1
PROSPECTUS
[NUVEEN INVESTMENTS LOGO]
$48,000,000
NUVEEN NEW JERSEY DIVIDEND
ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED(R)")
1,920 SHARES SERIES T
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
Nuveen New Jersey 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 New
Jersey 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 market conditions, the Fund
will invest its net assets in a portfolio of municipal bonds that are exempt
from regular federal and New Jersey income taxes. Under normal market
conditions, the Fund expects to be fully invested in such tax-exempt municipal
bonds. Through March 31, 2002, the Fund may invest in municipal bonds that are
exempt from regular federal income tax but not from New Jersey 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
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
16, 2001 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
(continued on next page)
---------------------
INVESTING IN MUNIPREFERRED SHARES INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 11.
Neither the SEC 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 $48,000,000
Sales Load $ 250 $ 480,000
Proceeds to Fund(1) (before expenses) $24,750 $47,520,000
------------
(1) Not including offering expenses payable by the Fund estimated to be
$156,500. The Fund and Nuveen Advisory Corp. have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, and the Investment Company Act
of 1940, as amended.
The underwriters expect to deliver shares of MuniPreferred to purchasers on
or about May 18, 2001.
---------------------
SALOMON SMITH BARNEY NUVEEN INVESTMENTS
DEUTSCHE BANC ALEX. BROWN A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO. PRUDENTIAL SECURITIES
UBS WARBURG
May 16, 2001
2
(continued from previous page)
information, the table of contents of which appears on page 33 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.
The Fund is offering 1,920 shares of Series T 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 2.95% for MuniPreferred Series T. The
initial rate period is from the date of issuance through May 29, 2001. 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.
---------------------
3
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................................................ 11
How the Fund Manages Risk................................... 13
Management of the Fund...................................... 14
Description of MuniPreferred................................ 16
The Auction................................................. 24
Description of Common Shares................................ 27
Certain Provisions in the Declaration of Trust.............. 27
Repurchase of Common Shares; Conversion to Open-End Fund.... 28
Tax Matters................................................. 28
Custodian, Transfer Agent, Dividend Disbursing Agent and
Redemption Agent.......................................... 30
Underwriting................................................ 30
Legal Opinions.............................................. 31
Available Information....................................... 31
Special Note Regarding Forward-Looking Statements........... 32
Table of Contents for the Statement of Additional
Information............................................... 33
Taxable Equivalent Yield Table.............................. A-1
UNTIL JUNE 10, 2001, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE MUNIPREFERRED, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4
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 New Jersey Dividend Advantage Municipal Fund
(the "Fund") is a non-diversified, closed-end
management investment company. See "The Fund." The
Fund's common shares, $.01 par value ("Common
Shares"), are traded on the American Stock Exchange
under the symbol "NXJ." See "Description of Common
Shares." As of April 30, 2001, the Fund had
6,357,000 Common Shares outstanding and net assets
of $90,494,076.
Investment Objectives...... The Fund's investment objectives are to provide
current income exempt from regular federal and New
Jersey 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 market
conditions, the Fund will invest its net assets in
a portfolio of municipal bonds that are exempt from
regular federal and New Jersey income taxes. Under
normal market conditions, the Fund expects to be
fully invested in such tax-exempt municipal bonds.
Through March 31, 2002, the Fund may invest in
municipal bonds that are exempt from regular
federal income tax but not from New Jersey income
tax ("Out of State Bonds"), provided that no more
than 10% of the Fund's investment income during
that time, as measured on the date of purchase of
such bond, may be derived from Out of State Bonds.
The Fund will invest at least 80% of its net assets
in municipal bonds that at the time of investment
are investment grade quality. Investment grade
quality bonds are bonds rated within the four
highest grades (Baa or BBB or better by Moody's
Investor Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") or Fitch IBCA, Inc.
("Fitch")), or bonds that are unrated but judged to
be of comparable quality by the Fund's investment
adviser. The Fund may invest up to 20% of its net
assets in municipal bonds that, at the time of
investment, are rated Ba/BB or B by Moody's, S&P or
Fitch or that are unrated but judged to be of
comparable quality by the Fund's investment
adviser. Bonds of below investment grade quality
are regarded as having predominately speculative
characteristics with respect to capacity to pay
interest and repay principal, and are commonly
referred to as junk bonds. 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 Nuveen
Investments ("Nuveen"). See "Management of the
Fund" and "Underwriting."
The Offering............... The Fund is offering 1,920 shares of Series T
MuniPreferred each at a purchase price of $25,000
per share. Shares of MuniPreferred are being
offered by the underwriters listed under
"Underwriting."
1
5
Risk Factors Summary....... Risk is inherent in all investing. Therefore,
before investing you should consider certain risks
carefully when you invest in the Fund. The primary
risks of investing in MuniPreferred shares are:
- if an auction fails you may not be able to sell
some or all of your shares;
- because of the nature of the market for
MuniPreferred shares, you may receive less than
the price you paid for your shares if you sell
them outside of the auction, especially when
market interest rates are rising;
- a rating agency could downgrade MuniPreferred
shares, which could affect liquidity;
- the Fund may be forced to redeem your shares to
meet regulatory or rating agency requirements or
may voluntarily redeem your shares in certain
circumstances;
- 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; and
- 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.
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 first auction date for the MuniPreferred shares
will be May 29, 2001, the business day before the
dividend payment date for the initial rate period
for the MuniPreferred shares. The start date for
subsequent rate periods normally will be the
business day following the auction date unless the
then-current rate period is a special rate period,
or the day that normally would be the auction date
or the first day of the subsequent rate period is
not a business day.
Dividends and Rate
Periods.................... The table below shows the dividend rate for the
initial rate period of the MuniPreferred shares
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
2
6
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
shares. 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 NUMBER OF
INITIAL ACCUMULATION DATE FOR SUBSEQUENT DAYS OF
DIVIDEND AT INITIAL INITIAL RATE DIVIDEND INITIAL RATE
RATE RATE* PERIOD* PAYMENT DAY PERIOD
-------- ------------ ------------ ----------- ------------
2.95% May 18 May 30 Wednesday 12
-----------------------------------------
* All dates are 2001.
Taxation................... Because under normal circumstances the Fund will
invest substantially all of its assets in municipal
bonds that pay interest exempt from regular federal
income tax, the income you receive will ordinarily
be similarly exempt. Your income may be subject to
state and local taxes. All or a portion of the
income from these bonds will be subject to the
federal alternative minimum tax, so MuniPreferred
shares may not be a suitable investment if you are
subject to this tax or would become subject to such
tax by investing in MuniPreferred shares. Taxable
income or gain earned by the Fund will be allocated
proportionately to holders of MuniPreferred shares
and Common Shares, based on the percentage of total
dividends paid to each class for that year.
Accordingly, certain specified MuniPreferred
dividends may be subject to 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 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 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."
3
7
Redemption................. Although the Fund does not ordinarily redeem
MuniPreferred shares, it may be required to redeem
shares if, for example, the Fund does not meet an
asset coverage ratio required by law or to correct
a failure to meet a rating agency guideline in a
timely manner. The Fund voluntarily may redeem
MuniPreferred shares in certain conditions. See
"Description of MuniPreferred -- Redemption" and
"Description of MuniPreferred -- Rating Agency
Guidelines 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 Preferred Shares, including
MuniPreferred shares, 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 shares, voting together as a single
class. The holders of Preferred Shares, including
MuniPreferred shares, 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
8
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 operations
on March 28, 2001 until April 30, 2001. Since the Fund was recently organized
and commenced operations on March 28, 2001, the table covers approximately 5
weeks of operations, during which a substantial portion of the Fund's portfolio
was held in temporary investments pending investment in municipal bonds that
meet the Fund's investment objectives and policies. Accordingly, the information
presented may not provide a meaningful picture of the Fund's operating
performances.
(UNAUDITED)
-----------
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period...................... $ 14.33
-------
Net Investment Income.................................. .02
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... (.08)
-------
Total From Investment Operations.................. (.06)
-------
Offering Costs............................................ (.03)
-------
Net Asset Value, End of Period............................ $ 14.24
=======
Per Share Market Value, End of Period..................... $ 15.38
Total Return on Net Asset Value........................... (.63)%
Total Investment Return on Market Value................... 2.53%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands).................. $90,494
Ratio of Expenses to Average Net Assets Before
Credit/Reimbursement................................... .86%*
Ratio of Net Investment Income to Average Net Assets
Before Credit/ Reimbursement........................... 1.52%*
Ratio of Expenses to Average Net Assets After
Credit/Reimbursement................................... .53%*
Ratio of Net Investment Income to Average Net Assets After
Credit/ Reimbursement.................................. 1.84%*
Portfolio Turnover Rate................................... --%
------------
* Annualized
5
9
THE FUND
Nuveen New Jersey Dividend Advantage Municipal Fund is a recently organized
non-diversified, closed-end management investment company registered under the
1940 Act. The Fund was organized as a Massachusetts business trust on June 1,
1999 pursuant to a Declaration of Trust governed by the laws of the Commonwealth
of Massachusetts (the "Declaration"). On March 30, 2001, the Fund issued an
aggregate of 5,850,000 Common Shares of beneficial interest, par value $.01 per
share, pursuant to the initial public offering thereof and commenced its
operations. On April 20, 2001 and May 9, 2001, the Fund issued an additional
500,000 and 190,000 Common Shares, respectively, in connection with the partial
exercise by the underwriters of the over-allotment option. The Fund's Common
Shares are traded on the American Stock Exchange (the "Exchange") under the
symbol "NXJ." 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 April 30, 2001:
AMOUNT HELD
BY THE
FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT AMOUNT OUTSTANDING
-------------- ----------------- --------------- ------------------
Common........................................ unlimited 0 6,357,000
MuniPreferred................................. unlimited 0 0
Series T.................................... 10,000 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $47,363,500 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
10
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of April
30, 2001, and as adjusted, to give effect to the issuance of 190,000 Common
shares on May 9, 2001, as well as the issuance of the shares of MuniPreferred
offered hereby.
