemed in part if after such partial
redemption fewer than 250 shares of such series would remain outstanding;
(ii) shares of a series of MuniPreferred are redeemable by the Fund during
the Initial Rate Period thereof only on the second Business Day next
preceding the last Dividend Payment Date for such Initial Rate Period; and
(iii) the notice establishing a Special Rate Period of shares of such
series, as delivered to the Auction Agent and filed with the Secretary of
the Fund, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as
provided in clause (b) below) or shall be redeemable during the whole or
any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration of Trust, including the
Statement, and applicable law, on the first day following any Dividend
Period thereof included in a Rate Period of more than 364 Rate Period Days
if, on the date of determination of the Applicable Rate for shares of such
series for such Rate Period, such Applicable Rate equaled or exceeded on
such date of determination the Treasury Note Rate for such Rate Period, at
a redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of a series of
MuniPreferred (whether or not earned or declared) are in arrears, no shares of
such series shall be redeemed unless all outstanding shares of such series are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any shares of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of MuniPreferred with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation,
dissolution or winding up of the affairs 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
25
MuniPreferred of the full preferential amounts provided for as described herein,
the holders of shares of MuniPreferred as such shall have no right or claim to
any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Fund, shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's and S&P guidelines to maintain assets
having in the aggregate a Discounted Value at least equal to the MuniPreferred
Basic Maintenance Amount. Moody's and S&P have each established separate
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy the applicable rating agency's guidelines,
all or a portion of such holding's value will not be included in the calculation
of Discounted Value (as defined by such rating agency). The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Fund's assets
that may be invested in holdings not eligible for inclusion in the calculation
of the Discounted Value of the Fund's portfolio. The amount of such assets
included in the portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio, although it is not anticipated that in the normal course of business
the value of such assets would exceed 20% of the Fund's total assets. The
MuniPreferred Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of shares of MuniPreferred then outstanding and (b)
certain accrued and projected payment obligations of the Fund.
The Fund is also required under the 1940 Act and rating agency guidelines
to maintain, with respect to shares of MuniPreferred, as of the last Business
Day of each month in which any such shares are outstanding, asset coverage of at
least 200% with respect to all outstanding senior securities which are shares of
beneficial interest, including MuniPreferred (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
MuniPreferred Asset Coverage"). Based on the composition of the portfolio of the
Fund and market conditions as of May 7, 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
$1,324,756, would have been computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $338,924,623
------------------------------------------------------------ = --------------- = 287%
Senior securities representing indebtedness plus liquidation $118,000,000
value of the shares of MuniPreferred
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the MuniPreferred Basic Maintenance
Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in each case in
accordance with the requirements of the rating agency or agencies then rating
the shares of 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.
26
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the shares of MuniPreferred are not recommendations
to purchase, hold or sell those shares, inasmuch as the ratings do not comment
as to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
shares of MuniPreferred will be able to sell such shares in an Auction or
otherwise. The ratings are based on current information furnished to Moody's and
S&P by the Fund and the Adviser and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Shares have not been rated by a
nationally recognized statistical rating organization.
A rating agency's guidelines will apply to shares of MuniPreferred only so
long as such rating agency is rating such shares. The Fund will pay certain fees
to Moody's or S&P, or both, for rating shares of MuniPreferred.
VOTING RIGHTS
Except as otherwise provided in this prospectus and in the Statement of
Additional Information, in the Declaration of Trust or as otherwise required by
law, holders of shares of MuniPreferred will have equal voting rights with
holders of Common Shares and any Preferred Shares (one vote per share) and will
vote together with holders of Common Shares and any Preferred Shares as a single
class.
In connection with the election of the Fund's trustees, holders of
outstanding Preferred Shares, including MuniPreferred shares, voting as a
separate class, are entitled to elect two of the Fund's trustees, and the
remaining trustees are elected by holders of Common Shares and Preferred Shares,
including MuniPreferred shares, voting together as a single class. In addition,
if at any time dividends (whether or not earned or declared) on outstanding
Preferred Shares, including MuniPreferred shares, shall be due and unpaid in an
amount equal to two full years' dividends thereon, and sufficient cash or
specified securities shall not have been deposited with the Auction Agent for
the payment of such dividends, then, as the sole remedy of holders of
outstanding Preferred Shares, including MuniPreferred shares, the number of
trustees constituting the Board shall be automatically increased by the smallest
number that, when added to the two trustees elected exclusively by the holders
of Preferred Shares, including shares of MuniPreferred, as described above,
would constitute a majority of the Board as so increased by such smallest
number, and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of MuniPreferred,
voting as a separate class, will be entitled to elect the smallest number of
additional trustees that, together with the two trustees which such holders will
be in any event entitled to elect, constitutes a majority of the total number of
trustees of the Fund as so increased. The terms of office of the persons who are
trustees at the time of that election will continue. If the Fund thereafter
shall pay, or declare and set apart for payment, in full, all dividends payable
on all outstanding Preferred Shares, including MuniPreferred shares, the voting
rights stated in the second preceding sentence shall cease, and the terms of
office of all of the additional trustees elected by the holders of Preferred
Shares, including MuniPreferred shares (but not of the trustees with respect to
whose election the holders of Common Shares were entitled to vote or the two
trustees the holders of Preferred Shares have the right to elect in any event),
will terminate automatically.
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
27
with respect to the payment of dividends and the distribution of assets
upon liquidation; provided, however, that if Moody's or S&P is not then
rating the shares of MuniPreferred, the aggregate liquidation preference of
all Preferred Shares of the Fund outstanding after any such issuance,
exclusive of accumulated and unpaid dividends, may not exceed $118,000,000)
or
(b) amend, alter or repeal the provisions of the Declaration of Trust,
including the Statement, whether by merger, consolidation or otherwise, so
as to affect any preference, right or power of such shares of MuniPreferred
or the holders thereof;
provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers, (ii) a
division of a share of MuniPreferred will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely affect the holders
of shares of MuniPreferred and (iii) the authorization, creation and issuance of
classes or series of stock ranking junior to shares of MuniPreferred with
respect to the payment of dividends and the distribution of assets upon
liquidation will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating shares of MuniPreferred and such issuance would,
at the time thereof, cause the Fund not to satisfy the 1940 Act MuniPreferred
Asset Coverage or the MuniPreferred Basic Maintenance Amount. So long as any
shares of MuniPreferred are outstanding, the Fund shall not, without the
affirmative vote or consent of the holders of at least 66 2/3% of the shares of
MuniPreferred outstanding at the time, voting as a separate class, file a
voluntary application for relief under federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
If any action set forth above would adversely affect the rights of one or
more series (the "Affected Series") of MuniPreferred shares in a manner
different from any other series of MuniPreferred shares, the Fund will not
approve any such action without the affirmative vote or consent of the holders
of at least a majority of the shares of each such Affected Series outstanding at
the time, in person or by proxy, either in writing or at a meeting (each such
Affected Series voting as a separate class). The Board may, without shareholder
approval, amend, alter or repeal any or all of the definitions and related
provisions which have been adopted by the Fund pursuant to the rating agency
guidelines in the event the Fund receives written confirmation from Moody's or
S&P, or both, as appropriate, that any such amendment, alteration or repeal
would not impair the ratings then assigned by Moody's and S&P to shares of
MuniPreferred. Unless a higher percentage is provided for in the Declaration of
Trust (see "Certain Provisions in the Declaration of Trust"), (A) the
affirmative vote of the holders of at least a majority of the Preferred Shares,
including MuniPreferred shares, outstanding at the time, voting as a separate
class, shall be required to approve any conversion of the Fund from a closed-end
to an open-end investment company and (B) the affirmative vote of the holders of
a majority of the outstanding Preferred Shares, including MuniPreferred shares,
voting as a separate class, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares. The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, including MuniPreferred shares, voting as a separate class,
shall be required to approve any action not described in the preceding sentence
requiring a vote of security holders of the Fund under Section 13(a) of the 1940
Act.
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
28
dividend rates bid by them, offer to purchase or sell shares of such series.
Each periodic implementation of the Auction Procedures is referred to herein as
an "Auction." See the Statement for a more complete description of the Auction
process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred.
The Auction Agent after each Auction for shares of MuniPreferred will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a
series of MuniPreferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction 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
29
Sell Order with respect to such shares to its Broker-Dealer. A Beneficial Owner
of shares of such series that fails to submit an Order with respect to such
shares to its Broker-Dealer will be deemed to have submitted a Hold Order with
respect to such shares of such series to its Broker-Dealer; provided, however,
that if a Beneficial Owner of shares of such series fails to submit an Order
with respect to shares of such series to its Broker-Dealer for an Auction
relating to a Rate Period of more than 28 Rate Period Days, such Beneficial
Owner will be deemed to have submitted a Sell Order with respect to such shares
to its Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell
the shares of MuniPreferred subject thereto. A Beneficial Owner that offers to
become the Beneficial Owner of additional shares of MuniPreferred is, for
purposes of such offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of MuniPreferred but that wishes to purchase shares of such series, or
that is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series (in each case, a "Potential Beneficial Owner"),
may submit Bids to its Broker-Dealer in which it offers to purchase shares of
such series at $25,000 per share if the Applicable Rate for shares of such
series for the next Rate Period thereof is not less than the rate specified in
such Bid. A Bid placed by a Potential Beneficial Owner of shares of such series
specifying a rate higher than the Maximum Rate for shares of such series on the
Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of MuniPreferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
MuniPreferred held by it. A Broker-Dealer may also submit Orders to the Auction
Agent for its own account as an Existing Holder or Potential Holder, provided it
is not an affiliate of the Fund.
If Sufficient Clearing Bids for shares of a series of MuniPreferred exist
(that is, the number of shares of such series subject to Bids submitted or
deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of
Potential Holders with rates equal to or lower than the Maximum Rate for shares
of such series is at least equal to the number of shares of such series subject
to Sell Orders submitted or deemed submitted to the Auction Agent by
Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of such series for the next succeeding Rate Period thereof will be the
lowest rate specified in the Submitted Bids which, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of Existing 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.
30
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 T and Series F will
normally be held every Tuesday and Friday, respectively and each Subsequent Rate
Period of shares of such series will normally begin on the following Wednesday
and Monday, respectively.
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
The Broker-Dealers are expected to maintain a secondary trading market in
shares of MuniPreferred outside of Auctions, but are not obligated to do so, and
may discontinue such activity at any time. There can be no assurance that such
secondary trading market in shares of MuniPreferred will provide owners with
liquidity of investment. The shares of MuniPreferred are not registered on any
stock exchange or on the Nasdaq Stock Market. Investors who purchase shares in
an Auction for a Special Rate Period should note that because the dividend rate
on such shares will be fixed for the length of such Rate Period, the value of
the shares may fluctuate in response to changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next Auction therefor, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of shares of MuniPreferred only in whole shares and only (1) pursuant to
a Bid or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of shares of MuniPreferred from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the shares of MuniPreferred, the Declaration of Trust
authorizes the issuance of an unlimited number of common shares, par value $.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 preemptive, 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.
31
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 of Trust 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 of Trust 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 of Trust 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 of Trust 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 of Trust or the Bylaws, in which case the
affirmative vote of the holders of at least a majority of the Fund's Common
Shares and MuniPreferred shares outstanding at the time, voting together as a
single class, is required; provided, however, that where only a particular class
or series is affected (or, in the case of removing a trustee, when the trustee
has been elected by only one class), only the required vote by the applicable
class or series will be required. Approval of shareholders is not required,
however, for any transaction, whether deemed a merger, consolidation,
reorganization or otherwise whereby the Fund issues shares in connection with
the acquisition of assets (including those subject to liabilities) from any
other investment company or similar entity. None of the foregoing provisions may
be amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's MuniPreferred shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration of Trust or the Bylaws, 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 of Trust
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 of Trust on file with the SEC
for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
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, 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
32
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 Fund's Common
Shares would no longer be listed on the American Stock Exchange. In contrast to
a closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Certain Provisions in the Declaration
of Trust" for a discussion of the voting requirements applicable to the
conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Common Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The discussion below and in the Statement of Additional Information
provides general federal income 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.
The Fund intends to elect to be treated and to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to distribute substantially all of its net
income and gains to its shareholders. Therefore, it is not expected that the
Fund will be subject to any federal income tax. The Fund primarily invests in
municipal bonds from issuers located in California or in municipal bonds whose
income is otherwise exempt from regular federal and California income taxes.
Thus, substantially all of the Fund's dividends to the holders of the Fund's
Common Shares and MuniPreferred shareholders will qualify as "exempt-interest
dividends." A shareholder treats an exempt-interest dividend as interest on
state and local bonds exempt from regular federal income tax. Some or all of an
exempt-interest dividend, however, may be subject to federal alternative minimum
tax imposed on the shareholder. Different federal alternative minimum tax rules
apply to individuals and to corporations. In addition to exempt-interest
dividends, the Fund also may distribute to its shareholders amounts that are
treated as long-term capital gain or ordinary income. The Fund will allocate
distributions to shareholders that are treated as tax-exempt interest and as
long-term capital gain and ordinary income, if any, among the Common Shares and
MuniPreferred shares in proportion to total dividends paid to each class for the
year. The Fund intends to notify MuniPreferred shareholders in advance if it
will allocate to them income that is not exempt from regular federal income tax.
In certain circumstances the Fund will make payments to MuniPreferred
shareholders to offset the tax effects of the taxable distribution. See
"Description of MuniPreferred -- Dividends and Dividend Periods -- Gross-Up
Payments." As long as the Fund qualifies as a regulated investment company,
distributions paid by the Fund generally will not be eligible for the dividends-
received deduction available to corporations. The sale or other disposition of
Common Shares or shares of MuniPreferred of the Fund will normally result in
capital gain or loss to shareholders if such shares are held as
33
a capital asset. Present law taxes both long-term and short-term capital gains
of corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, long-term capital gains are generally subject to reduced rates of
taxation. Losses realized by a shareholder on the sale or exchange of shares of
the Fund held for six months or less are disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such shares,
and, if not disallowed, such losses are treated as long-term capital losses to
the extent of any distribution of long-term capital gain received (or designated
amounts of undistributed capital gain that are treated as received) with respect
to such shares. Under certain circumstances, a shareholder's holding period may
have to restart after, or may be suspended for, any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares of the
Fund will be disallowed to the extent those shares of the Fund are replaced by
other substantially identical shares of the Fund within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
original shares. In that event, the basis of the replacement shares of the Fund
will be adjusted to reflect the disallowed loss. Although dividends generally
will be treated as distributed when paid, dividends declared in October,
November or December, payable to shareholders of record on a specified date in
one of those months and paid during the following January, will be treated as
having been distributed by the Fund (and received by the shareholders) on
December 31 of the year declared. The Fund is required in certain circumstances
to withhold a portion of dividends and certain other payments paid to certain
holders of the Fund's shares who do not furnish to the Fund their correct
taxpayer identification number (in the case of individuals, their social
security number) and certain certifications, or who are otherwise subject to
backup withholding. The Statement of Additional Information contains a more
detailed summary of the federal income tax rules that apply to the Fund and its
shareholders. Legislative, judicial or administrative action may change the tax
rules that apply to the Fund or its shareholders and any such change may be
retroactive. You should consult with your tax advisor about federal income tax
matters.
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 Shares of MuniPreferred and realize a capital gain on the transactions.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California state and local tax matters. Please
refer to the Statement of Additional Information for more detailed information.
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of the Fund is JPMorgan Chase Bank, P.O. Box
660086, Dallas, Texas 75266-0086. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also JPMorgan Chase Bank. By the end of
the year, it is anticipated that State Street Bank Corp., 225 Franklin Street,
Boston, Massachusetts 02110, will replace JPMorgan Chase Bank as custodian and
that Boston Financial Data Services, 66 Brooks Drive, Suite 8391, Braintree,
Massachusetts 02184, will replace JPMorgan Chase Bank as transfer, shareholder
services and
34
dividend paying agent. 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.
UNDERWRITING
Salomon Smith Barney Inc. is acting as 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
agreed to purchase, and the Fund has agreed to sell to such underwriter, the
number of MuniPreferred shares set forth opposite the name of such underwriter.
NUMBER OF SHARES
-------------------
NAME SERIES T SERIES F
---- -------- --------
Salomon Smith Barney Inc. .................................. 472 472
Nuveen Investments ......................................... 472 472
A.G. Edwards & Sons, Inc. .................................. 472 472
Prudential Securities Incorporated.......................... 472 472
UBS Warburg LLC............................................. 472 472
----- -----
Total............................................. 2,360 2,360
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the MuniPreferred shares if they purchase any of
the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $137.50 per share. The sales load the Fund will pay of $250 per share
is equal to 1.00% of the initial offering price. The underwriters may allow, and
dealers may reallow, a concession not to exceed $37.50 per share on sales to
other dealers. After the initial public offering, the underwriters may change
the public offering price and the other selling terms. Investors must pay for
any MuniPreferred shares purchased in the initial public offering on or before
May 17, 2002.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, the Fund. Nuveen may engage in these transactions only in
compliance with the 1940 Act.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction" and in the Statement of Additional
Information.
Nuveen, one of the underwriters, is the parent company of Nuveen Advisory.
The Fund and Nuveen Advisory have agreed to indemnify the underwriters
against certain liabilities, including liabilities arising under the Securities
Act of 1933, or to contribute payments the underwriters may be required to make
for any of those liabilities. Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Fund pursuant to the foregoing provisions, or
otherwise, the Fund has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Fund of
expenses incurred or paid by a director, officer or controlling person of the
Fund in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Fund will, unless in the opinion of its counsel the matter
35
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
The settlement date for the purchase of the MuniPreferred shares will be
May 17, 2002, as agreed upon by the underwriters, the Fund and Nuveen Advisory
pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
LEGAL OPINIONS
Certain legal matters in connection with the shares of MuniPreferred
offered hereby will be passed upon for the Fund by Vedder, Price, Kaufman &
Kammholz, Chicago, Illinois, and for the underwriters by 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 Dana LLP, Boston, Massachusetts and as to certain matters of
California law on the opinion of Orrick, Herrington & 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 American Stock
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.
36
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives....................................... S-1
Investment Policies and Techniques.......................... S-3
Other Investment Policies and Techniques.................... S-9
Management of the Fund...................................... S-12
Portfolio Transactions...................................... S-17
Net Asset Value............................................. S-18
Additional Information Concerning the Auctions for
MuniPreferred............................................. S-18
Certain Provisions in the Declaration of Trust.............. S-20
Repurchase of Common Shares; Conversion to Open-End Fund.... S-21
Tax Matters................................................. S-23
Experts..................................................... S-28
Additional Information...................................... S-28
Financial Statements........................................ F-1
Appendices
Appendix A -- Statement Establishing and Fixing the Rights
and Preferences of Municipal Auction Rate
Cumulative Preferred Shares
("MuniPreferred")............................. A-1
Appendix B -- Ratings of Investments........................ B-1
Appendix C -- Hedging Strategies and Risks.................. C-1
Appendix D -- Factors Pertaining to California.............. D-1
Appendix E -- Description of Insurers....................... E-1
37
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield for federal
regular income tax purposes on a municipal investment. To assist you to more
easily compare municipal investments like the Fund with taxable alternative
investments, the table below presents the taxable equivalent yield for a range
of hypothetical tax-free yields assuming the stated marginal federal tax rates
for 2002 listed below:
TAXABLE EQUIVALENT OF TAX-FREE YIELDS*
TAX-FREE YIELD
0.50% 1.00% 1.50% 2.00% 2.50% 3.00%
TAX RATE ----- ----- ----- ----- ----- -----
--------------------------------------------------------
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 table shows the approximate taxable yields for individuals
that are equivalent to tax-free yields under combined federal and California
state tax rates, using published 2002 marginal federal tax rates and marginal
California tax rates currently available and scheduled to be in effect.