ACTUAL AS ADJUSTED
----------- ------------
(UNAUDITED)
SHAREHOLDERS' EQUITY:
Preferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no
shares issued and 1,920 shares issued, as adjusted,
respectively).......................................... $ -- $ 48,000,000
Common Shares, $.01 par value per share; unlimited shares
authorized (6,357,000 shares outstanding and 6,547,000
shares outstanding, as adjusted, respectively)*........ 63,570 65,470
Paid-in surplus**......................................... 90,809,955 92,887,605
Balance of undistributed net investment income............ 142,262 142,262
Accumulated net realized gain from investment
transactions........................................... -- --
Net unrealized appreciation (depreciation) of
investments............................................ (521,711) (521,711)
----------- ------------
Net assets................................................ $90,494,076 $140,573,626
=========== ============
------------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted paid-in surplus reflects the proceeds of the issuance of 190,000
Common Shares ($2,721,750) less the Common Shares at $.01 par value ($1,900)
and the offering costs of $.03 per Common Share ($5,700) as well as a
reduction for the sales load and estimated offering costs of the Preferred
Share issuance ($636,500).
PORTFOLIO COMPOSITION
As of April 30, 2001, 96.80% of the market value of the Fund's portfolio
was invested in long-term municipal bonds and 3.20% of the market value of the
Fund's portfolio was invested in short-term municipal bonds. The following table
sets forth certain information with respect to the composition of the Fund's
investment portfolio as of April 30, 2001.
CREDIT RATING VALUE PERCENT
------------- ----------- -------
Aaa/AAA***.......................................... $43,754,962 70.17%
Aa/AA............................................... 5,949,429 9.54
Baa/BBB............................................. 499,335 0.80
Other............................................... 10,155,800 16.29
Short-term.......................................... 2,000,000 3.20
----------- ------
Total............................................. $62,359,526 100.00%
=========== ======
------------
*** Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government securities or U.S. Government agency securities
to ensure the timely payment of principal and interest.
7
11
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objectives are:
- to provide current income exempt from regular federal and New Jersey
income tax; and
- to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes are
underrated or undervalued or that represent municipal market sectors that
are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times believe
that bonds associated with a particular municipal market sector (for example,
electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise (relative to the market) to
reflect their true value. The Fund attempts to increase its portfolio value
relative to the municipal bond market by prudent selection of municipal bonds
regardless of the direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to Common Shareholders and MuniPreferred Shareholders.
Under normal market conditions, the Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and New Jersey
income taxes. Under normal market conditions, the Fund expects to be fully
invested (at least 95% of its assets) in such tax-exempt municipal bonds. After
the completion of the offering through March 31, 2002, 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 New Jersey income taxes. For more information, see the
statement of additional information. The Fund will invest at least 80% of its
net assets in investment grade quality municipal bonds. Investment grade quality
means that such bonds are rated, at the time of investment, within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated
but judged to be of comparable quality by Nuveen Advisory. The Fund may invest
up to 20% of its net assets in municipal bonds that are rated, at the time of
investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged
to be of comparable quality by Nuveen Advisory. Bonds of below investment grade
quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of below
investment grade quality are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal.
The foregoing credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency downgrades its assessment of the credit characteristics of
a particular issue. In determining whether to retain or sell such a security,
Nuveen Advisory may consider such factors as Nuveen Advisory's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by other rating
agencies. A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix B to the statement of additional
information. See "-- Municipal Bonds" below for a general description of the
economic and credit characteristics of municipal issuers in New Jersey. The Fund
may also invest in securities of other open- or closed-end investment companies
that invest primarily in municipal bonds
8
12
of the types in which the Fund may invest directly. See "-- Other Investment
Companies" and "-- Initial Portfolio Composition."
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from insurers
with a claims-paying ability rated Aaa by Moody's 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 New Jersey income taxes.
For more information, see the statement of additional information.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
shares voting together as a single class, and of the holders of a "majority of
the outstanding" MuniPreferred shares voting as a separate class. A "majority of
the outstanding," means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less. See "Description of
MuniPreferred -- Voting Rights" for additional information with respect to the
voting rights of holders of MuniPreferred shares.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gains distributions will be subject to capital gains taxes. See "Tax Matters."
MUNICIPAL BONDS
General. Municipal bonds are either general obligation or revenue bonds
and typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction, or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Fund will only
purchase municipal bonds representing lease obligations where Nuveen Advisory
believes the issuer has a strong incentive to continue making appropriations
until maturity.
The municipal bonds in which the Fund will invest are generally issued by
the State of New Jersey, a city in New Jersey, or a political subdivision of
such State or City, 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 New Jersey 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 possessions (such as Puerto
Rico or Guam) that are exempt from regular federal and New Jersey income taxes.
Through March 31, 2002, the Fund may also invest in Out Of State Bonds subject
to the limitations described under "-- Investment Objectives and Policies."
9
13
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.
Special Considerations Relating to New Jersey Municipal Bonds. The
following information provides only a brief summary of the complex factors
affecting the financial situation in New Jersey (the "State") and is derived
from sources that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from various State and
local agencies in New Jersey. Additional information regarding the factors
affecting the financial situation in New Jersey may be found in the statement of
additional information. It should be noted that the creditworthiness of
obligations issued by local New Jersey issuers may be unrelated to the
creditworthiness of obligations issued by the State of New Jersey, and that
there is no obligation on the part of the State to make payment on such local
obligations in the event of default.
New Jersey's economic base remains among the most diverse in the country.
The State's economic growth rates continue to outpace regional growth rates,
although they remain below the national average. The State has recovered the
jobs it lost during the national recession of the early 1990's, which severely
affected New Jersey and much of the Northeast region. As a result, the State's
unemployment rate has dropped to record low levels registering approximately
3.9% in 2000, down from approximately 4.6% the previous year. Although its
income growth rate lagged or just equaled the national rate, New Jersey remains
one of the country's wealthiest states, with a per capita income of $36,106 in
1999, ranking it second among the states in per capita income.
New Jersey's general obligation bonds were rated Aa1 by Moody's, AA+ by S&P
and AA+ by Fitch. These ratings reflect the State's credit quality only, and do
not indicate the creditworthiness of other tax-exempt securities in which the
Fund may invest. Furthermore, it cannot be assumed that the State will maintain
its current credit ratings.
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.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve an
element of risk because no interest accrues on the bonds prior to settlement
and, since bonds are subject to market fluctuations, the value of the bonds at
the time of delivery may be less (or more) than cost. A separate account of the
Fund will be established with its custodian consisting of cash, cash
equivalents, or liquid securities having a market value at all times at least
equal to the amount of the commitment.
10
14
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 may
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. However, due to current New Jersey tax
regulations, the Fund does not currently intend to invest in other investment
companies. 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. Common Shareholders would therefore be subject to duplicative expenses
to the extent the Fund invests in other investment companies. Nuveen Advisory
will take expenses into account when evaluating the investment merits of an
investment in the investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage risks described
herein. As described in the prospectus in the section entitled "Risks," the net
asset value and market value of leveraged shares will be more volatile and the
yield to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.
INITIAL PORTFOLIO COMPOSITION
If current market conditions persist, the Fund expects that approximately
95% of its initial portfolio will consist of investment grade quality municipal
bonds, rated as such at the time of investment, meaning that such bonds are
rated by national rating agencies within the four highest grades of the
investment grade category or are unrated but judged to be of comparable quality
by Nuveen Advisory (approximately 50% in Aaa/AAA; 20% in Aa/AA; 10% in A; and
15% in Baa/BBB). The Fund will generally select obligations which may not be
redeemed at the option of the issuer for approximately seven to nine years from
the date of purchase by the Fund. See the statement of additional information
under "Other Investment Policies and Techniques -- Portfolio Trading and
Turnover Rate." Subject to market availability, the Fund would likely seek to
invest approximately 5% of its initial portfolio in municipal bonds that are, at
the time of investment, either rated below investment grade or that are unrated
but judged to be of comparable quality by Nuveen Advisory. See "-- Investment
Objectives and Policies."
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.
11
15
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, though probably with higher resulting dividend rates. If a rating agency
downgrades MuniPreferred shares, the Fund will alter its portfolio or redeem
MuniPreferred shares. The Fund may voluntarily redeem MuniPreferred shares under
certain circumstances. See "Description of MuniPreferred -- Rating Agency
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Fund must meet.
INFLATION RISK
Inflation is the reduction in the purchasing power of money resulting from
the increase in the price of goods and services. Inflation risk is the risk that
the inflation adjusted (or "real") value of your MuniPreferred investment or the
income from that investment will be worth less in the future. As inflation
occurs, the real value of the MuniPreferred shares and distributions declines.
In an inflationary period, however, it is expected that, through the auction
process, MuniPreferred dividend rates would increase, tending to offset this
risk.
CREDIT RISK
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal bonds carry a greater degree of credit risk. If
rating agencies lower their ratings of municipal bonds in the Fund's portfolio,
the value of those bonds could decline, which could jeopardize the rating
agencies' ratings of the MuniPreferred. Because the primary source of income for
the Fund is the interest and principal payments on the municipal bonds in which
it invests, any default by an issuer of a municipal bond could have a negative
impact on the Fund's ability to pay dividends on the MuniPreferred shares and
could result in the redemption of some or all of the MuniPreferred shares. In
addition, the Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds rated Ba/BB or B
are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal, and these bonds are commonly
referred to as "junk bonds." The
12
16
prices of these bonds are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
CONCENTRATION IN NEW JERSEY ISSUERS
The Fund's policy of investing primarily in municipal obligations of
issuers located in New Jersey makes the Fund more susceptible to adverse
economic, political or regulatory occurrences affecting such issuers. For unique
considerations relating to New Jersey municipal bonds, see "The Fund's
Investments -- Municipal Bonds -- Special Considerations Relating to New Jersey
Municipal Bonds."
INCOME RISK
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short- and long-term. If interest
rates drop, the Fund's income available over time to make dividend payments with
respect to the MuniPreferred could drop as well if the Fund purchases securities
with lower interest coupons. This risk is magnified when prevailing short-term
interest rates increase and the Fund holds residual interest municipal bonds.
CALL RISK
If interest rates fall, it is possible that issuers of callable bonds with
higher interest coupons will "call" (or prepay) their bonds before their
maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.
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 voting together as a
single class, and the approval of the holders of a majority of the outstanding
MuniPreferred voting as a separate class. Among other restrictions, the Fund may
not invest more than 25% of total Fund assets in securities of issuers in any
one industry, except that this limitation does not apply to municipal bonds
backed by the assets and revenues of governments or political subdivisions of
governments. The Fund is subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred. See "Investment
Objectives -- Investment Restrictions" 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.
13
17
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 ongoing 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
$35 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. Thomas C. Spalding is the portfolio manager of the Fund and will
provide daily oversight for, and execution of, the Fund's investment activities.
Mr. Spalding has been a Vice President of Nuveen Advisory since 1990. Mr.
Spalding is also a Chartered Financial Analyst and currently manages investments
for eight 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 $61 billion of net assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
14
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
(AS A PERCENTAGE
YEAR ENDING OF AVERAGE
MARCH 31, DAILY NET ASSETS)
----------- -----------------
2001**............. 0.30%
2002............... 0.30%
2003............... 0.30%
2004............... 0.30%
2005............... 0.30%
2006............... 0.30%
PERCENTAGE
REIMBURSED
(AS A PERCENTAGE
YEAR ENDING OF AVERAGE
MARCH 31, DAILY NET ASSETS)
----------- -----------------
2007............... 0.25%
2008............... 0.20%
2009............... 0.15%
2010............... 0.10%
2011............... 0.05%
------------
** 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, 2011.
LEGAL PROCEEDINGS
A lawsuit brought in June, 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end funds
sponsored by Nuveen is currently pending in federal district court. The
plaintiffs allege that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' trustees and Nuveen Advisory and various misrepresentations and omissions
in prospectuses and shareholder reports relating to the use of leverage through
the issuance and periodic auctioning of preferred stock and the basis of the
calculation and payment of management fees to Nuveen Advisory and Nuveen.
Plaintiffs also filed a motion to certify defendant and plaintiff cases.
The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the court
granted most of the defendants' motion to dismiss and denied plaintiffs' motion
to certify defendant and plaintiff classes. The court dismissed all claims
against the funds, the funds' trustees and Nuveen. The court dismissed these
claims without prejudice (which means the plaintiff can refile and they can
correct the
15
19
defect that led to the claim being dismissed) on the ground that the claims
should have been brought as derivative claims on behalf of the funds. The only
remaining claim is brought under Section 36(b) of the 1940 Act against Nuveen
Advisory, and relates solely to advisory fees Nuveen Advisory received from the
six relevant funds. Discovery is underway on that single claim. While the Fund
cannot assure that the litigation will be decided in Nuveen Advisory's favor,
Nuveen Advisory believes a decision, if any, against it would have no material
adverse effect on the Fund or the ability of Nuveen Advisory to perform its
duties under the investment management agreement.
DESCRIPTION OF MUNIPREFERRED
The following is a brief description of the terms of the shares of
MuniPreferred. This description does not purport to be complete and is subject
to and qualified in its entirety by reference to the more detailed description
of the shares of MuniPreferred in the Fund's Statement Establishing and Fixing
the Rights and Preferences of Municipal Auction Rate Cumulative Preferred Shares
(the "Statement") attached as Appendix A to the statement of additional
information.
GENERAL
The Fund's Declaration authorizes the issuance of an unlimited number of
preferred shares, par value $.01 per share, in one or more classes or series,
with rights as determined by the Board of Trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of 10,000
shares of MuniPreferred Series T. 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 will rank on parity 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 rights to cumulative voting.
DIVIDENDS AND DIVIDEND PERIODS
General. The initial Rate Period of shares of MuniPreferred Series T will
be a period consisting of 12 days. Any Subsequent Rate Period of shares of
MuniPreferred will be a Minimum Rate Period (7 Rate Period Days), unless the
Fund, subject to certain conditions, designates such Subsequent Rate Period as a
Special Rate Period. See "-- Designation of Special Rate Periods" below.
Dividends on shares of MuniPreferred shall be payable, when, as and if
declared by the Board out of funds legally available therefor in accordance with
the Declaration, including the Statement, and applicable law, on shares of
MuniPreferred, Series T, on May 30, 2001, and thereafter on each Wednesday;
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 MuniPreferred on any
date on which dividends shall be payable on such shares shall be computed by
multiplying the Applicable Rate for such shares 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.
16
20
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 MuniPreferred will accumulate from the Date of
Original Issue thereof. The dividend rate for shares of MuniPreferred for the
initial Rate Period for such shares shall be 2.95% per annum for Series T. For
each Subsequent Rate Period of shares of MuniPreferred 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 MuniPreferred will
not be greater than the Maximum Rate for such shares, 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 such shares and (ii) the Rate Multiple on such Auction Date,
unless such shares 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 such shares after such Special Rate Period, in which case the
higher of:
(A) the dividend rate on such shares for the then-ending Rate
Period; and
(B) the product of (i) 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 such shares, 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 such
shares, 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 such shares, 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 (ii) 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 such
shares, 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 such shares, 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 MuniPreferred is
not held for any reason other than as described below, the dividend rate on such
shares for such Subsequent Rate Period will be the Maximum Rate for such shares
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
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
17
21
will be held in respect of such shares for the first Subsequent Rate Period
thereof thereafter and the dividend rate for such shares for such Subsequent
Rate Period will be the Maximum Rate for such shares 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
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 such shares 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 such shares for each such Subsequent Rate Period shall
be a rate per annum equal to the Maximum Rate for such shares on the Auction
Date for such Subsequent Rate Period (but with the prevailing rating for such
shares, 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
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 such shares 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 such shares for each
such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
for such shares on the Auction Date for each such Subsequent Rate Period (but
with the prevailing rating for such shares 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
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 such
shares and (b) without duplication, the redemption price for such shares, if
any, 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
18
22
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 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 New Jersey
income tax rate applicable to ordinary income (taking into account the federal
income tax deductibility of state and local taxes paid or incurred) or net
capital gain, as applicable, or the maximum marginal regular federal corporate
income tax rate applicable to ordinary income or net capital gain, as
applicable, whichever is greater, in effect at the time such Gross-up Payment is
made.
Restrictions on Dividends and Other Distributions. Except as otherwise
described herein, for so long as any shares of MuniPreferred are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in, or in options,
warrants or rights to subscribe for or purchase, its shares of Common Shares) in
respect of its Common Shares or 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), unless (a) full cumulative dividends on shares 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
19
23
of MuniPreferred for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of MuniPreferred through
its most recent Dividend Payment Date. When dividends are not paid in full upon
the shares 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 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 shall have been held on the Auction
Date immediately preceding the first day of such proposed Special Rate Period
and Sufficient Clearing Bids for such shares shall have existed in such Auction
and (c) if the Fund shall have mailed a notice of redemption with respect to any
shares, 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 portfolio equal to the MuniPreferred
Basic Maintenance Amount or (b) the 1940 Act MuniPreferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of MuniPreferred, shares of MuniPreferred will be subject
to mandatory redemption on a date specified by the Board out of funds legally
available therefor in accordance with the Declaration of Trust, including the
Statement, and applicable law, at the redemption price of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to (but not including) the date fixed for redemption. Any
such redemption will be limited to the number of shares of MuniPreferred
necessary to restore the required Discounted Value or the 1940 Act MuniPreferred
Asset Coverage, as the case may be.
Optional Redemption. Shares of MuniPreferred 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 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 may not be redeemed in
part if after such partial redemption fewer than 250 shares would remain
outstanding; (ii) shares 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 as delivered to the
Auction Agent and filed with the Secretary of the Fund, may provide that
shares 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
20
24
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 MuniPreferred
(whether or not earned or declared) are in arrears, no shares shall be redeemed
unless all outstanding shares are simultaneously redeemed, and the Fund shall
not purchase or otherwise acquire any shares provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares 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.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with shares of MuniPreferred with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of shares of MuniPreferred
then outstanding will be entitled to receive and to be paid out of the assets of
the Fund available for distribution to its shareholders, before any payment or
distribution shall be made on the Common Shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, together with any applicable Gross-up Payments in connection
with the liquidation of the Fund. After the payment to the holders of shares of
MuniPreferred of the full preferential amounts provided for as described herein,
the holders of shares of MuniPreferred as such shall have no right or claim to
any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under the 1940 Act and 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 senior securities which are shares, including
MuniPreferred (or such other asset coverage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities which
are shares of a closed-end investment company as a condition of declaring
dividends on its common shares) ("1940 Act MuniPreferred Asset Coverage"). Based
on the composition of the portfolio of the Fund and market conditions as of
April 30, 2001, 1940 Act MuniPreferred Asset Coverage with respect to shares of
MuniPreferred, assuming the issuance of 190,000 Common Shares on May 9, 2001,
less the offering costs related thereto, and the issuance on the date thereof of
all shares of MuniPreferred
21
25
offered hereby and giving effect to the deduction of sales load and offering
costs related thereto estimated at $636,500, would have been computed as
follows:
Value of Fund assets less liabilities
not constituting senior securities $140,573,626
------------------------------------------------------------ = --------------- = 293%
Senior securities representing indebtedness plus liquidation $ 48,000,000
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.