SINGLE RETURN FEDERAL TAX STATE TAX COMBINED TAX
BRACKET JOINT RETURN BRACKET RATE RATE** RATE**
------------- -------------------- ----------- --------- ------------
$0-6,000 $0-12,000 10.00% 2.00% 11.80%
6,000-27,950 12,000-46,700 15.00% 6.00% 20.10%
27,950-67,700 46,700-112,850 27.00% 9.30% 33.80%
67,700-141,250 112,850-171,950 30.00% 9.30% 36.50%
141,250-307,050 171,950-307,050 35.00% 9.30% 41.00%
Over 307,050 Over 307,050 38.60% 9.30% 44.30%
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 state tax brackets are those for 2001. The 2002 brackets will be adjusted
to take into account changes in the California Consumer Prince Index. These
adjustments have not yet been released. The combined tax rates shown reflect
the fact that state tax payments are currently deductible for federal tax
purposes.
A-1
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-2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$118,000,000
NUVEEN INSURED CALIFORNIA DIVIDEND
ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
MUNIPREFERRED(R)
2,360 SHARES, SERIES T
2,360 SHARES, SERIES F
------------------
PROSPECTUS
MAY 15, 2002
------------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES
UBS WARBURG
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE
MUNICIPAL FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relating to this offering does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated May 15, 2002. This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing shares of MuniPreferred in this offering, and
investors should obtain and read the prospectus prior to purchasing such shares.
A copy of the prospectus may be obtained without charge by calling (800)
257-8787. Capitalized terms used but not defined in this Statement of Additional
Information have the meanings ascribed to them in the prospectus.
TABLE OF CONTENTS
PAGE
----
Investment Objectives..........................................................................................S-1
Investment Policies and Techniques.............................................................................S-3
Other Investment Policies and Techniques.......................................................................S-9
Management of the Fund........................................................................................S-12
Portfolio Transactions........................................................................................S-17
Net Asset Value...............................................................................................S-18
Additional Information Concerning the Auctions for MuniPreferred..............................................S-18
Certain Provisions in the Declaration of Trust................................................................S-20
Repurchase of Common Shares; Conversion to Open-End Fund......................................................S-21
Tax Matters...................................................................................................S-23
Experts .....................................................................................................S-28
Additional Information........................................................................................S-28
Financial Statements...........................................................................................F-1
Appendices
Appendix A - Statement Establishing and Fixing the Rights and Preferences of
Municipal Auction Rate Cumulative Preferred Shares ("MuniPreferred")..............................A-1
Appendix B - Ratings of Investments............................................................................B-1
Appendix C - Hedging Strategies and Risks......................................................................C-1
Appendix D - Factors Pertaining to California..................................................................D-1
Appendix E - Description of Insurers...........................................................................E-1
The date of this Statement of Additional Information is May 15, 2002.
INVESTMENT OBJECTIVES
The Fund's investment objective is to provide current income exempt
from regular federal 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 Corp.'s ("Nuveen Advisory") 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 the holders of Common Shares and
MuniPreferred shares. The Fund's investment objectives are fundamental policies
of the Fund.
Under normal circumstances, the Fund seeks to achieve its investment
objectives by investing at least 80% of its net assets (plus any borrowings for
investment purposes) in a portfolio of tax-exempt municipal bonds that are
covered by insurance guaranteeing the timely payment of principal and interest
thereon. The Fund will notify shareholders at least 60 days prior to any change
in this 80% policy. The Fund also may 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 are rated, at the time of investment, within the four highest grades (Baa
or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of
comparable quality by Nuveen Advisory.
The Fund has not established any limit on the percentage of its
portfolio that may be invested in municipal bonds subject to the alternative
minimum tax provisions of federal tax law, and the Fund expects that a
substantial portion of the income it produces will be includable in alternative
minimum taxable income. MuniPreferred shares therefore would not ordinarily be a
suitable investment for investors who are subject to the federal alternative
minimum tax or who would become subject to such tax by purchasing MuniPreferred
shares. The suitability of an investment in MuniPreferred shares will depend
upon a comparison of the after-tax yield likely to be provided from the Fund
with that from comparable tax-exempt investments not subject to the alternative
minimum tax, and from comparable fully taxable investments, in light of each
such investor's tax position. Special considerations apply to corporate
investors. See "Tax Matters."
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and MuniPreferred shares voting together as a single class, and of the
holders of a majority of the outstanding MuniPreferred shares voting as a
separate class:
1. 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 regular federal and
California income tax;
2. Issue senior securities, as defined in the Investment
Company Act of 1940, other than MuniPreferred shares, except to the
extent permitted under the Investment Company Act of 1940 and except as
otherwise described in the prospectus;
3. Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount
not exceeding one-third of the value of the Fund's total assets
(including the amount borrowed) less the Fund's liabilities (other than
borrowings);
4. Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities;
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;
S-1
6. Purchase or sell real estate, but this shall not prevent
the Fund from investing in municipal bonds secured by real estate or
interests therein or foreclosing upon and selling such security;
7. Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, derivative instruments or from investing in securities or
other instruments backed by physical commodities);
8. Make loans, other than by entering into repurchase
agreements and through the purchase of municipal bonds or short-term
investments in accordance with its investment objectives, policies and
limitations; and
9. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer; provided that, with respect to 50% of
the Fund's assets, the Fund may invest up to 25% of its assets in the
securities of any one issuer.
For purposes of the foregoing, "majority of the outstanding," when used
with respect to particular shares of the Fund, means (i) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.
For the purpose of applying the limitation set forth in subparagraph
(9) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act of 1940 (the "1940 Act"), the Fund may
invest only up to 10% of its total assets in the aggregate in shares of other
investment companies and only up to 5% of its total assets in any one investment
company, provided the investment does not represent more than 3% of the voting
stock of the acquired investment company at the time such shares are purchased.
As a shareholder in any investment company, the Fund will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Fund's management, advisory and administrative fees with respect to assets
so invested. 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 "Risks," the net asset value
and
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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.
6. Invest in inverse floating rate securities (which are
securities that pay interest at rates that vary inversely with changes
in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
prospectus.
INVESTMENT IN MUNICIPAL BONDS
PORTFOLIO INVESTMENTS
The California Fund will invest its net assets in a portfolio of
municipal bonds that are exempt from regular federal and California income tax.
Under normal circumstances, and except for the temporary investments
described below, the Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds described herein. Through March 31,
2003, the Fund may invest in municipal bonds that are exempt from regular
federal income tax but not from the Fund's particular state income tax ("Out of
State Bonds"), provided that no more than 10% of the Fund's investment income
during that time may be derived from Out of State Bonds.
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Under normal circumstances the Fund will invest at least 80% of its net
assets (plus any borrowings for investment purposes) in municipal bonds that are
exempt from regular federal income taxes and that are covered by insurance
guaranteeing the timely payment of principal and interest thereon. The Fund also
may 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 are rated, at the time of
investment, within the four highest grades (Baa or BBB or better by Moody's, S&P
or Fitch), or bonds that are unrated but judged to be of comparable quality by
Nuveen Advisory.
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.
Except to the extent that the Fund buys temporary investments as
described herein, the Fund will invest at least 80% of its net assets (plus any
borrowings for investment purposes) in tax-exempt municipal bonds that are
covered by insurance guaranteeing the timely payment of principal and interest
on the bonds. The Fund also may 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 are rated, at the time of investment, within the four highest grades (Baa
or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of
comparable quality by Nuveen Advisory.
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 ("Secondary Market Insurance"), or (3) covered by
a master municipal insurance policy purchased by the Fund ("Portfolio
Insurance"). The Fund, as a non-fundamental policy that can be changed by the
Board of Trustees, will only buy Portfolio Insurance from insurers whose
claims-paying ability Moody's rates "Aaa" or S&P or Fitch rates "AAA."
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 is set forth in Appendix C hereto.
The Fund also may 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 any percentage
of its net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open or closed-end investment companies that
invest primarily in municipal bonds of the type in which the Fund may invest
directly. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Tax-exempt short-term investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. The Fund will invest only in
taxable short-term investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or floating
rate of interest. See Appendix B for a general description of Moody's, S&P's and
Fitch's ratings of securities in such
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categories. Taxable short-term investments of the Fund may include certificates
of deposit issued by U.S. banks with assets of at least $1 billion, or
commercial paper or corporate notes, bonds or debentures with a remaining
maturity of one year or less, or repurchase agreements. See "Other Investment
Policies and Techniques -- Repurchase Agreements." To the extent the Fund
invests in taxable investments, the Fund will not at such times be in a position
to achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security, and the Fund will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the
municipal bond market by investing in tax-exempt municipal bonds that it
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued. Underrated municipal bonds are those whose ratings
do not, in Nuveen Advisory's opinion, reflect their true creditworthiness.
Undervalued municipal bonds are bonds that, in Nuveen Advisory's opinion, are
worth more than the value assigned to them in the marketplace. Nuveen Advisory
may at times believe that bonds associated with a particular municipal market
sector (for example, electric utilities), or issued by a particular municipal
issuer, are undervalued. Nuveen Advisory may purchase such a bond for the Fund's
portfolio because it represents a market sector or issuer that Nuveen Advisory
considers undervalued, even if the value of the particular bond is consistent
with the value of similar bonds. Municipal bonds of particular types or purposes
(e.g., hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value.
The Fund has not established any limit on the percentage of its
portfolio investments that may be invested in municipal bonds subject to the
federal alternative minimum tax provisions of federal tax law, and the Fund
expects that a substantial portion of the current income it produces will be
includable in alternative minimum taxable income. Special considerations apply
to corporate investors. See "Tax Matters."
Also included within the general category of municipal bonds described
in the Fund's prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Fund's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and disposition or releasing of the property
might prove difficult. In order to reduce this risk, the Fund will only purchase
Municipal Lease Obligations where Nuveen Advisory believes the issuer has a
strong incentive to continue making appropriations until maturity.
Upon Nuveen Advisory's recommendation, during temporary defensive
periods and in order to keep the Fund's cash fully invested, including the
period during which the net proceeds of the offering are
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being invested, the Fund may invest up to 100% of its net assets in short-term
investments including high quality, short-term securities that may be either
tax-exempt or taxable. To the extent the Fund invests in taxable short-term
investments, the Fund will not at such times be in a position to achieve that
portion of its investment objective of seeking current income exempt from
regular federal income tax. For further information, see "Short-Term
Investments" below.
Obligations of issuers of municipal bonds are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
The Fund also may invest up to 10% of its net assets in securities of
other open or closed-end investment companies that invest primarily in municipal
bonds of the type in which the Fund may invest directly. The Fund will generally
select obligations which may not be redeemed at the option of the issuer for
approximately seven to nine years.
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 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.
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(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
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 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.
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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 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
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contracts create an ongoing greater potential financial risk than do options
transactions, where the exposure is limited to the cost of the initial premium.
Losses due to hedging transactions will reduce yield. Net gains, if any, from
hedging and other portfolio transactions will be distributed as taxable
distributions to shareholders. The Fund will not make any investment (whether an
initial premium or deposit or a subsequent deposit) other than as necessary to
close a prior investment if, immediately after such investment, the sum of the
amount of its premiums and deposits would exceed 5% of the Fund's net assets.
The Fund will invest in these instruments only in markets believed by Nuveen
Advisory to be active and sufficiently liquid. Successful implementation of most
hedging strategies would generate taxable income, and the Fund has no present
intention to use these strategies. For further information regarding these
investment strategies and risks presented thereby, see Appendix C to this
Statement of Additional Information.
FACTORS PERTAINING TO CALIFORNIA
Factors pertaining to California are set forth in Appendix D.
OTHER INVESTMENT POLICIES AND TECHNIQUES
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (i.e., securities that are
not readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is required,
the Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than that which
prevailed when it decided to sell. Illiquid securities will be priced at a fair
value as determined in good faith by the Board of Trustees or its delegate.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment
objectives of the Fund in relation to actual and anticipated movements in
interest rates. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what
Nuveen Advisory believes to be a temporary price disparity between the two
securities. Temporary price disparities between two comparable securities may
result from supply and demand imbalances where, for example, a temporary
oversupply of certain bonds may cause a temporarily low price for such bonds, as
compared with other bonds of like quality and characteristics. The Fund may also
engage to a limited extent in short-term trading consistent with its investment
objectives. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold, but the Fund will not engage in trading solely
to recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its
investment objectives by prudent selection of municipal bonds with a view to
holding them for investment. While there can be no
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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 up to 10% of its net assets in securities of other
open or closed-end investment companies that invest primarily in municipal bonds
of the types in which the Fund may invest directly. The Fund generally expects
to invest in other investment companies either during periods when it has large
amounts of uninvested cash, such as the period shortly after the Fund receives
the proceeds of the offering of its Common Shares or MuniPreferred shares, or
during periods when there is a shortage of attractive, high-yielding municipal
bonds available in the market. As a shareholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses, and
would remain subject to payment of the Fund's management, advisory and
administrative fees with respect to assets so invested. 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. 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 Securities and Exchange Commission to maintain in a separate
account liquid assets, consisting of cash, cash equivalents or liquid
securities, having a market value at all times of at least equal to the amount
of the commitment. Income generated by any such assets which provide taxable
income for federal income tax purposes is includable in the taxable income of
the Fund. The Fund may enter into contracts to purchase municipal bonds on a
forward basis (i.e., where settlement will occur more than 60 days from the date
of the transaction) only to the extent that the Fund specifically collateralizes
such obligations with a security that is expected to be called or mature within
sixty days before or after the settlement date of the forward transaction. The
commitment to purchase securities on a when-issued, delayed delivery or forward
basis may involve an element of risk because no interest accrues on the bonds
prior to settlement and at the time of delivery the market value may be less
than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. Government securities or municipal bonds) agrees to repurchase
the same security at a specified price on a future date agreed upon by the
parties. The agreed-upon repurchase price determines the yield during the Fund's
holding period. Repurchase agreements are considered to be loans collateralized
by the underlying security that is the subject of the repurchase contract.
Income generated from transactions in repurchase agreements will be taxable. See
"Tax Matters" for information relating to the allocation of taxable income, if
any, between Common Shares and MuniPreferred shares. The Fund will only enter
into repurchase agreements with registered securities dealers or domestic banks
that, in the opinion of Nuveen Advisory, present
S-10
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. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
S-11
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven, one of whom is an "interested person" (as that term is
defined in the 1940 Act) and six of whom are not "interested persons". 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,
birthdates and business addresses of the trustees and officers of the Fund,
their principal occupations, other affiliations and other directorships they
held during the past five years, their positions and offices with the Fund and
the year they were first elected or appointed, and the number of portfolios each
oversees are set forth below.
Name, Birthdate Positions and Principal Occupations Including Number of
--------------- ------------- ------------------------------- ---------
and Address Offices with the Other Directorships During Portfolios in
----------- ---------------- -------------------------- -------------
Fund and Year Past Five Years Fund Complex
------------- --------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Trustee who is an interested person of the Fund:
-----------------------------------------------
Timothy R. Schwertfeger* Chairman of the Chairman and Director (since July 1996) of The 121
3/28/49 Board, President John Nuveen Company, Nuveen Investments, Nuveen
333 West Wacker Drive and Trustee Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 1994 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
January 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 September 1999) of
Nuveen Senior Loan Asset Management Inc.
Trustees who are not interested persons of the Fund:
---------------------------------------------------
Robert P. Bremner Trustee Private Investor and Management Consultant. 104
8/22/40 1997
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown Trustee Retired (August 1989) as Senior Vice President 104
7/29/34 1993 of The Northern Trust Company.
201 Michigan Avenue
Highwood, IL 60040
Anne E. Impellizzeri Trustee Executive Director (since 1998) of Manitoga 104
1/26/33 1994 (Center for Russel Wright's Design with
3 West 29th Street Nature); formerly, President and Chief
New York, NY 10001 Executive Officer of Blanton-Peale Institutes
of Religion and Health (since December 1990);
prior thereto, Vice President, Metropolitan
Life Insurance Co.
Peter R. Sawers Trustee Adjunct Professor of Business and Economics, 104
4/3/33 1991 University of Dubuque, Iowa; formerly
22 The Landmark (1991-2000) Adjunct Professor, Lake Forest
Northfield, IL 60093 Graduate School of Management, Lake Forest,
Illinois; prior thereto,
Executive Director, Towers
Perrin Australia, a management
consulting firm; Chartered
Financial Analyst; Certified
Management Consultant.
* 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-12
Name, Birthdate Positions and Principal Occupations Including Number of
--------------- ------------- ------------------------------- ---------
and Address Offices with the Other Directorships During Portfolios in
----------- ---------------- -------------------------- -------------
Fund and Year Past Five Years Fund Complex
------------- --------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
William J. Schneider Trustee Senior Partner and Chief Operating Officer, 104
9/24/44 1997 Miller-Valentine Group, Vice President,
4000 Miller-Valentine Ct. Miller-Valentine Realty, a development and
P. O. Box 744 contract company; Chair, Miami Valley Hospital;
Dayton, OH 45401 Vice 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 104
12/29/47 1997 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
Officers of the Fund:
--------------------
Michael T. Atkinson Vice President Vice President (since January 2002), formerly, 119
2/3/66 2002 Assistant Vice President (since 2000), previously,
333 W. Wacker Drive associate of Nuveen Investments.
Chicago, IL 60606
Paul L. Brennan Vice President Vice President (since January 2002), formerly, 119
11/10/66 2002 Assistant Vice President (since 1997), of Nuveen
333 W. Wacker Drive Advisory Corp.; prior thereto, portfolio manager of
Chicago, IL 60606 Flagship Financial Inc.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments (since 121
11/28/67 Treasurer January 1999), prior thereto, Assistant Vice
333 W. Wacker Drive 1999 President (from January 1997); formerly,
Chicago, IL 60606 Associate of Nuveen Investments; Vice President
and Treasurer (since September 1999) of Nuveen
Senior Loan Asset Management Inc.; Chartered
Financial Analyst.
Michael S. Davern Vice President Vice President of Nuveen Advisory 119
6/26/57 1997 Corp. (since January 1997); prior thereto, Vice
333 W. Wacker Drive President and Portfolio Manager of Flagship
Chicago, IL 60606 Financial.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. (since 121
9/8/54 2001 August 2001); previously, Vice President of
333 W. Wacker Drive Van Kampen Investment Advisory Corp.
Chicago, IL 60606 (since 1998); prior thereto, Assistant Vice
President of Van Kampen Investment Advisory
Corp. (since 1994).