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
22
26
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, or
authorize, create or issue additional shares of any series of MuniPreferred
(except that, notwithstanding the foregoing, but subject to certain rating
agency approvals, the Board, without the vote or consent of the holders of
MuniPreferred, may from time to time authorize and create, and the Fund may
from time to time issue additional shares of any series of MuniPreferred,
or classes or series of Preferred Shares ranking on a parity with shares of
MuniPreferred with respect to the payment of dividends and the distribution
of assets upon liquidation; provided, however, that if Moody's or S&P is
not then rating the shares of MuniPreferred, the aggregate liquidation
preference of all Preferred Stock of the Fund outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not exceed
$48,000,000) 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 in a manner different from
any other series of MuniPreferred, the Fund will not approve any such action
without the affirmative vote or consent of the Holders of at least a majority of
the shares of each such Affected Series outstanding at the time, in person or by
proxy, either in writing or at a meeting (each such Affected Series voting as a
separate class). The Board may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions which have been
adopted by the Fund pursuant to the rating agency guidelines in the event the
Fund receives written confirmation from Moody's or S&P, or both, as appropriate,
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's and S&P to shares of MuniPreferred. Unless a higher
percentage is provided for in the Declaration of Trust (see "Certain Provisions
in the Declaration of Trust"), (A) the affirmative vote of the holders of at
least a majority of the Preferred Shares, including MuniPreferred shares,
outstanding at the time,
23
27
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 MuniPreferred, including the shares of
MuniPreferred to be issued in this offering, for each Rate Period of such shares
after the initial Rate Period thereof shall be equal to the rate per annum that
the Auction Agent advises has resulted on the Business Day preceding the first
day of such Subsequent Rate Period (an "Auction Date") from implementation of
the auction procedures (the "Auction Procedures") set forth in the Statement and
summarized below, in which persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell such shares. Each
periodic implementation of the Auction Procedures is referred to herein as an
"Auction." See the Statement for a more complete description of the Auction
process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of MuniPreferred so long as the Applicable Rate for
such shares 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.
24
28
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
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
(a "Beneficial Owner") may submit orders ("Orders") with respect to such shares
to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares without regard to the
Applicable Rate for such shares for the next Rate Period thereof.
- Bid -- indicating its desire to sell shares at $25,000 per share if the
Applicable Rate for such shares 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 at $25,000 per share
without regard to the Applicable Rate for such shares for the next Rate
Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of MuniPreferred then held by such
Beneficial Owner. A Beneficial Owner of shares that submits a Bid with respect
to such shares to its Broker-Dealer having a rate higher than the Maximum Rate
for such shares on the Auction Date therefor will be treated as having submitted
a Sell Order with respect to such shares to its Broker-Dealer. A Beneficial
Owner of shares 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 to its Broker-Dealer; provided, however, that if a Beneficial Owner of
shares fails to submit an Order with respect to shares 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
MuniPreferred but that wishes to purchase such shares, or that is a Beneficial
Owner of shares that wishes to purchase additional shares (in each case, a
"Potential Beneficial Owner"), may submit Bids to its Broker-Dealer in which it
offers to purchase shares at $25,000 per share if the Applicable Rate for such
shares 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 specifying a
rate higher than the Maximum Rate for such shares 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 MuniPreferred exist (that is, the
number of shares 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 is at least equal to the number of
shares
25
29
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
such shares 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 available for purchase in the Auction. If Sufficient Clearing Bids
for shares of MuniPreferred do not exist, the Applicable Rate for shares for the
next succeeding Rate Period thereof will be the Maximum Rate for such shares on
the Auction Date therefor. In such event, Beneficial Owners of shares that have
submitted or are deemed to have submitted Sell Orders may not be able to sell in
such Auction all shares 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 MuniPreferred, the Applicable Rate for such
shares 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 MuniPreferred that is
fewer than the number of shares specified in its Order. To the extent the
allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
The Auctions for shares of MuniPreferred Series T will normally be held
every Tuesday and each Subsequent Rate Period of such shares will normally begin
on the following Wednesday.
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
26
30
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of the foregoing if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other person, if permitted by the Fund) to
whom such transfer is made shall advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the shares of MuniPreferred, the Declaration authorizes the
issuance of an unlimited number of Common Shares, par value $.01 per share. All
Common Shares have equal rights to the payment of dividends and the distribution
of assets upon liquidation. Common Shares are fully paid and, subject to matters
discussed in "Certain Provisions in the Declaration of Trust," non-assessable
when issued and have no preemptive, conversion rights or rights to cumulative
voting. Whenever MuniPreferred shares are outstanding, Common Shareholders will
not be entitled to receive any distributions from the Fund unless all accrued
dividends on MuniPreferred shares have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to MuniPreferred shares would be at least
200% after giving effect to the distributions.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and MuniPreferred shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund, or
(5) removal of trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-Laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's Common Shares and
MuniPreferred shares outstanding at the time, voting together as a single class,
is required; provided, however, that where only a particular class or series is
affected (or, in the case of removing a trustee, when the trustee has been
elected by only one class), only the required vote by the applicable class or
series will be required. Approval of shareholders is not required, however, for
any transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues Common Shares in connection with the
acquisition of assets (including those subject to liabilities) from any other
investment company or similar entity. None of the foregoing provisions may be
amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's MuniPreferred shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-Laws, the
27
31
affirmative vote of the holders of at least a majority of the Fund's
MuniPreferred shares outstanding at the time, voting as a separate class. The
votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of MuniPreferred shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders. See the statement of additional
information under "Certain Provisions in the Declaration of Trust."
Reference should be made to the Declaration on file with the 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 shares
of closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. The Fund
cannot assure you that its Board of Trustees will decide to take any of these
actions, or that share repurchases or tender offers will actually reduce market
discount.
If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
would no longer be listed on the 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 company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
statement of additional information under "Repurchase of Fund Shares; Conversion
to Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The discussion below and in the statement of additional information
provides general tax information. Because tax laws are complex and often change,
you should consult your tax advisor about the tax consequences of an investment
in the MuniPreferred.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
intends to distribute substantially all of its net income and gains to its
shareholders. The Fund will not be subject to any federal income tax to the
extent its earnings are so distributed. The Fund primarily invests in municipal
bonds from issuers located in New Jersey or in municipal bonds whose income is
otherwise exempt from regular federal and New Jersey income taxes.
28
32
Substantially all of the Fund's dividends to the Common Shareholders and
MuniPreferred shareholders will qualify as "exempt-interest dividends." A
shareholder treats an exempt-interest dividend as interest on state and local
bonds exempt from regular federal income tax. Some or all of an exempt-interest
dividend, however, may be subject to federal alternative minimum tax imposed on
the shareholder. Different federal alternative tax rules apply to individuals
and to corporations. In addition to exempt-interest dividends, the Fund also may
distribute to its shareholders amounts that are treated as long-term capital
gain or ordinary income. The Fund will allocate distributions to shareholders
that are treated as tax-exempt interest and as long-term capital gain and
ordinary income, if any, proportionately among the Common Shares and
MuniPreferred shares. The Fund intends to notify MuniPreferred shareholders in
advance if it will allocate to them income that is not exempt from regular
federal income tax. In certain circumstances the Fund will make payments to
MuniPreferred shareholders to offset the tax effects of the taxable
distribution. See "Description of MuniPreferred -- Dividends and Dividend
Periods -- Gross-Up Payments." The sale or other disposition of Common Shares or
shares of MuniPreferred of the Fund will normally result in capital gain or loss
to shareholders. Present law taxes both long-term and short-term capital gains
of corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, under current law short-term capital gains and ordinary income will
be taxed at a maximum rate of 39.6% while long-term capital gains will generally
be taxed at a maximum rate of 20%. Because of certain limitations on itemized
deductions and the deduction for personal exemptions applicable to higher income
taxpayers, the effective rate of tax may be higher in certain circumstances.
Losses realized by a shareholder on the sale or exchange of shares of the Fund
held for six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares, and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any distribution of long-term capital gain received with respect to such shares.
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 shares
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the original shares. In that event, the basis of the
replacement shares of the Fund will be adjusted to reflect the disallowed loss.
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 31% of taxable dividends and certain other
payments paid to non-corporate holders of the Fund's shares who do not furnish
to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain certifications, or who
are otherwise subject to backup withholding. The statement of additional
information contains a more detailed summary of the federal tax rules that apply
to the Fund and its shareholders. Legislative, judicial or administrative action
may change the tax rules that apply to the Fund or its shareholders and any such
change may be retroactive. You should consult with your tax adviser about
federal income tax matters.
NEW JERSEY TAX MATTERS
The Fund is designed to provide tax benefits to investors who are residents
of New Jersey. See "The Fund's Investments." Reference in this prospectus and
statement of additional information to New Jersey income tax shall mean the tax
imposed under the New Jersey Gross Income Tax Act (the "New Jersey Gross Income
Tax").
Assuming compliance with the provisions more fully described in statement
of additional information under Appendix D, the Fund's distributions will not be
subject to the New Jersey Gross Income Tax to the extent they are attributable
to interest or gains from obligations of the State of New Jersey and its
political subdivisions, and agencies or instrumentalities thereof or United
States government securities exempt from State tax by United States law.
Distributions of the Fund will be subject to the New Jersey Gross Income Tax,
however, to the extent the Fund makes distributions attributable to other
obligations. If a shareholder realizes a net gain from the sale of shares of the
Fund, the net gain will not be subject to the New Jersey Gross Income
29
33
Tax. If a shareholder realizes a loss from the sale of shares of the Fund, the
shareholder may not be able to use the loss to offset other New Jersey gains.
The treatment of corporate shareholders of the Fund differs from that
described above. Corporate shareholders should refer to the statement of
additional information for more detailed information and are urged to consult
their tax advisor.
The fund will be subject to the New Jersey Corporation Business Tax only if
it has sufficient nexus with New Jersey for purposes of the New Jersey
Corporation Business Tax. If it is subject to the New Jersey Corporation
Business Tax, it does not expect to pay a material amount of such tax.
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 The Chase Manhattan Bank, P.O.
Box 660089, 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 The Chase Manhattan Bank. Bankers
Trust Company, 4 Albany Street, New York, New York 10006, a banking corporation
organized under the laws of New York, is the Auction Agent with respect to
shares of MuniPreferred and acts as transfer agent, registrar, dividend
disbursing agent and redemption agent with respect to such shares.
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
NAME SHARES
---- ---------
Salomon Smith Barney Inc. .................................. 276
Nuveen Investments.......................................... 274
Deutsche Banc Alex. Brown................................... 274
A.G. Edwards & Sons, Inc. .................................. 274
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 274
Prudential Securities Incorporated.......................... 274
UBS Warburg LLC............................................. 274
------
Total............................................. 1,920
======
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 18, 2001.
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
30
34
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 to the underwriters may be required to
make for any of those liabilities.
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 18, 2001, 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
New Jersey law on the opinion of Riker, Danzig, Scherer, Hylan & Perretti, 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 at the SEC's New York Regional Office, Seven World
Trade Center, New York, New York 10048 and Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the 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. Additional information may be found
on the Internet at http://www.nuveen.com.
31
35
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.
32
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-22
Experts..................................................... S-27
33
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 2001 listed below:
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
TAX-FREE YIELD
TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
-------- ----- ----- ----- ----- ----- ------
15.0%............................................ 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
28.0%............................................ 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31.0%............................................ 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
36.0%............................................ 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
39.6%............................................ 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
------------
* In the table above, the taxable equivalent yields are calculated assuming that
the Fund's income 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.
NEW JERSEY
(STATE ONLY)
The following tables show the approximate taxable yields for individuals
that are equivalent to tax-free yields under combined Federal and New Jersey
state taxes, using published 2001 marginal Federal tax rates and marginal New
Jersey tax rates currently available and scheduled to be in effect.
SINGLE RETURN FEDERAL STATE COMBINED
BRACKET JOINT RETURN BRACKET TAX RATE TAX RATE* TAX RATE* 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
------------- ------------------------- -------- --------- --------- ----- ----- ----- ----- ------ ------
$0-27,050 $0-45,200 15.00% 1.750% 16.50% 4.79% 5.39% 5.99% 6.59% 7.19% 7.78%
27,050-65,550 45,200-109,250 28.00% 5.525% 32.00% 5.88% 6.62% 7.35% 8.09% 8.82% 9.56%
65,550-136,750 109,250-166,500 31.00% 6.370% 35.40% 6.19% 6.97% 7.74% 8.51% 9.29% 10.06%
136,750-297,350 166,500-297,350 36.00% 6.370% 40.10% 6.68% 7.51% 8.35% 9.18% 10.02% 10.85%
Over 297,350 Over 297,350 39.60% 6.370% 43.40% 7.07% 7.95% 8.83% 9.72% 10.60% 11.48%
------------
* The combined state and Federal tax rates shown reflect the fact that state tax
payments are currently deductible for Federal tax purposes. Please note that
the table does not reflect (i) any federal or state limitations on the amounts
of allowable itemized deductions, phase-outs of personal or dependent
exemption credits or other allowable credits, (ii) any local taxes imposed, or
(iii) any alternative minimum taxes or any taxes other than personal income
taxes. The table assumes that federal taxable income is equal to state income
subject to tax, and in cases where more than one state rate falls within a
federal bracket, the highest state rate corresponding to the highest income
within that federal bracket is used. The numbers in the Combined Tax Rate
column are rounded to the nearest one-tenth of one percent.
A-1
38
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$48,000,000
NUVEEN NEW JERSEY DIVIDEND
ADVANTAGE MUNICIPAL FUND
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES MUNIPREFERRED(R)
1,920 SHARES, SERIES T
------------------
PROSPECTUS
MAY 16, 2001
------------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
DEUTSCHE BANC ALEX. BROWN
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
UBS WARBURG
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
39
NUVEEN NEW JERSEY 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 16, 2001. 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-22
Experts .....................................................................................................S-27
The date of this statement of additional information is May 16, 2001.
40
INVESTMENT OBJECTIVES
The Fund's investment objective is to provide current income exempt from
regular federal and New Jersey 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 Nuveen Advisory Corp. ("Nuveen Advisory")
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued.
The Fund's investment in underrated or undervalued municipal bonds will be
based on Nuveen Advisory's belief that their yield is higher than that available
on bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise (relative to the
market) to reflect their true value. The Fund attempts to increase its portfolio
value relative to the municipal bond market by prudent selection of municipal
bonds, regardless of the direction the market may move. Any capital appreciation
realized by the Fund will generally result in the distribution of taxable
capital gains to Common Shareholders and MuniPreferred shareholders. The Fund's
investment objectives are fundamental policies of the Fund.
The Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of federal tax law, and the Fund expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. MuniPreferred shares therefore would not ordinarily be a suitable
investment for investors who are subject to the federal alternative minimum tax
or who would become subject to such tax by purchasing MuniPreferred shares. The
suitability of an investment in MuniPreferred shares will depend upon a
comparison of the after-tax yield likely to be provided from the Fund with that
from comparable tax-exempt investments not subject to the alternative minimum
tax, and from comparable fully taxable investments, in light of each such
investor's tax position. Special considerations apply to corporate investors.
See "Tax Matters."
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and MuniPreferred Shares voting together as a single class, and of the
holders of a majority of the outstanding MuniPreferred shares voting as a
separate class:
1. Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the prospectus;
2. Borrow money, except from banks for temporary or emergency purposes
or for repurchase of its shares, and then only in an amount not exceeding
one-third of the value of the Fund's total assets (including the amount
borrowed) less the Fund's liabilities (other than borrowings);
3. Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
4. Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal bonds other than those municipal bonds backed only by
the assets and revenues of non-governmental users;
S-1
41
5. Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
6. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed by
physical commodities);
7. Make loans, other than by entering into repurchase agreements and
through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations;
8. 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 10% 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 (8)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a
non-governmental issuer, such as an industrial corporation or a privately owned
or operated hospital, if the security is backed only by the assets and revenues
of the non-governmental issuer, then such non-governmental issuer would be
deemed to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up to
10% of its total assets in the aggregate in shares of other investment companies
and only up to 5% of its total assets in any one investment company, provided
the investment does not represent more than 3% of the voting stock of the
acquired investment company at the time such shares are purchased. However, due
to current New Jersey tax regulations, the Fund does not currently intend to
invest in other investment companies. If the Fund invested in an investment
company,as a shareholder in any investment company, the Fund will bear its
ratable share of that investment company's expenses, and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. In addition, the securities of other investment companies may also be
leveraged and will therefore be subject to the same leverage risks described
herein. As described in the prospectus in the section entitled "Risks," the net
asset value and
S-2
42
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 New Jersey Fund will invest its net assets in a portfolio of municipal
bonds that are exempt from regular federal and New Jersey income tax. Under
normal market conditions, and except for the temporary investments described
below, the Fund expects to be fully invested (at least 95% of its assets) in
such tax-exempt municipal bonds described above. Through March 31, 2002, 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.
S-3
43
The Fund will invest at least 80% of its net assets in municipal bonds that
at the time of investment are investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades (Baa or BBB or better by
Moody's, S&P or Fitch) or bonds that are unrated but judged to be of comparable
quality by Nuveen Advisory. The Fund may invest up to 20% of its net assets in
municipal bonds that are, at the time of investment, rated Ba/BB or B by
Moody's, S&P or Fitch or unrated but judged to be of comparable quality by
Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are
commonly referred to as "junk bonds." Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions which could adversely
affect such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities; municipal bonds rated Baa are considered medium
grade obligations which lack outstanding investment characteristics and have
speculative characteristics, while municipal bonds rated BBB are regarded as
having adequate capacity to pay principal and interest. Municipal bonds rated
AAA in which the Fund may invest may have been so rated on the basis of the
existence of insurance guaranteeing the timely payment, when due, of all
principal and interest. Municipal bonds rated below investment grade quality are
obligations of issuers that are considered predominately speculative with
respect to the issuer's capacity to pay interest and repay principal according
to the terms of the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy and increased market
price volatility. Municipal bonds rated below investment grade tend to be less
marketable than higher-quality bonds because the market for them is less broad.
The market for unrated municipal bonds is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly and the Fund may have greater difficulty selling its
portfolio securities. The Fund will be more dependent on Nuveen Advisory's
research and analysis when investing in these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix B hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the average
weighted maturity 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
S-4
44
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 laws 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
S-5
45
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.