Jessica R. Droeger Vice President Vice President (since January 2002), formerly 121
9/24/64 2002 Assistant Vice President and Assistant General
333 W. Wacker Drive Counsel (since May 1998) of Nuveen Investments;
Chicago, IL 60606 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
S-13
Name, Birthdate Positions and Principal Occupations Including Number of
--------------- ------------- ------------------------------- ---------
and Address Offices with the Other Directorships During Portfolios in
----------- ---------------- -------------------------- -------------
Fund and Year Past Five Years Fund Complex
------------- --------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Lorna C. Ferguson Vice President Vice President of Nuveen Investments; Vice 121
10/24/45 1998 President (since January 1998) of Nuveen
333 W. Wacker Drive Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.
William M. Fitzgerald Vice President Vice President of Nuveen Advisory Corp. 119
3/2/64 1995 since December 1995); Assistant Vice President
333 W. Wacker Drive of Nuveen Advisory Corp. (from September 1992
Chicago, IL 60606 to December 1995); prior thereto, Assistant
Portfolio Manager of Nuveen Advisory Corp.;
Chartered Financial Analyst.
Stephen D. Foy Vice President and Vice President of Nuveen Investments and 121
5/31/54 Controller (since May 1998) The John Nuveen Company; Vice
333 W. Wacker Drive 1998 President (since September 1999) of Nuveen
Chicago, IL 60606 Senior Loan Management Inc.; Certified Public
Accountant.
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; 119
7/5/55 1992 Chartered Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
Richard A. Huber Vice President Vice President of Nuveen Institutional Advisory 119
3/26/63 1997 Corp. (since March 1998) and Nuveen Advisory
333 W. Wacker Drive Corp. (since January 1997); prior thereto, Vice
Chicago, IL 60606 President and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa Vice President Vice President of Nuveen Advisory Corp. 119
8/21/57 1990
333 W. Wacker Drive
Chicago, IL 60606
David J. Lamb Vice President Vice President (since March 2000) of Nuveen 121
3/22/63 2000 Investments, previously Assistant Vice
333 W. Wacker Drive President (since January 1999); prior thereto,
Chicago, IL 60606 Associate of Nuveen Investments; Certified
Public Accountant.
Larry W. Martin Vice President and Vice President, Assistant Secretary and 121
7/27/51 Assistant Secretary Assistant General Counsel of Nuveen
333 W. Wacker Drive 1988 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
January 1997) Nuveen Asset Management, Inc.;
Vice President and Assistant Secretary (since
September 1999) of Nuveen Senior Loan Asset
Management Inc.
Edward F. Neild, IV Vice President Vice President (since September 1996), 119
7/7/65 1996 previously Assistant Vice President (since
333 W. Wacker Drive December 1993) of Nuveen Advisory Corp.,
Chicago, IL 60606 Portfolio Manager prior thereto; Vice President
(since September 1996), previously Assistant
Vice President (since May 1995), of Nuveen
Institutional Advisory Corp., Portfolio Manager
prior thereto; Chartered Financial Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), formerly, 119
9/4/60 2002 Assistant Vice President (1998),of Nuveen
333 W. Wacker Drive Advisory Corp.; prior thereto, portfolio manager.
Chicago, IL 60606
Thomas C. Spalding, Jr. Vice President Vice President of Nuveen Advisory Corp. and 119
7/31/51 1982 Nuveen Institutional Advisory Corp.; Chartered
333 W. Wacker Drive Financial Analyst.
Chicago, IL 60606
Gifford R. Zimmerman Vice President and Vice President, Assistant Secretary and 121
9/9/56 Secretary Associate General Counsel, formerly Assistant
333 W. Wacker Drive 1988 General Counsel, of Nuveen Investments; Vice
Chicago, IL 60606 President and Assistant Secretary of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Vice President and Assistant
Secretary of The John Nuveen Company (since
May 1994); Vice President and Assistant
Secretary (since September 1999) of Nuveen
Senior Loan Asset Management Inc.; Chartered
Financial Analyst.
S-14
The Board of Trustees has four standing committees: the executive
committee, the audit committee, the nominating and governance committee and the
dividend and valuation committee.
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of the Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are William J. Schneider, Chair, Robert P.
Bremner, Lawrence H. Brown, Anne E. Impellizzeri, Peter R. Sawers and Judith M.
Stockdale.
The nominating and governance committee is responsible for Board
selection and tenure; selection and review of committees; and Board education
and operations. In addition, the committee monitors performance of legal counsel
and other service providers; periodically reviews and makes recommendations
about any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities--including retaining special counsel
and other experts or consultants at the expense of the Fund. In the event of a
vacancy on the Board, the nominating and governance committee receives
suggestions from various sources as to suitable candidates. Suggestions should
be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen
Investments, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations
for new trustees and reserves the right to interview all candidates and to make
the final selection of any new trustees. The members of the nominating and
governance committee are Anne E. Impellizzeri, Chair, Robert P. Bremner,
Lawrence H. Brown, Peter R. Sawers, William J. Schneider and Judith M.
Stockdale.
The dividend and valuation 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
committee also 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 dividend and valuation committee
are Timothy R. Schwertfeger, Chair, and Lawrence H. Brown. The Fund commenced
operations on March 25, 2002 and, therefore, held no committee meetings during
the Fund's last fiscal year.
The trustees of the Fund are directors or trustees, as the case may be,
of 30 Nuveen open-end funds and 74 Nuveen closed-end funds advised by Nuveen
Advisory. Mr. Schwertfeger is a director or trustee, as the case may be, of 15
Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory
Corp. and two funds advised by Nuveen Senior Loan Asset Management Inc. 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 the Fund's Common Shares will elect trustees at the next
annual meeting of holders of the Fund's Common Shares, 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 holders of the Fund's Common Shares and holders of
MuniPreferred Shares, voting together as a single class. Holders of
MuniPreferred Shares will be entitled to elect a majority of the Fund's trustees
under certain circumstances. See "Description of Shares - MuniPreferred Shares -
Voting Rights."
The following table sets forth the dollar range of equity securities
beneficially owned by each trustee as of December 31, 2001:
Aggregate Dollar Range of
Equity Securities in
All Registered
Investment Companies
Dollar Range of Equity Overseen by Trustee
Securities in the in Family of
Name of Trustee Fund Investment Companies
--------------------- ---------------------- -------------------------
-------------------------------------------------------------------------------------
Timothy R. Schwertfeger $ 0 Over $100,000
-------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------
Judith M. Stockdale 0 Over $100,000
-------------------------------------------------------------------------------------
No trustee who is not an interested person of the Fund owns
beneficially or of record, any security of Nuveen Advisory, Nuveen or any person
(other than a registered investment company) directly or indirectly controlling,
controlled by or under common control with Nuveen Advisory or Nuveen.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the 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
COMPENSATION TOTAL COMPENSATION AMOUNT OF TOTAL
FROM FROM FUND AND FUND COMPENSATION
NAME OF TRUSTEE FUND* COMPLEX** THAT HAS BEEN DEFERRED
------------------------ ------------- --------------------- ------------------------
Robert P. Bremner....... $ 740 $ 72,500 $ 8,280
Lawrence H. Brown....... 760 78,500 0
Anne E. Impellizzeri.... 740 72,500 55,200
Peter R. Sawers......... 740 73,000 54,788
William J. Schneider.... 740 72,500 55,200
Judith M. Stockdale..... 740 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 estimated compensation paid to the trustees for the one year
period ending 12/31/01 for services to the open-end and closed-end funds
advised by Nuveen Advisory.
The Fund has no employees. Its officers are compensated by Nuveen
Advisory or Nuveen.
On July 27, 1999, the Board of Trustees approved the Investment
Management Agreement between the Fund and Nuveen Advisory Corp. and on February
20, 2001, the Board of Trustees approved an amendment to the Investment
Management Agreement. In approving this agreement the trustees considered, among
other things, the nature and quality of services to be provided by Nuveen
Advisory, the profitability to Nuveen Advisory of its relationship with the
Fund, fall-out benefits from that relationship, economies of scale and
comparative fees and expense ratios.
S-15
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. Over 1,300,000 individuals have invested to date in The John Nuveen
Company's funds and trusts. Founded in 1898, The John Nuveen Company brings over
a century of expertise to the municipal bond market. According to data from CDA
Weisenberger, Nuveen is the leading sponsor of exchange-traded municipal bond
funds as measured by number of funds (77) and fund assets under management
($43.6 billion as of December 31, 2001). Overall as of December 31, 2001, The
John Nuveen Company and its affiliates have over $76 billion in assets under
management or surveillance. 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.
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
NET ASSETS(1) 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
------------------
(1) Including net assets attributable to MuniPreferred shares.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
S-16
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
(AS A PERCENTAGE OF (AS A PERCENTAGE OF
YEAR ENDING AVERAGE DAILY NET YEAR ENDING AVERAGE DAILY NET
MARCH 31, ASSETS)(1) MARCH 31, ASSETS)(1)
------------------ ----------------------- --------------- -----------------------
2002(2)......... .30% 2008 .25%
2003............ .30 2009 .20
2004............ .30 2010 .15
2005............ .30 2011 .10
2006............ .30 2012 .05
2007............ .30
------------------
(1) Including net assets attributable to MuniPreferred shares.
(2) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the holders of the Fund's Common Shares. Nuveen Advisory
has not agreed to reimburse the Fund for any portion of its fees and expenses
beyond March 31, 2012.
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 can be viewed online or downloaded from the EDGAR Database on
the SEC's internet web site at www.sec.gov. You may also review and copy those
documents by visiting the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may
be obtained, after mailing the appropriate duplicating fee, by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities
for the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
On occasion, the Fund may clear portfolio transactions through Nuveen. It is the
policy of Nuveen Advisory to seek the best execution under the circumstances of
each trade. Nuveen Advisory evaluates price as the primary consideration, with
the financial condition, reputation and responsiveness of the dealer considered
secondary in determining best execution. Given the best execution obtainable, it
will be Nuveen Advisory's practice to select dealers which, in addition, furnish
research information (primarily
S-17
credit analyses of issuers and general economic reports) and statistical and
other services to Nuveen Advisory. It is not possible to place a dollar value on
information and statistical and other services received from dealers. Since it
is only supplementary to Nuveen Advisory's own research efforts, the receipt of
research information is not expected to reduce significantly Nuveen Advisory's
expenses. While Nuveen Advisory will be primarily responsible for the placement
of the business of the Fund, the policies and practices of Nuveen Advisory in
this regard must be consistent with the foregoing and will, at all times, be
subject to review by the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
Under the 1940 Act, the Fund may not purchase portfolio securities from
any underwriting syndicate of which Nuveen is a member except under certain
limited conditions set forth in Rule 10f-3. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund that may be invested in a particular
issue. In addition, purchases of securities made pursuant to the terms of the
Rule must be approved at least quarterly by the Board of Trustees of the Fund,
including a majority of the members thereof who are not interested persons of
the Fund.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
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
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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 -- Voting Rights" in the prospectus, Cede will be
the holder of record of all shares of each series of MuniPreferred and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of MuniPreferred, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of MuniPreferred, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of MuniPreferred" in
the prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
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.
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BROKER-DEALERS
The Auction Agent after each Auction for shares of MuniPreferred will
pay to each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust 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 of Trust 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 of Trust 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 of Trust
requires a vote by holders of at least two-thirds of the Common Shares and
MuniPreferred shares, voting together as a single class, except as described
below, to authorize (1) a conversion of the Fund from a closed-end to an
open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-
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thirds of the total number of trustees fixed in accordance with the Declaration
of Trust or the By-laws, in which case the affirmative vote of the holders of at
least a majority of the Fund's Common Shares and MuniPreferred shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), only the required vote by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. None of the foregoing provisions may be amended except by the
vote of at least two-thirds of the Common Shares and MuniPreferred shares,
voting together as a single class. In the case of the conversion of the Fund to
an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred shares outstanding at the time, voting as a separate class, or, if
such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration of Trust 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 of Trust relating to such higher votes are in
the best interest of the Fund and its shareholders.
Reference should be made to the Declaration of Trust on file with the
Securities and Exchange Commission for the full text of these provisions.
The Declaration of Trust 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 of Trust,
however, protects a trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and 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,
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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 Trustees of the Fund at the time it
considers such issue, it is the Board of Trustees' present policy, which may be
changed by the Board of Trustees, not to authorize repurchases of Common Shares
or a tender offer for such shares if (1) such transactions, if consummated,
would (a) result in the delisting of the Common Shares from the American Stock
Exchange, or (b) impair the Fund's status as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the "Code") (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company under
the 1940 Act; (2) the Fund would not be able to liquidate portfolio securities
in an orderly manner and consistent with the Fund's investment objectives and
policies in order to repurchase shares; or (3) there is, in the Board's
judgment, any (a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting the
Fund, (b) general suspension of or limitation on prices for trading securities
on the American Stock Exchange, (c) declaration of a banking moratorium by
federal or state authorities or any suspension of payment by United States or
state banks in which the Fund invests, (d) material limitation affecting the
Fund or the issuers of its portfolio securities by federal or state authorities
on the extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees of the Fund may in the future modify these
conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and MuniPreferred
shares outstanding at the time, voting together as a single class, and of the
holders of at least two-thirds of the Fund's MuniPreferred shares outstanding at
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 of Trust
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
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large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management. The Board of Trustees of the Fund may
at any time propose conversion of the Fund to an open-end company depending upon
their judgment as to the advisability of such action in light of circumstances
then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when MuniPreferred shares are outstanding will increase the leverage applicable
to the outstanding Common Shares then remaining.
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon
the advice of Vedder, Price, Kaufman & Kammholz, special counsel to the Fund.
The Fund intends to elect to be treated and to qualify under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company and to satisfy conditions which enable dividends on Common
Shares or shares of MuniPreferred which are attributable to interest on
municipal obligations to be exempt from federal income tax in the hands of
owners of such stock, subject to the possible application of the federal
alternative minimum tax.
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
S-23
other regulated investment companies) or two or more issuers controlled by the
Fund and engaged in the same, similar or related trades or businesses. In
meeting these requirements of Subchapter M of the Code, the Fund may be
restricted in the utilization of certain of the investment techniques described
under "Investment Policies and Techniques" and "Other Investment Policies and
Techniques" above. If in any year the Fund should fail to qualify under
Subchapter M for tax treatment as a regulated investment company, the Fund would
incur a regular federal corporate income tax upon its taxable income for that
year, and distributions to its shareholders would be taxable to such holders as
ordinary income to the extent of the earnings and profits of the Fund. A
regulated investment company that fails to distribute, by the close of each
calendar year, an amount equal to the sum of 98% of its ordinary taxable income
for such year and 98% of its capital gain net income for the one-year period
ending October 31 in such year, plus any shortfalls from the prior years'
required distribution, is liable for a 4% excise tax on the excess of the
required distribution for such calendar year over the distributed amount for
such calendar year. To avoid the imposition of this excise tax, the Fund
generally intends to make the required distributions of its ordinary taxable
income, if any, and its capital gain net income, to the extent possible, by the
close of each calendar year.
The Fund intends to qualify to pay "exempt-interest" dividends, as
defined in the Code, on its Common Shares and shares of MuniPreferred by
satisfying the requirement that, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consist of tax-exempt
municipal bonds. Exempt-interest dividends are dividends or any part thereof
(other than a capital gain dividend) paid by the Fund which are attributable to
interest on municipal bonds and are so designated by the Fund. Exempt-interest
dividends will be exempt from federal income tax, subject to the possible
application of the federal alternative minimum tax. Insurance proceeds received
by the Fund under any insurance policies in respect of scheduled interest
payments on defaulted municipal bonds, as described herein, will generally be
excludable from federal gross income under Section 103(a) of the Code. In the
case of non-appropriation by a political subdivision, however, there can be no
assurance that payments made by the issuer representing interest on such
"non-appropriation" municipal lease obligations will be excludable from gross
income for federal income tax purposes. See "Investment Policies and Techniques"
above. Gains of the Fund that are attributable to market discount on certain
municipal obligations acquired after April 30, 1993 are treated as ordinary
income to the extent of accrued market discount on the bond. Distributions to
shareholders of net income received by the Fund from taxable temporary
investments, if any, and of net short-term capital gains realized by the Fund,
if any, will be taxable to its shareholders as ordinary income. Distributions by
the Fund of net capital gain (i.e., the excess of net long-term capital gain
over net short-term capital loss), if any, are taxable as long-term capital
gain, regardless of the length of time the shareholder has owned Common Shares
or shares of MuniPreferred of the Fund. The amount of taxable income allocable
to the Fund's shares of MuniPreferred will depend upon the amount of such income
realized by the Fund, but is not generally expected to be significant. Except
for dividends paid on shares of MuniPreferred which include an allocable portion
of any net capital gain or other taxable income, the Fund anticipates that all
other dividends paid on shares of its MuniPreferred will constitute
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
S-24
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 -- Dividends and Dividend
Periods -- Gross-up Payments" in the prospectus.
In order for any distributions to owners of the Fund's shares of
MuniPreferred to be eligible to be treated as exempt-interest dividends, such
shares of MuniPreferred must be treated as stock for federal income tax
purposes. Nuveen Advisory believes the shares of MuniPreferred should be treated
as stock for federal income tax purposes.
If at any time when the Fund's shares of MuniPreferred are outstanding
the Fund fails to meet the MuniPreferred Basic Maintenance Amount or the 1940
Act MuniPreferred Asset Coverage, the Fund will be required to suspend
distributions to holders of its Common Shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
MuniPreferred -- Dividends and Dividend Periods -- Restrictions on Dividends and
Other Distributions" in the prospectus. This may prevent the Fund from
distributing at least 90% of the sum of its investment company taxable income
(as that term is defined in the Code, determined without regard to the deduction
for dividends paid) and its net tax-exempt income, and may therefore jeopardize
the Fund's qualification for taxation as a regulated investment company or cause
the Fund to incur a tax liability or a non-deductible 4% excise tax on the
undistributed taxable income (including gain), or both. Upon failure to meet the
MuniPreferred Basic Maintenance Amount or the 1940 Act MuniPreferred Asset
Coverage, the Fund will be required to redeem its shares of MuniPreferred in
order to maintain or restore such maintenance amount or asset coverage and avoid
the adverse consequences to the Fund and its shareholders of failing to qualify
as a 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
S-25
business." "Related persons" are in general defined to include persons among
whom there exists a relationship, either by family or business, which would
result in a disallowance of losses in transactions among them under various
provisions of the Code (or if they are members of the same controlled group of
corporations under the Code), including a partnership and each of its partners
(and certain members of their families), an S corporation and each of its
shareholders (and certain members of their families) and various combinations of
these and other relationships. The foregoing is not a complete description of
all of the provisions of the Code covering the definitions of "substantial user"
and "related person."