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.
S-6
46
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Fund purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities
to the seller, who also simultaneously agrees to buy back the securities at
a fixed price and time. This assures a predetermined yield for the Fund
during its holding period, since the resale price is always greater than
the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Fund to invest temporarily available cash.
The Fund may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Fund may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Fund is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The investment adviser
monitors the value of the collateral at the time the action is entered into
and at all times during the term of the repurchase agreement. The
investment adviser does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase 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 ratios)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.
SHORT-TERM TAX-EXEMPT FIXED INCOME SECURITIES
Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
S-7
47
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 or municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or a tax-exempt money market
index.
While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are available
in the marketplace, and the Fund may invest in such other types of notes to the
extent permitted under its investment objectives, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
HEDGING STRATEGIES
The Fund may periodically engage in hedging transactions. Hedging is a term
used for various methods of seeking to preserve portfolio capital value 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. Rating agency guidelines may limit the Fund's
ability to engage in hedging transactions.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by the Fund may be greater than gains in the value of the securities in the
Fund's portfolio. In addition, futures and options markets may not be liquid in
all circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
S-8
48
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 NEW JERSEY
Factors pertaining to New Jersey 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 only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at a fair value as determined in good
faith by the Board of Trustees or its delegate.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what Nuveen Advisory
believes to be a temporary price disparity between the two securities. Temporary
price disparities between two comparable securities may result from supply and
demand imbalances where, for example, a temporary oversupply of certain bonds
may cause a temporarily low price for such bonds, as compared with other bonds
of like quality and characteristics. The Fund may also engage to a limited
extent in short-term trading consistent with its investment objectives.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its investment
objectives by prudent selection of municipal bonds with a view to holding them
for investment. While there can be no assurance thereof, the Fund anticipates
that its annual portfolio turnover rate will generally not exceed
S-9
49
100%. However, the rate of turnover will not be a limiting factor when the Fund
deems it desirable to sell or purchase securities. Therefore, depending upon
market conditions, the annual portfolio turnover rate of the Fund may exceed
100% in particular years.
OTHER INVESTMENT COMPANIES
The Fund may invest in securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Fund may invest directly. However, due to current New Jersey tax regulations,
the Fund does not currently intend to invest in other investment companies. If
the Fund decides to do so, the Fund generally would invest in other investment
companies either during periods when it has large amounts of uninvested cash,
such as the period shortly after the Fund receives the proceeds of the offering
of its Common Shares or MuniPreferred Shares, or during periods when there is a
shortage of attractive, high-yielding municipal bonds available in the market.
As a shareholder in an investment company, the Fund will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Fund's management, advisory and administrative fees with respect to assets
so invested. Common Shareholders would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. Nuveen
Advisory will take expenses into account when evaluating the investment merits
of an investment in the investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage risks described
herein. 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 and,
to the extent distributed, will be taxable distributions to shareholders. The
Fund may enter into contracts to purchase municipal bonds on a forward basis
(i.e., where settlement will occur more than 60 days from the date of the
transaction) only to the extent that the Fund specifically collateralizes such
obligations with a security that is expected to be called or mature within sixty
days before or after the settlement date of the forward transaction. The
commitment to purchase securities on a when-issued, delayed delivery or forward
basis may involve an element of risk because no interest accrues on the bonds
prior to settlement and at the time of delivery the market value may be less
than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable, if any.
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
50
minimal credit risk. The risk to the Fund is limited to the ability of the
issuer to pay the agreed-upon repurchase price on the delivery dates; however,
although the value of the underlying collateral at the time the transaction is
entered into always equals or exceeds the agreed-upon repurchase price, if the
value of the collateral declines there is a risk of loss of both principal and
interest. In the event of default, the collateral may be sold but the Fund might
incur a loss if the value of the collateral declines, and might incur
disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Fund may be
delayed or limited. Nuveen Advisory will monitor the value of the collateral at
the time the transaction is entered into and at all times subsequent during the
term of the repurchase agreement in an effort to determine that such value
always 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
51
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 the term
"interested" persons is defined in the Investment Company Act of 1940) 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 and business addresses of the
trustees and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth below, with those trustees
who are "interested" persons of the Fund indicated by an asterisk.
POSITIONS AND
OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS BIRTHDATE WITH THE FUND PAST FIVE YEARS
------------------------------- --------- ---------------------- --------------------------------------------------------
Timothy R. Schwertfeger* 3/28/49 Chairman of the Board, Chairman and Director (since July 1996) of The John
333 West Wacker Drive President and Trustee Nuveen Company, Nuveen Investments, Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp.; prior
thereto, Executive Vice President and Director of The
John Nuveen Company and Nuveen Investments; Director
(since 1992) and Chairman (since 1996) of Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp.; Chairman
and Director (since January 1997) of Nuveen Asset
Management, Inc.; Director (since 1996) of Institutional
Capital Corporation; Chairman and Director of Rittenhouse
Financial Services Inc. (since 1999); Chief Executive
Officer (since September 1999) of Nuveen Senior Loan
Asset Management Inc.
Robert P. Bremner 8/22/40 Trustee Private Investor and Management Consultant.
3725 Huntington Street, N.W.
Washington, D.C. 20015
Lawrence H. Brown 7/29/34 Trustee Retired (August 1989) as Senior Vice President of The
201 Michigan Avenue Northern Trust Company
Highwood, IL 60040
Anne E. Impellizzeri 1/26/33 Trustee Executive Director (since 1998) of Manitoga (Center for
3 West 29th Street Russel Wright's Design with Nature), formerly President
New York, NY 10001 and Chief Executive Officer of Blanton-Peale Institutes
of Religion and Health (since December 1990); prior
thereto, Vice President, Metropolitan Life Insurance Co.
Peter R. Sawers 4/3/33 Trustee Adjunct Professor of Business and Economics, University
22 The Landmark of Dubuque, Iowa; formerly (1991-2000) Adjunct Professor,
Northfield, IL 60093 Lake Forest Graduate School of Management, Lake Forest,
Illinois; prior thereto, Executive Director, Towers
Perrin Australia; Chartered Financial Analyst; Certified
Management Consultant.
S-12
52
POSITIONS AND
OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS BIRTHDATE WITH THE FUND PAST FIVE YEARS
------------------------------- --------- ---------------------- --------------------------------------------------------
William J. Schneider 9/24/44 Trustee Senior Partner and Chief Operating Officer,
4000 Miller-Valentine Court Miller-Valentine Partners, Vice President,
P.O. Box 744 Miller-Valentine Group, a development and contract
Dayton, OH 45401 company; Member Community Advisory Board, National City
Bank, Dayton, Ohio; Business Advisory Council, Cleveland
Federal Reserve Bank.
Judith M. Stockdale 12/29/47 Trustee Executive Director, Gaylord and Dorothy Donnelley
35 East Wacker Drive Foundation (since 1994); prior thereto, Executive
Suite 2600 Director, Great Lakes Protection Fund (from 1990 to
Chicago, IL 60601 1994).
Alan G. Berkshire 12/28/60 Vice President and Senior Vice President and General Counsel (since
333 West Wacker Drive Assistant Secretary September 1997) and Secretary (since May 1998) of The
Chicago, IL 60606 John Nuveen Company, Nuveen Investments, Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp., Senior
Vice President and Secretary (since September 1999) of
Nuveen Senior Loan Management Inc.; prior thereto,
Partner in the law firm of Kirkland & Ellis.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments (since January
333 West Wacker Drive Treasurer 1999), prior thereto, Assistant Vice President (from
Chicago, IL 60606 January 1997); formerly, Associate of Nuveen Investments;
Vice President and Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management Inc.; Chartered
Financial Analyst.
Michael S. Davern 6/26/57 Vice President Vice President of Nuveen Advisory Corp. (Since January
333 West Wacker Drive 1997); prior thereto, Vice President and Portfolio
Chicago, IL 60606 Manager of Flagship Financial.
Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments; Vice President
333 West Wacker Drive (since January 1998) of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President Vice President of Nuveen Advisory Corp. (since December
333 West Wacker Drive 1995); Assistant Vice President of Nuveen Advisory Corp.
Chicago, IL 60606 (from September 1992 to December 1995), prior thereto,
Assistant Portfolio Manager of Nuveen Advisory Corp.;
Chartered Financial Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments and (since May 1998)
333 West Wacker Drive Controller The John Nuveen Company, Vice President (since
Chicago, IL 60606 September 1999) of Nuveen Senior Loan Management Inc.;
Certified Public Accountant.
J. Thomas Futrell 7/5/55 Vice President Vice President of Nuveen Advisory Corp.; Chartered
333 West Wacker Drive Financial Analyst.
Chicago, IL 60606
S-13
53
POSITIONS AND
OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS BIRTHDATE WITH THE FUND PAST FIVE YEARS
------------------------------- --------- ---------------------- --------------------------------------------------------
Richard A. Huber 3/26/63 Vice President Vice President of Nuveen Institutional Advisory Corp.
333 West Wacker Drive (since March 1998) and Nuveen Advisory Corp. (since
Chicago, IL 60606 January 1997); prior thereto, Vice President and
Portfolio Manager of Flagship Financial, Inc.
Steven J. Krupa 8/21/57 Vice President Vice President of Nuveen Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
David J. Lamb 3/22/63 Vice President Vice President (since March 2000) of Nuveen Investments,
333 West Wacker Drive previously Assistant Vice President (since January 1999),
Chicago, IL 60606 prior thereto, Associate of Nuveen Investments; Certified
Public Accountant.
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary and Assistant General
333 West Wacker Drive Assistant Secretary Counsel of Nuveen Investments; Vice President and
Chicago, IL 60606 Assistant 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 7/7/65 Vice President Vice President (since September 1996), previously
333 West Wacker Drive Assistant Vice President (since December 1993) of
Chicago, IL 60606 Nuveen Advisory Corp., Portfolio Manager prior thereto;
Vice President (since September 1996), previously
Assistant Vice President (since May 1995) of Nuveen
Institutional Advisory Corp., Portfolio Manager prior
thereto; Chartered Financial Analyst.
Stephen S. Peterson 9/20/57 Vice President Vice President (since September 1997), previously
333 West Wacker Drive Assistant Vice President (since September 1996),
Chicago, IL 60606 Portfolio Manager, prior thereto, of Nuveen Advisory
Corp.; Chartered Financial Analyst.
Thomas C. Spalding, Jr. 7/31/51 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
333 West Wacker Drive Institutional Advisory Corp.; Chartered Financial
Chicago, IL 60606 Analyst.
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary and Associate General
333 West Wacker Drive Secretary Counsel, formerly Assistant General Counsel of Nuveen
Chicago, IL 60606 Investments; Vice 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
54
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 trustees of the Fund are also directors or trustees, as the case may
be, of 35 Nuveen open-end funds and 59 Nuveen closed-end funds advised by Nuveen
Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of
13 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 has ever been a director, officer, or employee of, or a
consultant to, Nuveen Advisory, Nuveen or their affiliates.
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.
TOTAL COMPENSATION AMOUNT OF TOTAL
NEW JERSEY FROM FUND AND FUND COMPENSATION
NAME OF TRUSTEE FUND* COMPLEX** THAT HAS BEEN DEFERRED
--------------- ---------- ------------------ ----------------------
Robert P. Bremner....... $120 $71,000 $ 8,368
Lawrence H. Brown....... $126 $75,250 $ 0
Anne E. Impellizzeri.... $120 $71,000 $55,784
Peter R. Sawers......... $120 $71,000 $55,784
William J. Schneider.... $120 $69,000 $54,216
Judith M. Stockdale..... $120 $71,000 $13,946
----------
* 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 12/31/00 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.
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 Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (59) and
fund assets under management ($28 billion). Overall, Nuveen and its affiliates
have over $62 billion in assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, 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.
S-15
55
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:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF YEAR ENDING (AS A PERCENTAGE OF
MARCH 31, AVERAGE DAILY NET assets)(1) MARCH 31, AVERAGE DAILY NET assets)(1)
----------- ---------------------------- ----------- ----------------------------
2001(2)......... .30% 2007 .25%
2002............ .30% 2008 .20%
2003............ .30% 2009 .15%
2004............ .30% 2010 .10%
2005............ .30% 2011 .05%
2006............ .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 Common Shareholders. Nuveen Advisory has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond March 31,
2011.
The Fund, Nuveen Advisory, Nuveen Investments, 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
S-16
56
may be obtained, after mailing the appropriate duplicating fee by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
On occasion, the Fund may clear portfolio transactions through Nuveen. It is the
policy of Nuveen Advisory to seek the best execution under the circumstances of
each trade. Nuveen Advisory evaluates price as the primary consideration, with
the financial condition, reputation and responsiveness of the dealer considered
secondary in determining best execution. Given the best execution obtainable, it
will be Nuveen Advisory's practice to select dealers which, in addition, furnish
research information (primarily credit analyses of issuers and general economic
reports) and statistical and other services to Nuveen Advisory. It is not
possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to Nuveen
Advisory's own research efforts, the receipt of research information is not
expected to reduce significantly Nuveen Advisory's expenses. While Nuveen
Advisory will be primarily responsible for the placement of the business of the
Fund, the policies and practices of Nuveen Advisory in this regard must be
consistent with the foregoing and will, at all times, be subject to review by
the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
Under the 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The rule sets forth requirements relating
to, among other things, the terms of an issue of municipal bonds purchased by
the Fund, the amount of municipal bonds which may be purchased in any one issue
and the assets of the Fund that may be invested in a particular issue. In
addition, purchases of securities made pursuant to the terms of the Rule must be
approved at least quarterly by the Board of Trustees, including a majority of
the members thereof who are not interested persons of the Fund.
S-17
57
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. Eastern time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated by taking the fair
value of the Fund's total assets, including interest or dividends accrued but
not yet collected, less all liabilities, and dividing by the total number of
shares outstanding. The result, rounded to the nearest cent, is the net asset
value per share.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are valued
at market value. The prices of municipal bonds are provided by a pricing service
and based on the mean between the bid and asked price. When price quotes are not
readily available (which is usually the case for municipal bonds), the pricing
service establishes a fair market value based on prices of comparable municipal
bonds. All valuations are subject to review by the Fund's Board of Trustees or
its delegate, Nuveen Advisory.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR MUNIPREFERRED
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of MuniPreferred so long as the
Applicable Rate for shares of such series is to be based on the results of an
Auction.
Broker-Dealer Agreements. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of MuniPreferred. See "Broker-Dealers"
below.
Securities Depository. The Depository Trust Company ("DTC") will act as the
Securities Depository for the Agent Members with respect to shares of each
series of MuniPreferred. One certificate for all of the shares of each 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.
S-18
58
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of MuniPreferred, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of MuniPreferred" in
the prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of MuniPreferred will pay
to each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of MuniPreferred placed by
such Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of MuniPreferred will be placed by a Broker-Dealer if such shares were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit Orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
Orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of Orders submitted by other Broker-Dealers in that Auction.
S-19
59
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
very remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and MuniPreferred Shares, voting together as a single class, except as
described below, to authorize (1) a conversion of the Fund from a closed-end to
an open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, in which case the
affirmative vote of the holders of at least a majority of the Fund's Common
Shares and MuniPreferred Shares outstanding at the time, voting together as a
single class, is required, provided, however, that where only a particular class
or series is affected (or, in the case of removing a trustee, when the trustee
has been elected by only one class), only the required vote by the applicable
class or series will be required. Approval of shareholders is not required,
however, for any transaction, whether deemed a merger, consolidation,
reorganization or otherwise whereby the Fund issues shares in connection with
the acquisition of assets (including those subject to liabilities) from any
other investment company or similar entity. None of the foregoing provisions may
be amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred Shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of any
of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds of
the Fund's MuniPreferred Shares outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the Fund's MuniPreferred Shares outstanding at the time, voting as a
separate class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding
upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a
S-20
60
trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount.
Notwithstanding the foregoing, at any time when the Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). Any
service fees incurred in connection with any tender offer made by the Fund will
be borne by the Fund and will not reduce the stated consideration to be paid to
tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (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
S-21
61
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees of the Fund may in the future modify these
conditions in light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the
time, voting as a separate class, provided, however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all MuniPreferred Shares then outstanding, and the Fund's
Common Shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of the
Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
MuniPreferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining.
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
TAX MATTERS
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.
S-22
62
The Fund intends to qualify under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), as a regulated investment company and to
satisfy conditions which enable dividends on Common Shares or shares of
MuniPreferred which are attributable to interest on Municipal Obligations to be
exempt from federal income tax in the hands of owners of such stock, subject to
the possible application of the alternative minimum tax.
To qualify under Subchapter M for tax treatment as a regulated investment
company, the Fund must, among other things: (a) distribute to its shareholders
at least 90% of the sum of (i) its investment company taxable income (as that
term is defined in the Code determined without regard to the deduction for
dividends paid) and (ii) its net tax-exempt income (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 fiscal quarter of the Fund (i) at least
50% of the market value of the Fund's assets is represented by cash, cash items,
U.S. government securities, securities of other regulated investment companies,
and other securities, with these other securities limited, with respect to any
one issuer, to an amount not greater in value than 5% of the Fund's total
assets, and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the market value of the Fund's assets is
invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or two or more
issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. In meeting these requirements 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 year's 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. Distributions to shareholders by the Fund of net income received, if
any, from taxable temporary investments and net short-term capital gains, if
any, realized by the Fund will be taxable to its shareholders as ordinary
income. Distributions by the Fund of net capital 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
S-23
63
MuniPreferred will depend upon the amount of such income realized by the Fund,
but is not generally expected to be significant. Except for dividends paid on
shares of MuniPreferred which include an allocable portion of any net capital
gain or other taxable income, the Fund anticipates that all other dividends paid
on shares of its MuniPreferred will constitute exempt-interest dividends for
federal income tax purposes. Distributions, if any, in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after that basis has been reduced to zero, will constitute capital
gain to the shareholder (assuming the shares are held as a capital asset). As
long as the Fund qualifies as a regulated investment company under the Code, no
part of its distributions to shareholders will qualify for the dividends
received deduction available to corporate shareholders.
The Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must designate to each
such class proportionate amounts of each type of its income for each tax year
based upon the percentage of total dividends distributed to each class for such
year. The Fund intends each year to allocate, to the fullest extent practicable,
net tax-exempt interest, net capital gain and other taxable income, if any,
between its Common Shares and shares of MuniPreferred in proportion to the total
dividends paid to each class with respect to such year. To the extent permitted
under applicable law, the Fund reserves the right to make special allocations of
income within a class, consistent with the objectives of the Fund. The Fund
will, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate
Period Days, 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 its
investment company taxable income and net tax-exempt income (as that term is
defined in the Code determined without regard to the deduction for dividends
paid), 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
S-24
64
coverage and avoid the adverse consequences to the Fund and its shareholders of
failing to qualify as a regulated investment company. There can be no assurance,
however, that any such redemption would achieve such objectives.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry the Fund's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.