The Fund may, at its option, redeem shares of its MuniPreferred in
whole or in part, and is required to redeem shares of its MuniPreferred to the
extent required to maintain the MuniPreferred Basic Maintenance Amount and the
1940 Act MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a
redemption of the shares of MuniPreferred will be taxed as gain or loss from the
sale or exchange of the shares of MuniPreferred under Section 302 of the Code
rather than as a dividend, but only if the redemption distribution (a) is deemed
not to be essentially equivalent to a dividend, (b) is in complete redemption of
an owner's interest in the Fund, (c) is substantially disproportionate with
respect to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
ownership of Common Shares will be taken into account. In determining whether
the above conditions are satisfied, shares owned by certain persons related to
the owner will be treated as held by such owner.
Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S. withholding
tax at the rate of 30% (or possibly a lower rate provided by an applicable tax
treaty) on distributions of taxable net investment income and net short-term
capital gain. To the extent received by foreign investors, exempt-interest
dividends, distributions of net long-term capital gain and gain from the sale or
other disposition of the shares of MuniPreferred generally are exempt from U.S.
federal income taxation. Different tax consequences may result if the owner is
engaged in a trade or business in the United States or, in the case of an
individual, is present in the United States for more than 182 days during a
taxable year and certain other conditions are met.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year declared.
Certain of the Fund's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Fund and affect the holding period of securities
held by the Fund and the character of the gains or losses realized by the Fund.
These provisions may also require the Fund to recognize income or gain without
receiving cash with which to make distributions in the amounts necessary to
satisfy the requirements for maintaining regulated investment company status and
for avoiding income and excise taxes. The Fund will monitor its transactions and
may make certain tax elections in order to mitigate the effect of these rules
and prevent disqualification of the Fund as a regulated investment company.
The sale or other disposition of Common Shares or shares of
MuniPreferred of the Fund (other than redemptions, the rules for which are
described above) will normally result in capital gain or loss to shareholders
who hold their shares as capital assets. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, long-term capital gains are
generally subject to reduced rates of taxation. Losses realized by a shareholder
on the sale or exchange of shares of the Fund held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of
long-term capital gain received (or designated amounts of undistributed capital
gain that are treated as received) with respect to such shares. Under certain
circumstances, a shareholder's holding period may
S-26
have to restart after, or may be suspended for, any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares of the
Fund will be disallowed to the extent those shares of the Fund are replaced by
other substantially identical shares of the Fund within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
original shares. In that event, the basis of the replacement shares of the Fund
will be adjusted to reflect the disallowed loss.
Federal tax law imposes an alternative minimum tax with respect to
corporations, individuals, trusts and estates. Interest on certain municipal
obligations, such as bonds issued to make loans for housing purposes or to
private entities (but not to certain tax-exempt organizations such as
universities and non-profit hospitals) is included as an item of tax preference
in determining the amount of a taxpayer's alternative minimum taxable income. To
the extent that the Fund receives income from municipal obligations subject to
the federal alternative minimum tax, a portion of the dividends paid by it,
although otherwise exempt from federal income tax, will be taxable to its
shareholders to the extent that their tax liability is determined under the
alternative minimum tax. The Fund will annually supply a report indicating the
percentage of the Fund's income attributable to municipal obligations subject to
the federal alternative minimum tax. In addition, for certain corporations,
alternative minimum taxable income is increased by 75% of the difference between
an alternative measure of income ("adjusted current earnings") and the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all distributions by the Fund that
would otherwise be tax-exempt, is included in calculating a corporation's
adjusted current earnings. Certain small corporations are not subject to the
alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the
Fund, is taken into account in calculating the amount of social security and
railroad retirement benefits that may be subject to federal income tax.
The Fund is required in certain circumstances to withhold a portion of
taxable dividends and certain other payments paid to certain holders of the
Fund's shares who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited against such shareholder's
U.S. federal income tax liability, provided the required information is
furnished to the IRS.
The Code provides that every shareholder required to file a tax return
must include for information purposes on such return the amount of tax-exempt
interest received during the taxable year, including any exempt-interest
dividends received from the Fund.
The value of Common Shares acquired pursuant to the Fund's Dividend
Reinvestment Plan will generally be excluded from gross income to the extent
that the cash amount reinvested would be excluded from gross income.
The foregoing is a general summary of the provisions of the Code and
regulations thereunder presently in effect as they directly govern the federal
income taxation of the Fund and its shareholders. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive. Moreover, the foregoing does not address many of the factors that
may be determinative of whether an investor will be liable for the alternative
minimum tax. Shareholders are advised to consult their own tax advisors for more
detailed information concerning the federal income tax consequences of
purchasing, holding and disposing of Fund shares.
S-27
STATE TAX MATTERS
Tax matters pertaining to California are set forth in Appendix D.
EXPERTS
The financial statements of the Fund as of March 7, 2002 appearing in
this Statement of Additional Information have been audited by Ernst & Young LLP,
233 South Wacker Drive, Chicago, Illinois 60606, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP provides accounting and auditing
services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 relating to the shares offered
hereby, has been filed by the Fund with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The 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 Registration Statement. Statements contained in the
prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy 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-28
REPORT OF INDEPENDENT AUDITORS
AND
FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Nuveen Insured California Dividend Advantage Municipal Fund
We have audited the accompanying statement of net assets of Nuveen Insured
California Dividend Advantage Municipal Fund (the "Fund") as of March 7, 2002
and the related statement of operations for the period from July 12, 1999 (date
of organization) through March 7, 2002. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Fund at March 7, 2002, and
results of its operations for the period from July 12, 1999 (date of
organization) through March 7, 2002, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 8, 2002
F-2
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
Nuveen Insured California Dividend Advantage Municipal Fund
Statement of Net Assets
March 7, 2002
Assets:
Cash ............................................................. $100,275
Offering costs ................................................... 240,000
Receivable from Adviser .......................................... 11,500
--------
Total Assets ................................................... 351,775
--------
Liabilities:
Accrued offering costs ........................................... 240,000
Payable to Adviser for organization costs ........................ 11,500
--------
Total liabilities .............................................. 251,500
--------
Net Assets .......................................................... $100,275
========
Net asset value per Common Share outstanding ($100,275 divided
by 7,000 Common Shares outstanding) .............................. $ 14.325
========
Net Assets Represent:
Cumulative Preferred Shares, $25,000 liquidation value; unlimited
number of shares authorized, no shares outstanding ............. $ --
Common Shares, $.01 par value; unlimited number of shares
authorized, 7,000 shares outstanding ........................... 70
Paid-in surplus .................................................. 100,205
--------
$100,275
========
F-3
Nuveen Insured California Dividend Advantage Municipal Fund
Statement of Operations
Period from July 12, 1999 (date of organization) through March 7, 2002
Investment income ....................................... $ --
--------
Expenses:
Organization costs ................................... 11,500
Expense reimbursement ................................ (11,500)
--------
Total expenses ..................................... --
--------
Net investment income ................................... $ --
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on July 12, 1999, and
has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
Securities Act of 1933, as amended, and the sale of 7,000 Common Shares to
Nuveen Advisory Corp., the Fund's investment adviser (the "Adviser"), a wholly
owned subsidiary of The John Nuveen Company.
Nuveen Investments, also a wholly owned subsidiary of The John Nuveen Company,
has agreed to reimburse all organization expenses (approximately $11,500) and
pay all offering costs (other than the sales load) that exceed $.03 per Common
Share.
The Fund is authorized by its Declaration of Trust to issue Preferred Shares
("MuniPreferred Shares") having a liquidation value of $25,000 per share in one
or more classes or series, with dividend, liquidation preference and other
rights as determined by the Fund's Board of Trustees without approval of the
Common Shareholders.
Note 2: Accounting Policies
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. Actual results may differ from those estimates.
The Fund's share of offering costs will be recorded as a reduction of the
proceeds from the sale of Common Shares upon the commencement of Fund
operations. The offering costs reflected above assume the sale of 8,000,000
Common Shares.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund, upon commencement of Fund operations, has agreed to pay a management
fee, payable on a monthly basis, at an annual rate ranging from 0.6500% of the
first $125 million of the average daily net assets (including net assets
attributable to MuniPreferred Shares) to 0.5750% of the average daily net assets
(including net assets attributable to MuniPreferred Shares) in excess of $2
billion.
F-4
In addition to the reimbursement and waiver of organization and offering costs
discussed in Note 1, the Adviser has contractually agreed to reimburse the Fund
for fees and expenses during the first 10 years of operations. These reductions
range from 0.3000% of the average daily net assets (including net assets
attributable to MuniPreferred Shares) during the first year of operations,
declining to 0.0500% of the average daily net assets (including net assets
attributable to MuniPreferred Shares) during the tenth year. The Adviser has not
agreed to reimburse the Fund for any portion of its fees and expenses beyond
March 31, 2012.
Note 4: Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
tax-exempt net investment income, in addition to any significant amounts of net
realized capital gains and/or market discount realized from investment
transactions.
F-5
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
April 23, 2002
ASSETS
Investments in municipal securities, at market value $ 174,747,244
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value 35,855,000
Cash 37,954,661
Receivables:
Interest 1,569,924
Investments sold 200,000
-------------
Total assets 250,326,829
-------------
LIABILITIES
Payable for investments purchased 40,705,504
Accrued expenses:
Management fees 42,567
Organization and offering costs 446,500
Other 9,802
-------------
Total liabilities 41,204,373
-------------
Net assets $ 209,122,456
=============
Shares outstanding 14,507,000
=============
Net asset value per share outstanding (net assets
divided by shares outstanding) $ 14.42
=============
Net assets consist of:
Common Shares, $.01 par value per share $ 145,070
Paid-in surplus 207,232,705
Balance of undistributed net investment income 283,308
Net unrealized appreciation of investments 1,461,373
-------------
Net assets $ 209,122,456
=============
Authorized shares:
Common Unlimited
Preferred Unlimited
=============
See accompanying notes to financial statements.
F-6
STATEMENT OF OPERATIONS (UNAUDITED)
For the Period March 27, 2002 (commencement of operations) through
April 23, 2002
INVESTMENT INCOME $ 343,005
-----------
EXPENSES
Management fees 93,218
Shareholders' servicing agent fees and expenses 518
Custodian's fees and expenses 3,699
Trustees' fees and expenses 370
Professional fees 2,278
Shareholders' reports - printing and mailing expenses 2,124
Other expenses 814
-----------
Total expenses before expense reimbursement 103,021
Expense reimbursement (43,324)
-----------
Net expenses 59,697
-----------
Net investment income 283,308
-----------
UNREALIZED GAIN FROM INVESTMENTS
Change in net unrealized appreciation of investments 1,461,373
-----------
Net gain from investments 1,461,373
-----------
Net increase in net assets from operations $ 1,744,681
===========
See accompanying notes to financial statements.
F-7
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period March 27, 2002 (commencement of operations) through
April 23, 2002
OPERATIONS
Net investment income $ 283,308
Change in net unrealized appreciation of investments 1,461,373
------------
Net increase in net assets from operations 1,744,681
------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 207,277,500
------------
Net increase in net assets 209,022,181
Net assets at the beginning of period 100,275
------------
Net assets at the end of period $209,122,456
============
Balance of undistributed net investment income at
the end of period $ 283,308
============
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Fund covered in this report and its corresponding American Stock Exchange
symbol is Nuveen Insured California Dividend Advantage Municipal Fund (NKL) (the
"Fund").
The Fund seeks to provide current income exempt from regular federal and
California income tax by investing primarily in a portfolio of municipal
obligations issued by state and local government authorities within the state of
California. The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, closed-end management investment company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with
accounting principles generally accepted in the United States.
Securities Valuation
The prices of municipal bonds in the Fund's investment portfolio are provided by
a pricing service approved by the Fund's Board of Trustees. When price quotes
are not readily available (which is usually the case for municipal securities),
the pricing service establishes fair market value based on yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating, indications of value from securities dealers and general market
conditions. If it is determined that market prices for a security are
unavailable or inappropriate, the Board of Trustees of the Fund, may establish
a fair value for the security. Temporary investments in securities that have
variable rate and demand features qualifying them as short-term securities are
valued at amortized cost, which approximates market value.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains and
losses from such transactions are determined on the specific identification
method. Securities purchased or sold on a when-issued or delayed delivery basis
may have extended settlement periods. The securities so purchased are subject to
market fluctuation during this period. The Fund has instructed the custodian to
segregate assets in a separate account with a current value at least equal to
the amount of the when-issued and delayed delivery purchase commitments. At
April 23, 2002, the Fund had outstanding when-issued purchase commitments of
$37,446,541.
Investment Income
Interest income is determined on the basis of interest accrued, adjusted for
amortization of premiums and accretion of discounts for financial reporting
purposes.
Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
investment income to its shareholders. Therefore, no federal income tax
provision is required. Furthermore, the Fund intends to satisfy conditions which
will enable interest from municipal securities, which is exempt from regular
federal and California income tax, to retain such tax-exempt status when
distributed to shareholders of the Fund.
Dividends and Distributions to Shareholders
Tax-exempt net investment income is declared monthly as a dividend. Generally,
payment is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
from investment transactions, if any, are distributed to shareholders not less
frequently than annually. Furthermore, capital gains are distributed only to the
extent they exceed available capital loss carryforwards.
Distributions to shareholders of tax-exempt net investment income, net realized
capital gains and/or market discount are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from accounting principles generally
accepted in the United States. Accordingly, temporary over-distributions as a
result of these differences may occur and will be classified as either
distributions in excess of net investment income, distributions in excess of net
realized gains and/or distributions in excess of net ordinary taxable income
from investment transactions, where applicable.
F-8
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the period March 27, 2002 (commencement of operations)
through April 23, 2002.
Custodian Fee Credit
The Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on the Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results may differ from those estimates.
Organization and Offering Costs
Nuveen Investments, a wholly owned subsidiary of The John Nuveen Company,
has agreed to reimburse all organization expenses (approximately $11,500) and
pay all offering costs (other than the sales load) that exceed $.03 per Common
Share. The Fund's share of offering costs ($435,000) were recorded as a
reduction of the proceeds from the sale of shares.
2. FUND SHARES
The Fund sold 14,500,000 Common Shares during the period March 27, 2002
(commencement of operations) through April 23, 2002.
3. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in long-term municipal
securities and short-term municipal securities for the period March 27, 2002
(commencement of operations) through April 23, 2002, were as follows:
--------------------------------------------------------------------------------
Purchases:
Long-term municipal securities $173,283,443
Short-term municipal securities 36,055,000
Sales and maturities:
Long-term municipal securities --
Short-term municipal securities 200,000
============
--------------------------------------------------------------------------------
At April 23, 2002, the cost of investments owned for federal income tax
purposes was the same as the cost for financial reporting purposes.
4. UNREALIZED APPRECIATION (DEPRECIATION)
Gross unrealized appreciation and gross unrealized depreciation of investments
at April 23, 2002, were as follows:
------------------------------------------------------------------------------------------------------
Gross unrealized:
appreciation $ 1,485,339
depreciation (23,966)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 1,461,373
======================================================================================================
5. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Fund's investment management agreement with Nuveen Advisory Corp. (the
"Adviser"), a wholly owned subsidiary of The John Nuveen Company, the Fund pays
an annual management fee, payable monthly, at the rates set forth below, which
are based upon the average daily net assets of the Fund as follows:
AVERAGE DAILY NET ASSETS MANAGEMENT FEE
-----------------------------------------------------------------------------------------------------
For the first $125 million .6500%
For the next $125 million .6375
For the next $250 million .6250
For the next $500 million .6125
For the next $1 billion .6000
For net assets over $2 billion .5750
======================================================================================================
The fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Fund pays no
compensation directly to those of its Trustees who are affiliated with the
Adviser or to its officers, all of whom receive remuneration for their
services to the Fund from the Adviser.
F-9
For the first ten years of the Fund's operation, the Adviser has 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 AVERAGE DAILY YEAR ENDING OF AVERAGE DAILY
MARCH 31, NET ASSETS) MARCH 31, NET ASSETS)
----------- ----------------- ----------- -----------------
2002*........................ .30% 2008 ................ .25%
2003 ........................ .30 2009 ................ .20
2004 ........................ .30 2010 ................ .15
2005 ........................ .30 2011 ................ .10
2006 ........................ .30 2012 ................ .05
2007 ........................ .30
---------------
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond March 31, 2012.
F-10
PORTFOLIO OF INVESTMENTS (UNAUDITED)
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND (NKL)
April 23,2002
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT (000) DESCRIPTION PROVISIONS* RATINGS** VALUE
EDUCATION AND CIVIC ORGANIZATIONS - 10.0%
$3,070 California Educational Facilities Authority, Revenue Bonds, 3/09 at 101.00 Aa3 $3,147,364
Claremont University Center, Series 1999B, 5.250%, 3/01/18
9,000 Trustees of the California State University, Systemwide Revenue 11/12 at 100.00 AAA 8,900,820
Bonds, Series 2002A, 5.125%, 11/01/26 (WI, settling 4/30/02)
9,000 The Regents of the University of California, Multiple Purpose 9/08 at 101.00 AA 8,888,760
Project Revenue Bonds, Series K, 5.300%, 9/01/30
HOUSING/MULTIFAMILY - 0.9%
1,905 The City of Los Angeles, California, Multifamily Housing Revenue 7/11 at 102.00 AAA 1,867,167
Bonds (GNMA Mortgage-Backed Securities Program, Park Plaza West
Senior Apartments Project), Series 2001B, 5.300%, 1/20/21
TAX OBLIGATION/GENERAL - 20.3%
5,920 Cajon Valley Union School District, San Diego County, California, 8/10 at 102.00 AAA 5,803,494
General Obligation Bonds, Series 2002B, 5.125%, 8/01/32
(WI, settling 5/02/02)
9,000 State of California, General Obligation Refunding Bonds, Series 2/12 at 100.00 AAA 8,816,670
2002, 5.000%, 2/01/22
2,070 Fresno Unified School District, Fresno County, California, 8/10 at 102.00 AAA 2,052,798
General Obligation Bonds, Election of 1995, Series 2002G, 5.125%,
8/01/26
Fresno Unified School District, Fresno County, California,
General Obligation Bonds, Election of 2001, Series 2002B:
1,135 5.125%, 8/01/23 8/10 at 102.00 AAA 1,131,992
1,190 5.125%, 8/01/24 8/10 at 102.00 AAA 1,185,204
1,245 5.125%, 8/01/25 8/10 at 102.00 AAA 1,238,202
1,255 5.125%, 8/01/26 8/10 at 102.00 AAA 1,244,571
5,000 Los Angeles Unified School District, California, General 7/12 at 100.00 AAA 4,944,400
Obligation Bonds, Election of 1997, Series 2002E, 5.125%, 1/01/27
7,355 Mount San Antonio Community College District, Los Angeles County, 5/12 at 101.00 AAA 7,138,322
California, General Obligation Bonds, Series 2002A, 5.000%,
5/01/27 (WI, settling 5/02/02)
2,500 Oakland Unified School District, Alameda County, California, 8/12 at 100.00 AAA 2,532,475
General Obligation Bonds, Series 2002, 5.250%, 8/01/21
3,300 Peralta Community College District, Alameda County, California, 8/09 at 102.00 AAA 3,174,666
General Obligation Bonds, Election of 2000, Series A, 5.000%,
8/01/31
3,250 San Diego Unified School District, San Diego County, California, 7/11 at 102.00 AAA 3,195,010
General Obligation Bonds, Election of 1998, Series 2001C, 5.000%,
7/01/22
TAX OBLIGATION/LIMITED - 28.1%
6,895 Brea Olinda Unified School District, Orange County, California, 8/11 at 101.00 AAA 6,818,879
Refunding Certificates of Participation, Series 2002A, 5.125%,
8/01/26 (WI, settling 5/14/02)
3,145 Culver City Redevelopment Agency, California, Redevelopment 5/11 at 101.00 AAA 3,119,494
Project Tax Allocation Bonds, Series 2002A, 5.125%, 11/01/25
(WI, settling 4/25/02)
5,500 La Quinta Redevelopment Agency, Riverside County, California, Tax 9/11 at 102.00 AAA 5,372,785
Allocation Bonds, La Quinta Redevelopment Project Area No. 1,
Series 2001, 5.100%, 9/01/31
7,000 The City of Los Angeles, California, Certificates of 4/12 at 100.00 AAA 6,959,120
Participation, Real Property Acquisition Program, Series 2002,
5.200%, 4/01/27
3,000 Los Angeles Unified School District, California, Certificates of 10/11 at 100.00 AAA 2,881,590
Participation, Administration Building Project, Series 2001B,
5.000%, 10/01/31
4,250 Los Angeles County Metropolitan Transportation Authority, 7/08 at 101.00 AAA 4,149,318
California, Proposition C Sales Tax Revenue Refunding Bonds,
Second Senior, Series 1998A, 5.000%, 7/01/23
12,605 Los Angeles County Metropolitan Transportation Authority, 7/11 at 101.00 AAA 12,090,716
California, Proposition A First Tier Senior Sales Tax Revenue
Bonds, Series 2001A, 5.000%, 7/01/31
8,470 Ontario Redevelopment Financing Authority, California, Lease 8/11 at 101.00 AAA 8,387,672
Revenue Bonds, Capital Projects, Series 2001, 5.200%, 8/01/29
5,000 Palm Desert Financing Authority, California, Tax Allocation 4/12 at 102.00 AAA 4,876,550
Revenue Refunding Bonds, Project Area No. 1, Series 2002, 5.000%,
4/01/25
4,000 City of San Jose Financing Authority, California, Lease Revenue 9/11 at 100.00 AAA 4,010,120
Refunding Bonds, Series 2001F, Convention Center Project, 5.000%,
9/01/19
UTILITIES - 9.5%
9,000 Anaheim Public Financing Authority, California, Revenue Bonds, 10/12 at 100.00 AAA 8,722,620
Electric System Distribution Facilities, Series 2002A, 5.000%,
10/01/27
6,000 Northern California Power Agency, Revenue Refunding Bonds, 7/08 at 101.00 AAA 5,915,880
Hydroelectric Project No. 1, Series 1998A, 5.200%, 7/01/32
5,500 Sacramento Municipal Utility District, California, Electric 8/11 at 100.00 AAA 5,323,725
Revenue Bonds, Series 2001N, 5.000%, 8/15/28
WATER AND SEWER - 14.8%
9,000 Eastern Municipal Water District, California, Water and Sewer 7/11 at 100.00 AAA 8,650,980
Revenue Certificates of Participation, Series 2001B, 5.000%,
7/01/30
Department of Water and Power of the City of Los Angeles,
California, Waterworks Revenue Refunding Bonds, Series 2001A:
9,000 5.125%, 7/01/41 7/11 at 100.00 AAA 8,717,310
3,000 5.125%, 7/01/41 7/11 at 100.00 AAA 2,905,770
6,000 The City of Los Angeles, California, Wastewater System Revenue 6/12 at 100.00 AAA 5,769,600
Refunding Bonds, Series 2002A, 5.000%, 6/01/32
(WI, settling 5/01/02)
5,000 The Metropolitan Water District of Southern California, Water 1/08 at 101.00 AAA 4,813,200
Revenue Bonds, 1997 Authorization, Series A, 5.000%, 7/01/30
$178,560 Total Investments (cost $173,285,871) - 83.6% 174,747,244
SHORT-TERM INVESTMENTS - 17.1%
$ 9,500 California Pollution Control Financing Authority, Pollution VMIG-1 9,500,000
Control Revenue Refunding Bonds, ExxonMobil Project, Series 2000,
Variable Rate Demand Bonds, 1.350%, 4/01/17+
9,500 California Pollution Control Financing Authority, Solid Waste VMIG-1 9,500,000
Disposal Revenue Bonds, Shell Martinez Refining Project, Series
1996B, Variable Rate Demand Obligations, 1.500%, 10/01/31+
7,585 California Statewide Communities Development Authority, VMIG-1 7,585,000
Certificates of Participation, Northern California Retired
Officers Community, Variable Rate Demand Obligations, 1.450%,
6/01/26+
2,700 California Statewide Community Development Authority, Variable A-1 2,700,000
Rate Demand Revenue Bonds, Fremont-Rideout Health Group, Series
2001A, 1.500%, 1/01/31+
6,570 Irvine Ranch Water District, California, General Obligations of VMIG-1 6,570,000
Improvement No. 105, 140, 240 and 250, Variable Rate Demand Bonds,
1.450%, 1/01/21+
$ 35,855 Total Short-Term Investments (cost $35,855,000) 35,855,000
Other Assets Less Liabilities - (0.7)% (1,479,788)
Net Assets - 100% $209,122,456
All of the bonds in the portfolio, excluding temporary investments in
short-term municipal securities, are either covered by Original Issue
Insurance, Secondary Market Insurance or Portfolio Insurance, or are
backed by an escrow or trust containing sufficient U.S. Government or
U.S. Government agency securities, any of which ensure the timely
payment of principal and interest.
* Optional Call Provisions: Dates (month and year) and prices of the
earliest optional call or redemption. There may be other call
provisions at varying prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
(WI) Security purchased on a when-issued basis.
+ Security has a maturity of more than one year, but has variable rate
and demand features which qualify it as a short-term security. The
rate disclosed is that currently in effect. This rate changes
periodically based on market conditions or a specified market index.
See accompanying notes to financial statements.
APPENDIX A
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
TABLE OF CONTENTS
PAGE
----
DEFINITIONS......................................................................................................1
"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.......................................................................................3
Benchmark Rate................................................................................................3
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........................................................................................4
Declaration...................................................................................................4
Deposit Securities............................................................................................4
Discounted Value..............................................................................................4
Dividend Payment Date.........................................................................................4
Dividend Period...............................................................................................4
Existing Holder...............................................................................................4
Failure to Deposit............................................................................................4
Federal Tax Rate Increase.....................................................................................4
Fund..........................................................................................................4
Gross-Up Payment..............................................................................................5
Hold Order and Hold Orders....................................................................................5
Holder........................................................................................................5
Independent Accountant........................................................................................5
Initial Rate Period...........................................................................................5
Interest Equivalent...........................................................................................5
Issue Type Category...........................................................................................5
Kenny Index...................................................................................................5
Late Charge...................................................................................................5
i
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.......................................................................................7
Moody's Volatility Factor.....................................................................................7
Municipal Obligations.........................................................................................7
MuniPreferred.................................................................................................7
MuniPreferred Basic Maintenance Amount........................................................................8
MuniPreferred Basic Maintenance Cure Date.....................................................................9
MuniPreferred Basic Maintenance Report........................................................................9
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..................................................................................................10
Permanent Insurance..........................................................................................10
Person.......................................................................................................10
Portfolio Insurance..........................................................................................10
Potential Beneficial Owner...................................................................................10
Potential Holder.............................................................................................10
Preferred Shares.............................................................................................10
Quarterly Valuation Date.....................................................................................10
Rate Multiple................................................................................................10
Rate Period..................................................................................................10
Rate Period Days.............................................................................................10
Receivables For Municipal Obligations Sold...................................................................10
Redemption Price.............................................................................................11
Reference Rate...............................................................................................11
Registration Statement.......................................................................................11
S&P..........................................................................................................11
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
Sell Order and Sell Orders...................................................................................11
Special Rate Period..........................................................................................11
Special Redemption Provisions................................................................................11
Submission Deadline..........................................................................................12
Submitted Bid and Submitted Bids.............................................................................12
Submitted Hold Order and Submitted Hold Orders...............................................................12
ii
Submitted Order and Submitted Orders.........................................................................12
Submitted Sell Order and Submitted Sell Orders...............................................................12
Subsequent Rate Period.......................................................................................12
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...............................................................................................13
Treasury Bill................................................................................................13
Treasury Bill Rate...........................................................................................13
Treasury Note................................................................................................13
Treasury Note Rate...........................................................................................13
U.S. Government Securities Dealer............................................................................14
Valuation Date...............................................................................................14
Volatility Factor............................................................................................14
Voting Period................................................................................................14
Winning Bid Rate.............................................................................................14
PART I..........................................................................................................15
1. Number of Authorized Shares...................................................................15
2. Dividends.....................................................................................15
(a) Ranking..............................................................................15
(b) Cumulative Cash Dividends............................................................15
(c) Dividends Cumulative From Date of Original Issue.....................................15
(d) Dividend Payment Dates and Adjustment Thereof........................................15
(e) Dividend Rates and Calculation of Dividends..........................................16
(i) Dividend Rates..............................................................16
(ii) Calculation of Dividends....................................................17
(f) Curing a Failure to Deposit..........................................................18
(g) Dividend Payments by Fund to Auction Agent...........................................18
(h) Auction Agent as Trustee of Dividend Payments by Fund................................18
(i) Dividends Paid to Holders............................................................18
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends.................18
(k) Dividends Designated as Exempt-Interest Dividends....................................18
3. Gross-Up Payments.............................................................................18
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or Fewer........19
(b) Special Rate Periods of More Than 28 Rate Period Days................................19
(c) No Gross-Up Payments in the Event of a Reallocation..................................19
4. Designation of Special Rate Periods...........................................................19
(a) Length of and Preconditions for Special Rate Period..................................19
(b) Adjustment of Length of Special Rate Period..........................................19
(c) Notice of Proposed Special Rate Period...............................................20
(d) Notice of Special Rate Period........................................................20
(e) Failure to Deliver Notice of Special Rate Period.....................................21
5. Voting Rights.................................................................................21
(a) One Vote Per Share of MuniPreferred..................................................21
(b) Voting for Additional Trustees.......................................................21
(i) Voting Period...............................................................21
iii
(ii) Notice of Special Meeting...................................................22
(iii) Terms of Office of Existing Trustees........................................22
(iv) Terms of Office of Certain Trustees to Terminate Upon
Termination of Voting Period................................................22
(c) Holders of MuniPreferred to Vote on Certain Other Matters............................23
(i) Increases in Capitalization.................................................23
(ii) 1940 Act Matters............................................................23
(d) Board May Take Certain Actions Without Shareholder Approval..........................24
(e) Voting Rights Set Forth Herein Are Sole Voting Rights................................24
(f) No Preemptive Rights or Cumulative Voting............................................24
(g) Voting for Trustees Sole Remedy for Fund's Failure to Pay Dividends..................25
(h) Holders Entitled to Vote.............................................................25
6. 1940 Act MuniPreferred Asset Coverage.........................................................25
7. MuniPreferred Basic Maintenance Amount........................................................25
8. [Reserved]....................................................................................27
9. Restrictions on Dividends and Other Distributions.............................................27
(a) Dividends on Preferred Shares Other Than MuniPreferred...............................27
(b) Dividends and Other Distributions with Respect to Common Shares
Under the 1940 Act...................................................................27
(c) Other Restrictions on Dividends and Other Distributions..............................28
10. Rating Agency Restrictions....................................................................28
11. Redemption....................................................................................29
(a) Optional Redemption..................................................................29
(b) Mandatory Redemption.................................................................30
(c) Notice of Redemption.................................................................31
(d) No Redemption Under Certain Circumstances............................................31
(e) Absence of Funds Available for Redemption............................................31
(f) Auction Agent as Trustee of Redemption Payments by Fund..............................32
(g) Shares for Which Notice of Redemption Has Been Given are No Longer
Outstanding..........................................................................32
(h) Compliance with Applicable Law.......................................................32
(i) Only Whole Shares of MuniPreferred May Be Redeemed...................................32
12. Liquidation Rights............................................................................32
(a) Ranking..............................................................................32
(b) Distributions Upon Liquidation.......................................................33
(c) Pro Rata Distributions...............................................................33
(d) Rights of Junior Shares..............................................................33
(e) Certain Events Not Constituting Liquidation..........................................33
13. Miscellaneous.................................................................................33
(a) Amendment of Appendix A to Add Additional Series.....................................33
(b) Appendix A Incorporated By Reference.................................................34
(c) No Fractional Shares.................................................................34
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise
Acquired by the Fund.................................................................34
(e) Board May Resolve Ambiguities........................................................34
(f) Headings Not Determinative...........................................................34
(g) Notices..............................................................................34
PART II.........................................................................................................35
1. Orders........................................................................................35
2. Submission of Orders by Broker-Dealers to Auction Agent.......................................37
iv
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate..........................................................................................38
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares..........................................................................40
5. Notification of Allocations...................................................................42
6. Auction Agent.................................................................................42
7. Transfer of Shares of MuniPreferred...........................................................43
8. Global Certificate............................................................................43
Appendix A.....................................................................................................A-1
Section 1. Designation as to Series........................................................................A-1
Section 2. Number of Authorized Shares Per Series..........................................................A-1
Section 3. Exceptions to Certain Definitions...............................................................A-1
Section 4. Certain Definitions.............................................................................A-1
Section 5. Initial Rate Periods............................................................................A-8
Section 6. Date for Purposes of Paragraph (zzz) Contained Under the Heading
"Definitions" in this Statement.................................................................A-8
Section 7. Party Named for Purposes of the Definition of "Rate Multiple" in this Statement.................A-8
Section 8. Additional Definitions..........................................................................A-8
Section 9. Dividend Payment Dates..........................................................................A-8
Section 10. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this Statement.............A-8
Section 11. Redemption Provisions Applicable to Initial Rate Periods........................................A-8
Section 12. Applicable Rate for Purposes of Subparagraph (b)(iii) of Section 3 of Part II of
this Statement..................................................................................A-8
Section 13. Certain Other Restrictions and Requirements.....................................................A-9
v
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND, a
Massachusetts business trust (the "Fund"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees
of the Fund by Article IV of the Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time is, together with this
Statement, herein called the "Declaration"), the Board of Trustees has, by
resolution, authorized the issuance of shares of the Fund's authorized Preferred
Shares liquidation preference $25,000 per share, having such designation or
designations as to series as is set forth in Section 1 of Appendix A hereto and
such number of shares per such series as is set forth in Section 2 of Appendix A
hereto.
Second: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each series of MuniPreferred described in Section 1 of Appendix A hereto are
as follows (each such series being referred to herein as a series of
MuniPreferred, and shares of all such series being referred to herein
individually as a share of MuniPreferred and collectively as shares of
MuniPreferred):
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Appendix A
hereto, as used in Parts I and II of this Statement, the following terms shall
have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
(a)"AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any
Rate Period of shares of a series of MuniPreferred, shall mean (i) (A) in the
case of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate
Period Days, the interest equivalent of the 30-day rate; provided, however, that
if such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper placed
on behalf of issuers whose corporate bonds are rated "AA" by S&P or the
equivalent of such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New York for the
Business Day next preceding such date; or (ii) in the event that the Federal
Reserve Bank of New York does not make available any such rate, then the
arithmetic average of such rates, as quoted on a discount basis or otherwise, by
the Commercial Paper Dealers to the Auction Agent for the close of business on
the Business Day next preceding such date. If any Commercial Paper Dealer does
not quote a rate required to determine the "AA" Composite Commercial Paper Rate,
the "AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining
Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the
"interest equivalent" of a rate stated on a discount basis (a "discount rate")
for commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction,
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning
specified in paragraph (c) of Section 7 of Part I of this Statement.
(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.
2
(n) "BENCHMARK RATE" shall have the meaning specified in
Section 12 of Appendix A hereto.
(o) "BENEFICIAL OWNER," with respect to shares of a series of
MuniPreferred, means a customer of a Broker-Dealer who is listed on the records
of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of
shares of such series.
(p) "BID" and "BIDS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(q) "BIDDER" and "BIDDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement; provided,
however, that neither the Fund nor any affiliate thereof shall be 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.
3
(bb) "DEPOSIT SECURITIES" shall mean cash and Municipal
Obligations rated at least A-l+ or SP-l+ by S&P, except that, for purposes of
subparagraph (a)(v) of Section 11 of Part I of this Statement, such Municipal
Obligations shall be considered "Deposit Securities" only if they are also rated
P-1, MIG-1 or VMIG-1 by Moody's.
(cc) "DISCOUNTED VALUE," as of any Valuation Date, shall mean,
(i) with respect to an S&P Eligible Asset, the quotient of the Market Value
thereof divided by the applicable S&P Discount Factor 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.
4
(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.
(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:
5
(i) in the case of any Auction Date which is not the
Auction Date immediately prior to the first day of any proposed Special
Rate Period designated by the Fund pursuant to Section 4 of Part I of
this Statement, the product of (A) the Reference Rate on such Auction
Date for the next Rate Period of shares of such series and (B) the Rate
Multiple on such Auction Date, unless shares of such series have or had
a Special Rate Period (other than a Special Rate Period of 28 Rate
Period Days or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period of shares of
such series after such Special Rate Period, in which case the higher
of:
(A) the dividend rate on shares of such
series for the then-ending Rate Period; and
(B) the product of (1) the higher of (x) the
Reference Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to the then-ending Rate
Period of shares of such series, if such then-ending Rate
Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period of shares of such series,
if such Special Rate Period was 364 Rate Period Days or fewer,
or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if such
Special Rate Period was more than 364 Rate Period Days and (2)
the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the
Auction Date immediately prior to the first day of any proposed Special
Rate Period designated by the Fund pursuant to Section 4 of Part I of
this Statement, the product of (A) the highest of (1) the Reference
Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such then-ending
Rate Period was more than 364 Rate Period Days, (2) the Reference Rate
on such Auction Date for the Special Rate Period for which the Auction
is being held if such Special Rate Period is 364 Rate Period Days or
fewer or the Treasury Note Rate on such Auction Date for the Special
Rate Period for which the Auction is being held if such Special Rate
Period is more than 364 Rate Period Days, and (3) the Reference Rate on
such Auction Date for Minimum Rate Periods and (B) the Rate Multiple on
such Auction Date.
(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.
6
(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 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 are exempt from regular Federal and California
income tax. Under normal market conditions, the Fund expects to be fully
invested (at least 95% of its assets) in such tax-exempt municipal bonds.
(ggg)"MUNIPREFERRED" shall have the meaning set forth on
the first page of this Statement.
7
(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
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
8
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.
(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.
9
(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.
(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.
10
(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.
(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.
11
(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 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
12
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 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.
13
(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.
14
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.
15
(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
16
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
17
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:
18
(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
19
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
20
(if Moody's is then rating such series) and S&P Eligible Assets (if S&P
is then rating such series) each have an aggregate Discounted Value at
least equal to the MuniPreferred Basic Maintenance Amount as of such
Business Day (assuming for purposes of the foregoing calculation that
(a) the Maximum Rate is the Maximum Rate on such Business Day as if
such Business Day were the Auction Date for the proposed Special Rate
Period, and (b) the Moody's Discount Factors applicable to Moody's
Eligible Assets are determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Fund, as
described in the definition of Moody's Discount Factor herein); or
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Rate Period of shares
of such series and that the next succeeding Rate Period of shares of
such series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the
Fund fails to deliver either of the notices described in subparagraphs (d)(i) or
(d)(ii) of this Section 4 (and, in the case of the notice described in
subparagraph (d)(i) of this Section 4, a MuniPreferred Basic Maintenance Report
to the effect set forth in such subparagraph (if either Moody's or S&P is then
rating the series in question)) with respect to any designation of any proposed
Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this Section 4. In the event the Fund delivers to the
Auction Agent a notice described in subparagraph (d)(i) of this Section 4, it
shall file a copy of such notice with the Secretary of the Fund, and the
contents of such notice shall be binding on the Fund. In the event the Fund
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Fund will provide Moody's (if Moody's is then rating the series
in question) and S&P (if S&P is then rating the series in question) a copy of
such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER SHARE OF MUNIPREFERRED. Except as otherwise
provided in the 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
21
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.
22
(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
23
the first sentence of this Section 5(c)(ii) requiring a vote of
security holders of the Fund under Section 13(a) of the 1940 Act. For
purposes of the foregoing, "majority of the outstanding Preferred
Shares" means (i) 67% or more of such shares present at a meeting, if
the Holders of more than 50% of such shares are present or represented
by proxy, or (ii) more than 50% of such shares, whichever is less. In
the event a vote of Holders of MuniPreferred is required pursuant to
the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to
be taken, notify Moody's (if Moody's is then rating the shares of
MuniPreferred) and S&P (if S&P is then rating the shares of
MuniPreferred) that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken. The Fund shall,
not later than ten Business Days after the date on which such vote is
taken, notify Moody's (if Moody's is then rating the shares of
MuniPreferred) of the results of such vote.
(d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER
APPROVAL. The Board of Trustees, without the vote or consent of the shareholders
of the Fund, may from time to time amend, alter or repeal any or all of the
definitions of the terms listed below, or any provision of this Statement viewed
by Moody's or S&P as a predicate for any such definition, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of MuniPreferred or the Holders thereof; provided,
however, that the Board of Trustees receives written confirmation from Moody's
(such confirmation being required to be obtained only in the event Moody's is
rating the shares of MuniPreferred and in no event being required to be obtained
in the case of the definitions of (x) Deposit Securities, Discounted Value,
Receivables for Municipal Obligations Sold, Issue Type Category and Other Issues
as such terms apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and S&P (such
confirmation being required to be obtained only in the event S&P is rating the
shares of MuniPreferred and in no event being required to be obtained in the
case of the definitions of (x) Discounted Value, Receivables for Municipal
Obligations Sold, Issue Type Category and Other Issues as such terms apply to
Moody's Eligible Assets, and (y) Moody's Discount Factor, Moody's Eligible
Asset, Moody's Exposure Period and Moody's Volatility Factor) that any such
amendment, alteration or repeal would not impair the ratings then assigned by
Moody's or S&P, as the case may be, to shares of MuniPreferred:
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act MuniPreferred Asset 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.
24
(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.
25
(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
26
Maintenance Report to S&P (if S&P is then rating the shares of MuniPreferred),
Moody's (if Moody's is then rating the shares of MuniPreferred) and the Auction
Agent (if either S&P or Moody's is then rating the shares of MuniPreferred)
promptly following receipt by the Fund of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first
Business Day after the Date of Original Issue of any shares of MuniPreferred,
the Fund shall complete and deliver to S&P (if S&P is then rating the shares of
MuniPreferred) and Moody's (if Moody's is then rating the shares of
MuniPreferred) a MuniPreferred Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Fund shall cause the Independent Accountant to confirm in
writing to S&P (if S&P is then rating the shares of MuniPreferred) (i) the
mathematical accuracy of the calculations reflected in such Report and (ii) that
the Discounted Value of S&P Eligible Assets reflected thereon equals or exceeds
the MuniPreferred Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third
Business Day after either (i) the Fund shall have redeemed Common Shares or (ii)
the ratio of the Discounted Value of S&P Eligible Assets or the Discounted Value
of Moody's Eligible Assets to the MuniPreferred Basic Maintenance Amount is less
than or equal to 105% 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
27
condition of declaring dividends on its common shares or stock) after deducting
the amount of such dividend, distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
For so long as any share of MuniPreferred is outstanding, and except as set
forth in paragraph (a) of this Section 9 and paragraph (c) of Section 12 of this
Part I, (A) the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of
MuniPreferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of the Common Shares or any
other shares of the Fund ranking junior to or on a parity with the shares of
MuniPreferred as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption, redeem, purchase
or otherwise acquire for consideration any Common Shares or any other such
junior shares (except by conversion into or exchange for shares of the Fund
ranking junior to the shares of MuniPreferred as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up), or any
such parity shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with MuniPreferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), unless (i) full cumulative dividends on shares of each series of
MuniPreferred through its most recently ended Dividend Period shall have been
paid or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent and (ii) the Fund has redeemed the full number
of shares of MuniPreferred required to be redeemed by any provision for
mandatory redemption pertaining thereto, and (B) the Fund shall not declare, pay
or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any, ranking junior
to shares of MuniPreferred as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up) in respect of Common
Shares or any other shares of the Fund ranking junior to shares of MuniPreferred
as to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
shares of MuniPreferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of MuniPreferred) and S&P Eligible Assets (if S&P is then
rating the shares of MuniPreferred) would each at least equal the MuniPreferred
Basic Maintenance Amount.
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 centrum of the value of the total assets of the Fund
at the time of the
28
borrowing; for purposes of the foregoing, "temporary purpose" means that the
borrowing is to be repaid within sixty days and is not to be extended or
renewed;
(c) issue additional shares of any series of MuniPreferred or
any class or series of shares ranking prior to or on a parity with shares of
MuniPreferred with respect to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the Fund, or reissue any
shares of MuniPreferred previously purchased or redeemed by the Fund;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently J.J. Kenny) referred
to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of MuniPreferred of any series may be
redeemed, at the option of the Fund, as a whole or from time to time in
part, on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available therefor, at
a redemption price per share equal to the sum of $25,000 plus an amount
equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (1) shares of a series of
MuniPreferred may not be redeemed in part if after such partial
redemption fewer than 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
29
redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of any series of MuniPreferred may be
redeemed, at the option of the Fund, as a whole but not in part, out of
funds legally available therefor, on the first day following any
Dividend Period thereof included in a Rate Period consisting of more
than 364 Rate Period Days if, on the date of determination of the
Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate 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
30
number required to be redeemed to satisfy the MuniPreferred Basic Maintenance
Amount or the 1940 Act MuniPreferred Asset Coverage, as the case may be, pro
rata among shares of MuniPreferred and other Preferred Shares (and, then, pro
rata among each series of MuniPreferred) subject to redemption or retirement.
The Fund shall effect such redemption on the date fixed by the Fund therefor,
which date shall not be earlier than 20 days nor later than 40 days after such
Cure Date, except that if the Fund does not have funds legally available for the
redemption of all of the required number of shares of MuniPreferred and other
Preferred Shares 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
31
deposit in trust with the Auction Agent the Redemption Price with respect to any
shares where (1) the Notice of Redemption relating to such redemption provided
that such redemption was subject to one or more conditions precedent and (2) any
such condition precedent shall not have been satisfied at the time or times and
in the manner specified in such Notice of Redemption. Notwithstanding the fact
that the Fund may not have redeemed shares of MuniPreferred for which a Notice
of Redemption has been mailed, dividends may be declared and paid on shares of
MuniPreferred and shall include those shares of MuniPreferred for which a Notice
of Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY FUND.
All moneys paid to the Auction Agent for payment of the Redemption Price of
shares of MuniPreferred called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE
NO LONGER OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant
to paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the shares of MuniPreferred that are the subject of such
notice, dividends on such shares shall cease to accumulate and such shares shall
no longer be deemed to be outstanding for any purpose, and all rights of the
Holders of the shares so called for redemption shall cease and terminate, except
the right of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in subparagraph (e)(i)
of Section 2 of this Part I and in Section 3 of this Part I. Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of 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
32
Preferred Shares as to the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution,
liquidation or winding up of the affairs of the Fund, whether voluntary or
involuntary, the Holders of shares of MuniPreferred then outstanding shall be
entitled to receive and to be paid out of the assets of the Fund available for
distribution to its shareholders, before any payment or distribution shall be
made on the Common Shares or on any other class of shares of the Fund ranking
junior to the MuniPreferred upon dissolution, liquidation or winding up, an
amount equal to the Liquidation Preference with respect to such shares plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same day funds, together with any payments required to be made pursuant to
Section 3 of this Part I in connection with the liquidation of the Fund. After
the payment to the Holders of the shares of MuniPreferred of the full
preferential amounts provided for in this paragraph (b), the Holders of
MuniPreferred as such shall have no right or claim to any of the remaining
assets of the Fund.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the
Fund available for distribution to the Holders of shares of MuniPreferred upon
any dissolution, liquidation, or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to paragraph (b) of this Section 12, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with the shares of MuniPreferred
with respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of MuniPreferred, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the
holders of shares of any series or class or classes of shares ranking on a
parity with the shares of MuniPreferred with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Fund,
after payment shall have been made in full to the Holders of the shares of
MuniPreferred as provided in paragraph (b) of this Section 12, but not prior
thereto, any other series or class 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.
33
(b) APPENDIX A INCORPORATED BY REFERENCE. Appendix A hereto is
incorporated in and made a part of this Statement by reference thereto.
(c) NO FRACTIONAL SHARES. No fractional shares of
MuniPreferred shall be issued.
(d) STATUS OF SHARES OF MUNIPREFERRED REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE Fund. Shares of MuniPreferred which are redeemed,
exchanged or otherwise acquired by the Fund shall return to the status of
authorized and unissued Preferred Shares without designation as to series.
(e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the provisions of
this Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of MuniPreferred
prior to the issuance of shares of such series.
(f) HEADINGS NOT DETERMINATIVE. The headings contained in this
Statement are for convenience of reference only and shall not affect the meaning
or interpretation of this Statement.
(g) NOTICES. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or this Statement, shall be sufficiently
given if in writing and delivered in person or mailed by first-class mail,
postage prepaid.
34
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for
shares of a series of MuniPreferred:
(i) each Beneficial Owner of shares of such series
may submit to its Broker-Dealer by telephone or otherwise information
as to:
(A) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for shares of such series for the next
succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell if the Applicable Rate for
shares of such series for the next succeeding Rate Period of
shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if
any, of such series held by such Beneficial Owner which such
Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on such lists to
determine the number of shares, if any, of such series which each such
Potential Beneficial Owner offers to purchase if the Applicable Rate
for shares of such series for the next succeeding Rate Period of shares
of such series shall not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial
Owner or Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to
the Auction Agent, of information referred to in clause (i)(A), (i), (B), (i),
(C) or (ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of MuniPreferred subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
35
(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:
(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.
36
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction
Agent prior to the Submission Deadline on each Auction Date all Orders for
shares of MuniPreferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series
that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing
Holder of shares of such series:
(A) the number of shares, if any, of such
series subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such
series subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such
series subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder
of shares of such series, the rate and number of shares of such series
specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of MuniPreferred of a series held by any Existing Holder is not submitted
to the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted
to the Auction Agent covering in the aggregate more than the number of
Outstanding shares of MuniPreferred of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the following
order of priority:
37
(i) all Hold Orders for shares of such series shall
be considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall
be considered valid up to and including the excess of the
number of Outstanding shares of such series held by such
Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such
Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject to
each Bid with the same rate shall be reduced pro rata to cover
the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if
more than one Bid of an Existing Holder for shares of such
series is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any,
of such Outstanding shares of such series subject to any
portion of Bids considered not valid in whole or in part under
this clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall
be considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
MuniPreferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and number
of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction
Date for shares of a series of MuniPreferred, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
38
(i) the excess of the number of Outstanding shares of
such series over the number of Outstanding shares of such series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available MuniPreferred" of such series);
(ii) from the Submitted Orders for shares of such
series whether:
(A) the number of Outstanding shares of such
series subject to Submitted Bids of Potential Holders
specifying one or more rates equal to or lower than the
Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such
series subject to Submitted Bids of Existing Holders
specifying one or more rates higher than the Maximum Rate for
shares of such series; and
(C) the number of Outstanding shares of such
series subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to
hold the shares of such series that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid of Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids of Potential Holders specifying lower rates
were accepted;
would result in such Existing Holders described in subclause
(A) above continuing to hold an aggregate number of
Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be purchased by
such Potential Holders described in subclause (B) above, would
equal not less than the Available MuniPreferred of such
series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Fund of the Maximum Rate for shares of the series of
MuniPreferred for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for the
next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such
series exist, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be equal to the
Winning Bid Rate for shares of such series so determined;
39
(ii) if Sufficient Clearing Bids for shares of such
series do not exist (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Maximum Rate for shares of
such series; or
(iii) if all of the Outstanding shares of such series
are subject to Submitted Hold Orders, that the Applicable Rate for all
shares of such series for the next succeeding Rate Period thereof shall
be as set forth in Section 12 of Appendix A hereto.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
MuniPreferred that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph (a) of Section 3 of this Part II, the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the
Auction Agent and the Auction Agent shall take such other action as set forth
below:
(a) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have been made, all Submitted Sell Orders with respect to shares
of such series shall be accepted and, subject to the provisions of paragraphs
(d) and (e) of this Section 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is higher than the Winning Bid
Rate for shares of such series shall be accepted, thus requiring each
such Existing Holder to sell the shares of MuniPreferred subject to
such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning Bid Rate
for shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares
of such series specifying a rate that is equal to the Winning Bid Rate
for shares of such series shall be rejected, thus entitling such
Existing Holder to continue to hold the shares of MuniPreferred subject
to such Submitted Bid, unless the number of Outstanding shares of
MuniPreferred subject to all such Submitted Bids shall be greater than
the number of shares of MuniPreferred ("remaining shares") in the
excess of the Available MuniPreferred of such series over the number of
shares of MuniPreferred subject to Submitted Bids described in clauses
(ii) and (iii) of this paragraph (a), in which event such Submitted Bid
of such Existing Holder shall be rejected in part, and such Existing
Holder shall be entitled to continue to hold shares of MuniPreferred
subject to such Submitted Bid, but only in an amount equal to the
number of shares of MuniPreferred of such series obtained by
multiplying the number of remaining shares by a fraction, the numerator
of which shall be the number of Outstanding shares of MuniPreferred
held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding
shares of MuniPreferred subject to such Submitted Bids 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
40
but only in an amount equal to the number of shares of such series
obtained by multiplying the number of shares in the excess of the
Available MuniPreferred of such series over the number of shares of
MuniPreferred subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator of
which shall be the number of Outstanding shares of MuniPreferred
subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding shares of MuniPreferred subject to such
Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of
MuniPreferred have not been made (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), subject to the
provisions of paragraph (d) of this Section 4, Submitted Orders for shares of
such series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the shares of
MuniPreferred subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares
of such series specifying any rate that is higher than the Maximum Rate
for shares of such series and the Submitted Sell Orders for shares of
such series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted
any such Submitted Bid or Submitted Sell Order to sell the shares of
such series subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this paragraph
(b) by a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the aggregate number of Outstanding shares of such
series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of
MuniPreferred are subject to Submitted Hold Orders, all Submitted Bids for
shares of such series shall be rejected.
(d) If, as a result of the procedures described in clause (iv)
or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
MuniPreferred on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of shares of
MuniPreferred of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of MuniPreferred.
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of MuniPreferred on any
Auction Date, the Auction Agent shall, in such manner as it shall
41
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.
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
42
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
43
IN WITNESS WHEREOF, NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE
MUNICIPAL FUND, has caused these presents to be signed on May 15, 2002 in its
name and on its behalf by its Assistant Vice President and attested by its
Assistant Secretary. The Fund's Declaration of Trust is on file with the
Secretary of State of the Commonwealth of Massachusetts, and the said officers
of the Fund have executed this Statement as officers and not individually, and
the obligations and rights set forth in this Statement are not binding upon any
such officers, or the trustees or shareholders of the Fund, individually, but
are binding only upon the assets and property of the Fund.
NUVEEN INSURED CALIFORNIA DIVIDEND
ADVANTAGE MUNICIPAL FUND
By: /s/ GIFFORD R. ZIMMERMAN
----------------------------
Gifford R. Zimmerman
Vice President
ATTEST: /s/ VIRGINIA O'NEAL
-----------------------------------
Virginia O'Neal
Assistant Secretary
APPENDIX A
NUVEEN INSURED CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
SECTION 1. DESIGNATION AS TO SERIES.
SERIES T: A series of 10,000 Preferred Shares, par value $.01
per share, liquidation preference $25,000 per share, is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, SERIES T." Each of the
2,360 shares of SERIES T MuniPreferred issued on May 17, 2002 shall, for
purposes hereof, be deemed to have a Date of Original Issue of May 17, 2002;
have an Applicable Rate for its Initial Rate Period equal to 1.40% per annum;
have an initial Dividend Payment Date of May 29, 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 T MuniPreferred issued thereafter shall be
issued on the first day of a Rate Period of the then outstanding shares of
SERIES T MuniPreferred, shall have, for such Rate Period, an Applicable Rate
equal to the Applicable Rate for shares of such series established in the first
Auction for shares of such series preceding the date of such issuance; and shall
have such other preferences, limitations and relative voting rights, in addition
to those required by applicable law or set forth in the Declaration of Trust
applicable to Preferred Shares of the Fund, as set forth in Part I and Part II
of this Statement. The SERIES T MuniPreferred shall constitute a separate
series of Preferred Shares of the Fund, and each share of SERIES T
MuniPreferred shall be identical except as provided in Section 11 of Part I of
this Statement.
SERIES F: A series of 10,000 Preferred Shares, par value $.01
per share, liquidation preference $25,000 per share, is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, SERIES F." Each of the
2,360 shares of SERIES F MuniPreferred issued on May 17, 2002 shall, for
purposes hereof, be deemed to have a Date of Original Issue of May 17, 2002;
have an Applicable Rate for its Initial Rate Period equal to 1.40% per annum;
have an initial Dividend Payment Date of May 28, 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 F MuniPreferred issued thereafter shall be
issued on the first day of a Rate Period of the then outstanding shares of
SERIES F 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 F MuniPreferred shall constitute a separate
series of Preferred Shares of the Fund, and each share of SERIES F
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 T MuniPreferred is 10,000 and Series F
MuniPreferred is 10,000.
SECTION 3. EXCEPTIONS TO CERTAIN DEFINITIONS. Notwithstanding the
definitions contained under the heading "Definitions" in this Statement, the
following terms shall have the following meanings for purposes of this
Statement:
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
issue 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
A-2
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-l or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that (i) pays interest in
cash, (ii) does not have its Moody's rating, as applicable, suspended by
Moody's, and (iii) is part of an issue of Municipal Obligations of at least
$5,000,000 except for Municipal Obligations rated below A by Moody's, Municipal
Obligations within the healthcare Issue Type Category, in which case the minimum
issue size is $10,000,000. Except for general obligation bonds, Municipal
Obligations issued by any one issuer and rated BBB or lower by S&P, Ba or B by
Moody's or not rated by S&P and Moody's ("Other Securities") may comprise no
more than 4% of total Moody's Eligible Assets; such Other Securities, if any,
together with any Municipal Obligations issued by the same issuer and rated Baa
by Moody's or A by S&P, may comprise no more than 6% of total Moody's Eligible
Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's Eligible
Assets; and such Other Securities, Baa, A and AA-rated Municipal Obligations, if
any, together with any Municipal Obligations issued by the same issuer and rated
Aa by Moody's or AAA by S&P, may comprise no more than 20% of total Moody's
Eligible Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party shall be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Municipal
Obligation. Other Securities falling within a particular Issue Type Category may
comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal
A-3
Obligations falling within a particular Issue Type Category and rated Baa by
Moody's or A by S&P, may comprise no more than 20% of total Moody's Eligible
Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any,
together with any Municipal Obligations falling within a particular Issue Type
Category and rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations falling
within a particular Issue Type Category and rated Aa by Moody's or AAA by S&P,
may comprise no more than 60% of total Moody's Eligible Assets. For purposes of
this definition, a Municipal Obligation shall be deemed to be rated BBB by S&P
if rated BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise no
more than 4% of Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations issued by issuers located within the same county
and rated Baa by Moody's or A by S&P, may comprise no more than 6% of Moody's
Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by issuers located within
the same county and rated A by Moody's or AA by S&P, may comprise no more than
10% of Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same county and rated Aa by Moody's or AAA by S&P,
may comprise no more than 20% of Moody's Eligible Assets; and (B) in no event
may (i) student loan Municipal Obligations comprise more than 10% of Moody's
Eligible Assets; (ii) resource recovery Municipal Obligations comprise more than
10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than 10% of
Moody's Eligible Assets. For purposes of applying the foregoing requirements, a
Municipal Obligation rated BBB- by S&P shall not be considered to be rated BBB
by S&P, Moody's Eligible Assets shall be calculated without including cash, and
Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's,
rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-term rating
of A. When the Fund sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the MuniPreferred Basic
Maintenance Amount. When the Fund purchases a Moody's Eligible Asset and agrees
to sell it at a future date, such Eligible Asset shall be valued at the amount
of cash to be received by the Fund upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2 from
Moody's and the transaction has a term of no more than 30 days, otherwise such
Eligible Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered
a Moody's Eligible Asset to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Moody's has indicated to the Fund
will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (c) Liens to secure payment for services rendered or cash
advanced to the Fund by Nuveen Advisory Corp., JPMorgan Chase Bank or the
Auction Agent and (d) Liens by virtue of any repurchase agreement; or (ii)
deposited irrevocably for the payment of any liabilities for purposes of
determining the MuniPreferred Basic Maintenance Amount.
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
A-4
shares of such series in effect at the close of business on the Business Day
next preceding such Auction Date:
PREVAILING RATING PERCENTAGE
---------------------------- --------------
"aa3"/AA-- or higher........ 110%
"a3"/A--.................... 125%
"baa3"/BBB--................ 150%
"ba3"/BB--.................. 200%
Below "ba3"/BB--............ 250%
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal combined regular Federal
and 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.
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:
A-5
RATING CATEGORY
--------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* HIGH YIELD
--------------------- -------- -------- ------- ------- -------------
45 Business Days.... 200% 205% 220% 260% 220%
25 Business Days.... 180 185 200 240 220
10 Business Days.... 165 170 185 225 220
7 Business Days..... 160 165 180 220 220
3 Business Days..... 140 145 160 200 220
------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable within 30 days or less, or 120% so long as such Municipal
Obligations are rated A-1 or SP-1 by S&P and mature or have a demand feature
exercisable in 30 days or less or 125% if such Municipal Obligations are not
rated by S&P but are rated equivalent to A-1+ or SP-1+ by another nationally
recognized statistical rating organization, on a case by case basis; provided,
however, that any such non-S&P rated short-term Municipal Obligations which have
demand features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least A-1+ from S&P; and further
provided that such non-S&P rated short-term Municipal Obligations may comprise
no more than 50% of short-term Municipal Obligations that qualify as S&P
Eligible Assets; provided, however, that Municipal Obligations not rated by S&P
but rated equivalent to BBB or lower by another nationally recognized
statistical rating organization, rated BB+ or lower by S&P or non-rated (such
Municipal Obligations are hereinafter referred to as "High Yield Securities")
may comprise no more than 20% of the short-term Municipal Obligations that
qualify as S&P Eligible Assets; (ii) the S&P Discount Factor for Receivables for
Municipal Obligations Sold that are due in more than five Business Days from
such Valuation Date will be the S&P Discount Factor applicable to the Municipal
Obligations sold; (iii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold if such receivables are due within
five Business Days of such Valuation Date; and (iv) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
S&P but qualifies as an S&P Eligible Asset pursuant to clause (iii) of that
definition, such Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is the equivalent
of the rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible Assets as
of any Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date. The Fund may adopt S&P
Discount Factors for Municipal Obligations other than Municipal Obligations
provided that S&P advises the Fund in writing that such action will not
adversely affect its then current rating on the MuniPreferred. For purposes of
the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P,
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis, which do not mature or have a demand
feature at par exercisable in 30 days and which do not have a long-term rating,
shall be considered to be short-term Municipal Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash
irrevocably deposited by the Fund for the payment of any liabilities within the
meaning of MuniPreferred Basic Maintenance Amount), 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,
A-6
is part of an issue of Municipal Obligations with an original issue size of at
least $5 million. Any Municipal Obligation that is a part of an original issue
size of less than $10 million must carry a rating of at least A by S&P or an
equivalent rating by another nationally recognized statistical rating
organization and the Market Value of such Municipal Obligations may not exceed
20% of the aggregate Market Value of S&P Eligible Assets. Solely for purposes of
this definition, the term "Municipal Obligation" means any obligation the
interest on which is exempt from regular Federal income taxation and which is
issued by any of the fifty United States, the District of Columbia or any of the
territories of the United States, their subdivisions, counties, cities, towns,
villages, school districts and agencies (including authorities and special
districts created by the states), and federally sponsored agencies such as local
housing authorities. Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds
and High Yield Securities) of any one issuer or guarantor (excluding
bond insurers) shall be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Obligations (including
short-term Municipal Obligations) does not exceed 10% of the aggregate
Market Value of S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the Market Value
of such Municipal Obligations exceeds 5% of the aggregate Market Value
of S&P Eligible Assets. High Yield Securities of any one issuer shall
be considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Obligations does not exceed 5% of the aggregate
Market Value of S&P Eligible Assets;
(2) Municipal Obligations (excluding Escrowed Bonds)
of any one Issue Type Category shall be considered S&P Eligible Assets
only to the extent the Market Value of such Municipal Obligations does
not exceed 25% of the aggregate Market Value of S&P Eligible Assets;
provided, however, that Municipal Obligations falling within the
utility Issue Type Category will be broken down into three
sub-categories and such Municipal Obligations will be considered S&P
Eligible Assets to the extent the Market Value of such Municipal
Obligations in each 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
A-7
(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 T MuniPreferred shall be the period from and including the Date of
Original Issue thereof to but excluding May 29, 2002.
The Initial Rate Period for shares of Series F MuniPreferred shall be
the period from and including the Date of Original Issue thereof to but
excluding May 28, 2002.
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (ZZZ) CONTAINED UNDER THE
HEADING "DEFINITIONS" IN THIS Statement. May 31, 2002.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE
MULTIPLE" IN THIS STATEMENT.
PARTY SERIES OF MUNIPREFERRED
-------------------- -------------------------
Salomon Smith Barney Series T
Salomon Smith Barney Series F
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 T MuniPreferred, for the Initial Rate Period on May 29,
2002, and on each Wednesday thereafter.
Series F MuniPreferred, for the Initial Rate Period on May 28,
2002, and on each Monday thereafter.
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (C)(I) OF SECTION 5 OF
PART I OF THIS STATEMENT. 118,000,000.
SECTION 11. REDEMPTION PROVISIONS APPLICABLE TO INITIAL RATE PERIODS.
Not applicable.
SECTION 12. APPLICABLE RATE FOR PURPOSES OF SUBPARAGRAPH (B)(III) OF
SECTION 3 OF PART II OF THIS Statement. For purposes of subparagraph (b)(iii) of
Section 3 of Part II of this Statement, the Applicable Rate for shares of such
series for the next succeeding Rate Period of shares of such series shall be
equal to the lesser of the Kenny Index (if such Rate Period consists of fewer
than 183 Rate Period Days) or the product of (A)(I) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Rate Period, if such Rate
Period consists of fewer than 183 Rate Period Days; (II) the Treasury Bill Rate
on such Auction Date for such Rate Period, if such Rate Period consists of more
than 182 but fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on
such Auction Date for such Rate Period, if such Rate Period is more than 364
Rate Period Days (the rate described in the foregoing clause (A)(I), (II) or
(III), as applicable, being referred to herein as the "Benchmark Rate") and (B)
1 minus the maximum marginal 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
A-8
than 183 Rate Period Days) or the product of the Benchmark Rate multiplied by
the factor set forth in the preceding clause (B) and (y) the product of the
maximum marginal combined regular Federal and 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 applicable to ordinary income, whichever is
greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing,
Taxable Yield Rate means the rate determined by (a) dividing the amount of
Taxable Income available for distribution per such share of MuniPreferred by the
number of days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in
the case of any other Dividend Period), and (c) dividing the amount determined
in (b) above by $25,000.
SECTION 13. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as any MuniPreferred are rated by S&P, the
Fund will not purchase or sell futures contracts, write, purchase or sell
options on futures contracts or write put options (except covered put options)
or call options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions will
not impair the ratings then assigned to the MuniPreferred by S&P, except that
the Fund may purchase or sell futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively, "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any S&P Hedging
Transaction based on the Municipal Index (other than transactions which
terminate a futures contract or option held by the fund by the Fund's
taking an opposite position thereto ("Closing Transactions")), which
would cause the Fund at the time of such transaction to own or have
sold the least of (A) more than 1,000 outstanding futures contracts
based on the Municipal Index, (B) outstanding futures contracts based
on the Municipal Index exceeding in number 25% of the quotient of the
Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at the time of such transaction to own or
have sold the lesser of (A) outstanding futures contracts based on
Treasury Bonds exceeding in number 50% of the quotient of the Market
Value of the Fund's total assets divided by $100,000 ($200,000 in the
case of the two-year United States Treasury Note) or (B) outstanding
futures contracts based on Treasury Bonds exceeding in number 10% of
the average number of daily traded futures contracts based on Treasury
Bonds in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal.
(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
A-9
terms of such futures contract or option thereon unless the Fund holds
the securities deliverable under such terms; and
(v) when the fund writes a futures contract or option
thereon, it will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P), fixed-income securities in a
segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held
in the account of or on behalf of the Fund's broker with respect to
such futures contract or option equals the Market Value of the futures
contract or option, or, in the event the Fund writes a futures contract
or option thereon which requires delivery of an underlying security, it
shall hold such underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible
Assets with a Discounted Value that equals or exceeds the MuniPreferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked to market, of any
outstanding futures contracts based on the Municipal Index which are owned by
the Fund plus (ii) 25% of the aggregate settlement value, as marked to market,
of any outstanding futures contracts based on Treasury Bonds which contracts are
owned by the Fund.
(b) For so long as any MuniPreferred are rated by Moody's, the
Fund will not buy or sell futures contracts, write, purchase or sell call
options on futures contracts or purchase put options on futures contracts or
write call options (except covered call options) on portfolio securities unless
it receives written confirmation from Moody's that engaging in such transactions
would not impair the ratings then assigned to the MuniPreferred by Moody's,
except that the Fund may purchase or sell exchange-traded futures contracts
based on the Municipal Index or Treasury Bonds and purchase, write or sell
exchange-traded put options on such futures contracts and purchase, write or
sell exchange-traded call options on such futures contracts (collectively,
"Moody's Hedging Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions), which would cause the Fund at the time of such
transaction to own or have sold (A) outstanding futures contracts based
on the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the 30
days preceding the time of effecting such transaction as reported by
The Wall Street Journal or (B) outstanding futures contracts based on
the Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets owned
by the Fund (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at 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
A-10
the foregoing clauses (i) and (ii), the Fund shall be deemed to own the
number of futures contracts that underlie any outstanding options
written by the Fund);
(iii) the Fund will engage in Closing Transactions to
close out any outstanding futures contract based on the Municipal Index
if the amount of open interest in the Municipal Index as reported by
The Wall Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to
close out any outstanding futures contract by no later than the fifth
Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option on
a futures contract by no later than the first Business Day of the month
in which such option expires;
(v) the Fund will engage in Moody's Hedging
Transactions only with respect to futures contracts or options thereon
having the next settlement date or the settlement date immediately
thereafter;
(vi) the Fund will not engage in options and futures
transactions for leveraging or speculative purposes and will not write
any call options or sell any futures contracts for the purpose of
hedging the anticipated purchase of an asset prior to completion of
such purchase; and
(vii) the Fund will not enter into an option or
futures transaction unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the MuniPreferred Basic Maintenance
Amount.
For purposes of determining whether the Fund has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of Moody's Eligible
Assets which the Fund is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (i) assets subject
to call options written by the Fund which are either exchange-traded and
"readily reversible" or which expire within 49 days after the date as of which
such valuation is made shall be valued at the lesser of (a) Discounted Value and
(b) the exercise price of the call option written by the Fund; (ii) assets
subject to call options written by the Fund not meeting the requirements of
clause (i) of this sentence shall have no value; (iii) assets subject to put
options written by the Fund shall be valued at the lesser of (A) the exercise
price and (B) the Discounted Value of the subject security; (iv) futures
contracts shall be valued at the lesser of (A) settlement price and (B) the
Discounted Value of the subject security, provided that, if a contract matures
within 49 days after the date as of which such valuation is made, where the Fund
is the seller the contract may be valued at the settlement price and where the
Fund is the buyer the contract may be valued at the Discounted Value of the
subject securities; and (v) where delivery may be made to the Fund with any
security of a class of securities, the Fund shall assume that it will take
delivery of the security with the lowest Discounted Value.
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.
A-11
(c) For so long as any MuniPreferred are rated by Moody's, the
Fund will not enter into any contract to purchase securities for a fixed price
at a future date beyond customary settlement time (other than such contracts
that constitute Moody's Hedging Transactions that are permitted under Section
13(b) of this Statement), except that the Fund may enter into such contracts to
purchase newly-issued securities on the date such securities are issued
("Forward Commitments"), subject to the following limitation:
(i) the Fund will maintain in a segregated account
with its custodian cash, cash equivalents or short-term, fixed-income
securities rated P-1, MTG-1 or VMIG-1 by Moody's and maturing prior to
the date of the Forward Commitment with a Market Value that equals or
exceeds the amount of the Fund's obligations under any Forward
Commitments to which it is from time to time a party or long-term fixed
income securities with a Discounted Value that equals or exceeds the
amount of the Fund's obligations under any Forward Commitment to which
it is from time to time a party; and
(ii) the Fund will not enter into a Forward
Commitment unless, after giving effect thereto, the Fund would continue
to have Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the MuniPreferred Maintenance Amount.
For purposes of determining whether the Fund has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
MuniPreferred Basic Maintenance Amount, the Discounted Value of all Forward
Commitments to which the Fund is a party and of all securities deliverable to
the Fund pursuant to such Forward Commitments shall be zero.
A-12
APPENDIX B
RATINGS OF INVESTMENTS
S & P Corporation--A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness
of an obligor with respect to a specific financial obligation, a specific class
of financial obligations, or a specific financial program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor
to meet its financial commitment on an obligation in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA An obligation rated "AAA" has the highest rating
assigned by S&P. The obligor's capacity to meet
its financial commitment on the obligation is
extremely strong.
AA An obligation rated "AA" differs from the
highest-rated obligations only in small degree. The
obligor's capacity to meet its financial commitment
on the obligation is very strong.
B-1
A An obligation rated "A" is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than
obligations in higher-rated categories. However,
the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated "BBB" exhibits adequate
protection parameters. However, adverse economic
conditions or changing circumstances are more
likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the
obligation.
BB, B, CCC,
CC, and C Obligations rated "BB", "B", "CCC", "CC", and
"C" are regarded as having significant speculative
characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed
by large uncertainties or major exposures to
adverse conditions.
BB An obligation rated "BB" is less vulnerable to
nonpayment than other speculative issues. However,
it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic
conditions, which could lead to the obligor's
inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to
nonpayment than obligations rated "BB", but the
obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse
business, financial, or economic conditions will
likely impair the obligor's capacity or willingness
to meet its financial commitment on the obligation.
CCC An obligation rated "CCC" is currently vulnerable
to nonpayment and is dependent upon favorable
business, financial, and economic conditions for
the obligor to meet its financial commitment on the
obligation. In the event of adverse business,
financial, or economic conditions, the obligor is
not likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated "CC" is currently highly
vulnerable to nonpayment.
C The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or
similar action has been taken, but payments on this
obligation are being continued.
D An obligation rated "D" is in payment default. The
"D" rating category is used when payments on an
obligation are not made on the date due even if the
applicable grace period has not expired, unless
Standard & Poor's believes that such payments will
be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if
payments on an obligation are jeopardized.
Plus (+) or minus (-). The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
B-2
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to
purchase tendered bonds if the long-term credit rating of the
issuer is below an investment-grade level and/or the issuer's
bonds are deemed taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on
the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
* Continuance of the ratings is contingent upon S&P's
receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility
or high variability in expected returns as a result of
noncredit risks. Examples of such obligations are securities
with principal or interest return indexed to equities,
commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The
absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability
in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards. Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A S&P note ratings reflects the liquidity factors and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:
- Amortization schedule--the larger the final maturity relative
to other maturities, the more likely it will be treated as a
note; and
- 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.
B-3
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 A short-term obligation rated "A-1" is rated in the highest
category by S&P. The obligor's capacity to meet its
financial commitment on the obligation is strong. Within this
category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The
"D" rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless S&P believes that such payments will
be
B-4
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.
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.
B-5
Ca Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated "C" are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Issues that are secured by escrowed funds held in trust, reinvested in
direct, non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes superior credit
quality. Excellent protection is afforded by
established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit
quality. Margins of protection are ample, although
not as large as in the preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit
quality. Liquidity and cash-flow protection may be
narrow, and market access for refinancing is likely
to be less well-established.
SG This designation denotes speculative-grade credit
quality. Debt instruments in this category may lack
sufficient margins of protection.
COMMERCIAL PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
B-6
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong capacity
for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. "A" ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. "BB" ratings indicate that there is a
possibility of credit risk developing, particularly
as the result of adverse economic change over time;
however, business or financial alternatives may be
available to allow financial
B-7
commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. "B" ratings indicate that
significant credit risk is present, but a limited
margin of safety remains. Financial commitments are
currently being met; however, capacity for
continued payment is contingent upon a sustained,
favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business
or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C"
ratings signal imminent default.
DDD, DD,
and D Default. The ratings of obligations in this
category are based on their prospects for
achieving partial or full recovery in a
reorganization or liquidation of the obligor.
While expected recovery values are highly
speculative and cannot be estimated with any
precision, the following serve as general
guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of
outstanding amounts and accrued interest. "DD"
indicates potential recoveries in the range of
50%-90%, and "D" the lowest recovery potential,
i.e., below 50%. Entities rated in this category
have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest
prospect for resumption of performance or
continued operation with or without a formal
reorganization process. Entities rated "DD" and
"D" are generally undergoing a formal
reorganization or liquidation process; those rated
"DD" are likely to satisfy a higher portion of
their outstanding obligations, while entities
rated "D" have a poor prospect for repaying all
obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+"
to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of safety is
not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes
in financial and economic conditions.
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.
B-8
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1".
"NR" indicates that Fitch does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action.
Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
B-9
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various
defensive hedging techniques.
FUTURES AND INDEX TRANSACTIONS
FINANCIAL FUTURES
A financial future is an agreement between two parties to buy and sell
a security for a set price on a future date. They have been designed by boards
of trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging the
Fund's existing or anticipated holdings of long-term debt securities. When the
Fund purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity. The Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to the Fund to settle the final determination and the Fund
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. For example, if
the Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the Fund's portfolio would decline, but the value of the
Fund's financial futures would be expected to increase at approximately the same
rate thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have.
Among the risks associated with the use of financial futures by the
Fund as a hedging device, perhaps the most significant is the imperfect
correlation between movements in the price of the financial futures and
movements in the price of the debt securities which are the subject of the
hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances, as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
C-1
OPTIONS ON FINANCIAL FUTURES
The Fund may also purchase put or call options on financial futures
which are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by the Fund on its
portfolio securities to hedge against the risk of rising interest rates. As with
options on debt securities, the holder of an option may terminate his position
by selling an option of the Fund. There is no guarantee that such closing
transactions can be effected.
INDEX CONTRACTS
INDEX FUTURES
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash -- rather
than any security -- equal to specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and
the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
INDEX OPTIONS
The Fund may also purchase put or call options on U.S. Government or
tax-exempt bond index futures and enter into closing transactions with respect
to such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
of the writer's futures margin account which represents the amount by which the
market price of the index futures contract, at exercise, is less than the
exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
C-2
APPENDIX D
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 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 about 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 $1,095 billion in 2000,
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 in half from the recession to
under 5%, its lowest level in three decades. The strongest growth in a decade
occurred in 1999 and 2000, but 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 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 and California's economy is expected to continue a mild recovery in 2002
and 2003. 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."
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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 there were
no electricity blackouts or shortages of natural gas. Although energy prices
have risen from the levels of two 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 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. 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 started to enter 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"). DWR is also receiving repayment from a portion of retail
end use customers' payments, remitted through the IOUs, but these amounts will
cover only a small 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 are being used since that date 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. As of January 31, 2002, DWR had committed approximately $12.6 billion for
power purchases, funded from $6.1 billion in net State Loans, $3.7 billion in
customer payments and a net $2.7 billion from the Interim Loans ($1.4 billion of
Interim Loan proceeds remain available to fund future power purchases).
The State Loans, the Interim Loans and the balance of energy purchase costs, are
intended to be funded from the issuance of an estimated $11 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. 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.
A final schedule for issuance of the revenue bonds will depend on review of
legal challenges to these
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CPUC orders and related matters. 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 May, 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, 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, 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 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
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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.
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 certainly 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
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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 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.
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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 January
1, 2002, the State had outstanding approximately $23.9 billion of long-term
general obligation bonds, plus $724 million of general obligation commercial
paper and $6.2 billion of lease-purchase debt supported by the State General
Fund. The State also had about $13.2 billion of authorized and unissued
long-term general obligation bonds and lease-purchase debt. The State sold $1.8
billion of general obligation bonds to repay outstanding commercial paper notes
in February and April, 2002, and sold $187,705,000 of new lease purchase bonds
in February, 2002. In FY 2000-01, debt service on general obligation bonds and
lease purchase debt was approximately 3.8% of General Fund revenues. State
voters approved $2.8 billion of new general bond authorizations on the ballot in
March, 2002. At least $15 billion in new bond authorizations will be on the
ballot in November, 2002.
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 early
2002 it is now clear that revenue from capital gains and stock options will fall
below projections. Indeed, the Administration now projects 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 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 State suffered a severe economic recession from 1990-94
during which the State experienced substantial revenue shortfalls and
accumulated a budget deficit of about $2.8 billion. With the economic recovery
which began in 1994, the State's financial condition improved markedly in the
years from fiscal year 1995-96 onward, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and continued
spending restraint based on the
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actions taken in earlier years.
The economy grew strongly during the second half of the 1990's, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97, $2.4 billion in 1997-98, $1.7 billion in
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 accumulated budget
deficit from the recession years was finally eliminated. 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 includes 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 the end of the recession resulted in
significant increases in State funding for local school districts under
Proposition 98. From the recession level of about $4,200 per pupil, annual State
funding has increased to over $6,700 per pupil in FY 2000-01. 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.
One of the most important elements 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 will be
offset by about $2.6 billion in General Fund money in FY 2000-01, and $3.6
billion for fiscal year 2001-02. (The Administration is proposing a one-year
reversal of the VLF cut above 25% in calendar 2003 to save about $2.4 billion.)
Other tax cuts included an increase in the dependent credit exemption for
personal income tax filers, restoration of a renter's tax credit for taxpayers,
and a variety of business tax relief measures. 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 statutory formula). This will result in about $1.15 billion in
lower revenues during calendar year 2001. The 0.25% rate was restored as of
January 1, 2002.
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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
is to be funded by using a part of the budget reserve from the prior year, and
assumes that the General Fund will be repaid in full for advances made to
purchase energy (see "Recent Developments Regarding Energy" above). The Governor
vetoed about $500 million of General Fund expenditures from the 2001 Budget Act
as adopted by the Legislature, to leave an estimated budget reserve in the SFEU
at June 30, 2002 of $2.6 billion. The 2001 Budget Act also included expenditures
of $21.3 billion from Special Funds and $3.2 billion from bond funds.
When the Governor released his proposed budget for 2002-03 in January 2002 (the
"2002-03 Governor's Budget"), the Administration estimated that the major tax
revenues (personal income, corporate and sales) would be more than $5 billion
lower in 2001-02 than projected when the 2001 Budget Act was signed. The
Administration projected the need to close a $12.5 billion budget gap for the
two fiscal years 2001-02 and 2002-03. As a first part of his plan to close this
gap, the Governor froze about $2.3 billion of spending for 2001-02 in November
2001; the Legislature ratified these actions in late January 2002.
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. In late
April, 2002, the State Controller indicated that cash flow projections for the
balance of the fiscal year, in light of weak revenues, indicated the need for
the State to borrow additional moneys in the short-term note markets in order to
pay the RANs when they mature on June 28, 2002, as well as other State
obligations in June, July and August 2002, given the fact that the DWR revenue
bonds will not be sold in time to replenish the General Fund by the end of June.
The Controller proposed the issuance of up to $7.5 billion of "revenue
anticipation warrants" in June, 2002. The need for any additional cash flow
borrowing will likely depend on how quickly the DWR revenue bonds are sold (see
"Recent Developments Regarding Energy" above).
One of the major disputes which delayed passage of the 2001 Budget Act past the
July 1 start of the fiscal year related to tax provisions. Under existing law,
since the budget reserve was expected to fall below 4% in 2001-02, the 0.25%
reduction in the State sales tax which went into effect on January 1, 2001 was
scheduled to be reversed on January 1, 2002, providing over $500 million of
revenues for the 2001-02 fiscal year. A compromise was reached which allows the
0.25% sales tax reinstatement to occur in 2002, but reduces the "trigger" for
sales tax reductions in future years to a 3% budget reserve test from the
present 4%. Certain other tax relief measures for senior citizens and rural and
agricultural areas were included in the Budget Act, totaling about $122 million.
The 2001 Budget Act provides full funding for K-14 education, and certain
additional funding for low-performing schools, child care and other programs.
Funding for higher education was increased, but less than in previous years. No
fee increases for higher education will be imposed. Health care, social services
and prisons are funded for all expected caseload and inflation increases.
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Assistance to local governments was reduced from the previous year.
The 2001 Budget Act was 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 Budget Act has much
less one-time spending for capital outlay. The 2001 Budget Act also extends for
two years the six-year transportation funding program implemented in 2000-01,
and uses 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.
In anticipation of reduced revenues in the 2001-02 fiscal year, the Governor in
October, 2001 announced a hiring freeze for State agencies, and requested State
agencies to find up to 10% in cost reductions in the current year. He also asked
State agencies to prepare budget proposals for the 2002-03 fiscal year with up
to a 15% cut from current levels. However, this cut would not apply to public
safety or K-12 education programs.
Proposed 2002-03 Budget
When the 2002-03 Governor's Budget was released in January, 2002, it projected a
$12.5 billion gap for the period through June 30, 2003. The Administration's May
Revision of the Governor's Budget, issued May 14, 2002 (the "May Revision"),
reported that as a result of continuing economic weakness, particularly in the
stock markets, revenues in the second part of the 2001-02 fiscal year fell
substantially below projections. Personal income tax receipts are projected at
$4.5 billion, or 11%, below the Governor's Budget estimate; total receipts will
be down about $3.3 billion, or 4.3%. Personal income tax receipts for 2002-03
were projected to be $5.5 billion, or 13%, below the Governor's Budget estimate.
Sales and corporations taxes are projected to be a little higher than earlier
estimates, reflecting improved economic conditions and corporate profits. The
May Revision concluded that, with the combination of lower revenues and certain
increased expenditure requirements, the budget gap had risen to about $23.6
billion. The Administration proposed, in the May Revision, to close this gap
with the following major actions:
1. Expenditure reductions of about $7.6 billion. About $2.3 billion of
these reductions, for the 2001-02 fiscal year, have already been approved by the
Legislature. The largest part of the reductions fall on health, welfare and
human services programs, but virtually all programs other than education and
public safety would be affected to some extent.
2. Funding shifts from the General Fund to other sources, including bond
funds and special funds, and deferral of expenditures to future years, totaling
$3.6 billion.
3. Anticipated increases in federal funding for health and human services
programs, security/bioterrorism and other areas totaling $1.1 billion.
4. Interfund loans, accelerations and transfers totaling $3.0 billion.
5. Various revenue increases totaling $3.9 billion, including deferral of
net operating loss carryforwards for corporations, an increase in the cigarette
tax, federal tax conformity
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legislation, and temporary suspension of the vehicle license fee reduction.
6. Sale of bonds secured by future payments from the tobacco litigation
settlement, to generate $4.5 billion in current receipts.
All of these proposals are subject to negotiations with the Legislature and, in
some cases, action by other bodies, such as the federal government. There is no
assurance which of these actions will be finally implemented, or the total
budget savings which will result.
The 2002-03 Governor's Budget, as updated by the May Revision, proposed an
austere spending plan for the next fiscal year, based on successful
implementation of the various actions to close the budget gap. Spending for K-12
schools would be increased by a small amount, with full cost of living increases
included, so that at least the minimum Proposition 98 guaranty would be funded.
Most other areas of government would receive some program or funding reductions,
although caseload increases, where appropriate, will be funded. The Governor
proposed some reductions in existing grants to local governments, and counties,
in particular, may have to make up for some of the reductions in state funding
for health and human services. The Governor did not propose any large-scale
funding shifts adverse to local government, as occurred in the early 1990's.
Final action on the 2002-03 Budget Act will occur in the summer following final
negotiations between the Governor and the Legislature.
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 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 May 1, 2002,
Standard & Poor's had reduced California's senior ratings to "A+" and 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.
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,
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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, 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
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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.
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
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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 losses; or (iii) the
federal or State government to appropriate sufficient funds within their
respective budget limitations.
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APPENDIX E
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
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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.
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.
The insurance provided by the Financial Guaranty Insurance Policy's is
not covered by the property/casualty insurance security fund specified by the
insurance laws of the State of New York.
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
$4,988,000,000 (unaudited) and statutory capital of approximately $2,693,000,000
(unaudited) as of September 30, 2001. 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
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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 "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. 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. The Company's Common Stock is listed on the NYSE.
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.
Incorporation of Certain Documents by Reference
The following documents filed by the Company with the Commission (File
No. 1-10777) are incorporated by reference in this Statement of Additional
Information:
1. The Company's Current Report on Form 8-K dated January 24, 2001
and filed on January 24, 2001;
2. The Company's Current Report on Form 8-K dated March 19, 2001 and
filed on March 19, 2001;
3. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and filed on March 28, 2001;
4. The Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended March 31, 2001 and filed on May 15, 2001;
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5. The Company's Current Report on Form 8-K dated July 18, 2001 and
filed on July 23, 2001;
6. The Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended June 30, 2001 and filed on August 10, 2001;
7. The Company's Current Report on Form 8-K dated and filed on
September 17, 2001;
8. The Company's Current Report on Form 8-K dated and filed on
September 19, 2001;
9. The Company's Current Report on Form 8-K dated and filed on
October 22, 2001; and
10. The Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended September 30, 2001 and filed on November
14, 2001.
All documents subsequently filed by the Company pursuant to the
requirements of the Exchange Act after the date of this Statement of Additional
Information will be available for inspection in the same manner as described
above in "Available Information".
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 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 December 31, 2001, Financial Security's total policyholders' surplus
and contingency reserves were approximately $1,593,569,000 and its total
unearned premium reserve was approximately $810,898,000 in accordance with
statutory accounting principles. At December 31, 2001, Financial Security's
total shareholders' equity was approximately
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$1,698,672,000 and its total net unearned premium reserve was approximately
$669,534,000 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 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
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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
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
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The following documents filed by the Company with the Securities and
Exchange Commission (the "SEC") are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December 31,
2000;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2001; and
(3) The report on Form 8-K filed by the Company on January 30, 2001.
Any documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act of 1934, as amended, after the date of this Statement
of Additional Information and prior to the termination of the offering of the
securities offered hereby shall be deemed to be incorporated by reference in
this Statement of Additional Information and to be a part hereof. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein, or contained in this Statement of Additional Information, shall be
deemed to be modified or superseded for purposes of this Statement of Additional
Information to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Statement of Additional 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, 2000, (2) the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, and (3) the report on Form 8-K filed
by the Company on January 30, 2001) 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, 2000, MBIA had admitted assets of $7.6 billion
(audited), total liabilities of $5.2 billion (audited), and total capital and
surplus of $2.4 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 2001, MBIA had admitted assets of $8.4 billion
(unaudited), total liabilities of $6.0 billion (unaudited), and total capital
and surplus of $2.4 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
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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")
The Portfolio Insurance Policy is non-cancellable except for failure to
pay the premium. The premium rate for each purchase of a security covered by the
Portfolio Insurance Policy is fixed for the life of the Insured Bond. The
insurance premiums are payable monthly by the Fund and are adjusted for
purchases, sales and payments prior to maturity of Insured Bonds during the
month. In the event of a sale of any Insured Bond by the Fund or payment thereof
prior to maturity, the Portfolio Insurance policy terminates as to such Insured.
Under the provisions of the Portfolio Insurance Policy, Financial Guaranty
unconditionally and irrevocably agrees to pay to State Street Bank and Trust
Company, or its successor, as its agent (the "Fiscal Agent"), that portion of
the principal of and interest on the Insured Bonds which shall become due for
payment but shall be unpaid by reason of nonpayment by the issuer of the Insured
Bonds. The term "due for payment" means, when referring to the principal of an
Insured Bond, its stated maturity date or the date on which it shall have been
called for mandatory sinking fund redemption and does not refer to any earlier
date on which payment is due by reason of call for redemption (other than by
mandatory sinking fund redemption), acceleration or other advancement of
maturity and means, when referring to interest on an Insured Bond, the stated
date for payment of interest. In addition, the Portfolio Insurance Policy covers
nonpayment by the issuer that results from any payment of principal or interest
made by such issuer on the Insured Bond to the Fund which has been recovered
from the Fund or its shareholders pursuant to the United States Bankruptcy Code
by a trustee in bankruptcy in accordance with a final, nonappealable order of a
court having competent jurisdiction.
Financial Guaranty will make such payments to the Fiscal Agent on the
date such principal or interest becomes due for payment or on the business day
next following the day on which Financial Guaranty shall have received notice of
nonpayment, whichever is later. The Fiscal Agent will disburse the Trustee the
face amount of principal and interest which is then due for payment but is
unpaid by reason of nonpayment by the issuer, but only upon receipt by the
Fiscal Agent of (i) evidence of the Trustee's right to receive payment of the
principal or interest due for payment and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of such
principal or interest due for payment thereupon shall vest in
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Financial Guaranty. Upon such disbursement, Financial Guaranty shall become the
owner of the Insured Bond, appurtenant coupon or right to payment of principal
or interest on such Insured Bond and shall be fully subrogated to all of the
Trustee's rights thereunder, including the right to payment, thereof.
In determining whether to insure municipal securities held in the Fund,
Financial Guaranty will apply its own standards which are not necessarily the
same as the criteria used in regard to the selection of securities by the Fund.
Certain of the municipal securities under the Portfolio Insurance
Policy may also be insured under an insurance policy obtained by the issuer of
such municipal securities. The premium for any insurance policy or policies
obtained by an issuer or Insured Bonds has been paid in advance by such issuer
and any such policy or policies are non-cancellable and will continue in force
so long as the Insured Bonds so insured are outstanding. Financial Guaranty has
also agreed, if requested by the Funds on or before the fifth day preceding the
1st day of any month, to insure to maturity Insured Bonds sold by the Trustee
during the month immediately following such request of the Funds. The premium
for any such insurance to maturity provided by Financial Guaranty is paid by the
Fund and any such insurance is non-cancellable and will continue in force so
long as the Bonds so insured are outstanding.
Financial Guaranty 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 September 30, 2001, the total capital and surplus of
Financial Guaranty was $1.033 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)
The policies of insurance obtained by the Fund from Financial Guaranty
and the negotiations in respect thereof represent the only relationship between
Financial Guaranty and the Fund. Otherwise neither Financial Guaranty nor its
parent, FGIC Corporation, or any affiliate thereof has any significant
relationship, direct or indirect, with the Fund or the Board of Directors of the
Fund.
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
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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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