The interest on private activity bonds in most instances is not federally
tax-exempt to a person who is a "substantial user" of a facility financed by
such bonds or a "related person" of such "substantial user." As a result, the
Fund may not be an appropriate investment for shareholders who are considered
either a "substantial user" or a "related person" within the meaning of the
Code. In general, a "substantial user" of a facility includes a "non-exempt
person who regularly uses a part of such facility in his trade or business."
"Related persons" are in general defined to include persons among whom there
exists a relationship, either by family or business, which would result in a
disallowance of losses in transactions among them under various provisions of
the Code (or if they are members of the same controlled group of corporations
under the Code), including a partnership and each of its partners (and certain
members of their families), an S corporation and each of its shareholders (and
certain members of their families) and various combinations of these and other
relationships. The foregoing is not a complete description of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person."
The Fund may, at its option, redeem shares of its MuniPreferred in whole or
in part, and is required to redeem shares of its MuniPreferred to the extent
required to maintain the MuniPreferred Basic Maintenance Amount and the 1940 Act
MuniPreferred Asset Coverage. Gain or loss, if any, resulting from a redemption
of the shares of MuniPreferred will be taxed as gain or loss from the sale or
exchange of the shares of MuniPreferred under Section 302 of the Code rather
than as a dividend, but only if the redemption distribution (a) is deemed not to
be essentially equivalent to a dividend, (b) is in complete redemption of an
owner's interest in the Fund, (c) is substantially disproportionate with respect
to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
ownership of the Common Shares will be taken into account.
Nonresident alien individuals and certain foreign corporations and other
entities ("foreign investors") generally are subject to U.S. withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on distributions of taxable net investment income and net short-term capital
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.
taxation. Different tax consequences may result if the owner is engaged in a
trade or business in the United States or, in the case of an individual, is
present in the United States for more than 182 days during a taxable year.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year declared.
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
S-25
65
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 describe above)
will normally result in capital gain or loss to shareholders. Present law taxes
both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however, under
current law short-term capital gains and ordinary income will be taxed at a
maximum rate of 39.6% while long-term capital gains generally will be taxed at a
maximum rate of 20%. However, because of the limitations on itemized deductions
and the deduction for personal exemptions applicable to higher income taxpayers,
the effective rate of tax may be higher in certain circumstances. Losses
realized by a shareholder on the sale or exchange of shares of the Fund held for
six months or less are disallowed to the extent of any distribution of
exempt-interest dividends received with respect to such shares, and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any distribution of long-term capital gain received with respect to such shares.
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 shares
within a period of 61 days beginning 30 days before and ending 30 days after the
date of disposition of the original shares. In that event, the basis of the
replacement shares of the Fund will be adjusted to reflect the disallowed loss.
Federal tax law imposes an alternative minimum tax with respect to
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 31% of taxable
dividends and certain other payments paid to non-corporate holders of the Fund's
shares who do not furnish to the Fund their correct taxpayer identification
number (in the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
S-26
66
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 taxation
of the Fund and its shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Moreover, the foregoing does not address many of the factors that may be
determinative of whether an investor will be liable for the alternative minimum
tax. Shareholders are advised to consult their own tax advisers for more
detailed information concerning the federal income tax consequences of
purchasing, holding and disposing of Fund shares.
STATE TAX MATTERS
Tax matters pertaining to New Jersey are set forth in Appendix D.
EXPERTS
The financial statements of the Fund as of March 5, 2001 appearing in this
statement of additional information has 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.
S-27
67
REPORT OF INDEPENDENT AUDITORS
AND
FINANCIAL STATEMENTS
F-1
68
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Nuveen New Jersey Dividend Advantage Municipal Fund
We have audited the statement of net assets as of March 5, 2001 and the related
statement of operations for the period from June 1, 1999 (date of organization)
through March 5, 2001 for the Nuveen New Jersey Dividend Advantage Municipal
Fund (the "Fund"). These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
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 presents fairly, in
all material respects, the financial position of the Fund at March 5, 2001, and
operating results for the period from June 1, 1999 (date of organization)
through March 5, 2001, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
March 6, 2001
F-2
69
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
Nuveen New Jersey Dividend Advantage Municipal Fund
Statement of Net Assets
March 5, 2001
Assets:
Cash............................................................... $ 100,275
Offering costs..................................................... 115,700
Receivable from adviser............................................ 15,000
---------
Total assets..................................................... 230,975
---------
Liabilities:
Accrued expenses................................................... 115,700
Payable for organization costs..................................... 15,000
---------
Total liabilities................................................ 130,700
---------
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
70
Nuveen New Jersey Dividend Advantage Municipal Fund
Statement of Operations
Period from June 1, 1999 (date of organization) through March 5, 2001
Investment income..................................................... $ -
--------
Expenses:
Organization costs.................................................. $ 15,000
Expense reimbursement............................................... (15,000)
--------
Total expenses.................................................... -
--------
Net investment income................................................. $ -
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on June 1, 1999, and
has been inactive since that date except for matters relating to its
organization and registration as a 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 $15,000) 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
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.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund 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
71
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, 2011.
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
72
STATEMENT OF NET ASSETS(UNAUDITED)
April 30, 2001
ASSETS
Investments in municipal securities, at market value $ 60,359,526
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value 2,000,000
Cash 32,109,407
Interest receivable 1,079,747
------------
Total assets 95,548,680
------------
LIABILITIES
Payable for investments purchased 4,810,291
Accrued expenses:
Management fees 24,765
Organization and offering costs 205,500
Other 14,048
------------
Total liabilities 5,054,604
------------
Net assets $ 90,494,076
============
Shares outstanding 6,357,000
============
Net asset value per share outstanding (net assets
divided by shares outstanding) $ 14.24
============
Net assets consist of:
Common Shares, $.01 par value per share $ 63,570
Paid-in surplus 90,809,955
Balance of undistributed net investment income 142,262
Accumulated net realized gain from investment transactions -
Net unrealized appreciation (depreciation) of investments (521,711)
------------
Net assets $ 90,494,076
============
Authorized shares:
Common Unlimited
Preferred Unlimited
============
F-6
73
STATEMENT OF OPERATIONS (UNAUDITED)
For the Period March 28, 2001 (commencement of operations) through
April 30, 2001
INVESTMENT INCOME $ 183,489
---------
EXPENSES
Management fees 50,151
Shareholders' servicing agent fees and expenses 723
Custodian's fees and expenses 3,391
Trustees' fees and expenses 181
Professional fees 4,828
Shareholders' reports - printing and mailing expenses 5,488
Stock exchange listing fees 90
Organization costs 15,000
---------
Total expenses before custodian fee credit and expense reimbursement 79,852
Custodian fee credit (653)
Expense reimbursement (37,972)
---------
Net expenses 41,227
---------
Net investment income 142,262
---------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain from investment transactions -
Change in net unrealized appreciation (depreciation) of investments (521,711)
---------
Net gain (loss) from investments (521,711)
---------
Net increase (decrease) in net assets from operations $(379,449)
=========
F-7
74
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period March 28, 2001 (commencement of operations) through April
30, 2001
OPERATIONS
Net investment income $ 142,262
Net realized gain from investment transactions --
Change in net unrealized appreciation (depreciation)
of investments (521,711)
------------
Net increase (decrease) in net assets from operations (379,449)
------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 90,773,250
------------
Net increase in net assets 90,393,801
Net assets at the beginning of period 100,275
------------
Net assets at the end of period $ 90,494,076
============
Balance of undistributed net investment income at
the end of period $ 142,262
============
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 New Jersey Dividend Advantage Municipal Fund (NXJ) (the
"Fund").
The Fund seeks to provide current income exempt from regular federal and New
Jersey income tax by investing primarily in a portfolio of municipal obligations
issued by state and local government authorities within the state of New Jersey.
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. 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 30, 2001, the Fund had an outstanding when-issued purchase commitment
of $4,810,291.
Investment Income
Interest income is determined on the basis of interest accrued, adjusted for
amortization of premiums and accretion of discounts.
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 New Jersey income taxes, 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 and payment
is made or reinvestment is credited to shareholder accounts on the first
business day after month-end. Net realized capital gains and/or market discount
from investment transactions, if any, are distributed to shareholders not less
frequently than annually. Furthermore, capital gains are distributed only to
the extent they exceed available capital loss carryforwards.
Distributions to shareholders of tax-exempt net investment income, net realized
capital gains and/or market discount are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from 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
75
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 28, 2001 (commencement of operations)
through April 30, 2001.
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 $15,000) and pay
all offering costs (other than the sales load) that exceed $.03 per Common
Share. The Fund's share of offering costs ($190,500) were recorded as a
reduction of the proceeds from the sale of shares.
2. FUND SHARES
The Fund sold 6,350,000 Common Shares during the period March 28, 2001
(commencement of operations) through April 30, 2001.
3. SECURITIES TRANSACTIONS
Purchases and sales (including maturities) of investments in long-term municipal
securities and short-term municipal securities for the period March 28, 2001
(commencement of operations) through April 30, 2001, were as follows:
--------------------------------------------------------------------------------
Purchases:
Long-term municipal securities $ 60,881,868
Short-term municipal securities 2,000,000
Sales and maturities:
Long-term municipal securities -
Short-term municipal securities -
--------------------------------------------------------------------------------
At April 30, 2001, the identified 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 30, 2001, were as follows:
------------------------------------------------------------------------------------------------------
Gross unrealized:
appreciation $ 46,724
depreciation (568,435)
------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $ (521,711)
======================================================================================================
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
76
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)
----------- ----------------- ------------ -----------------
2001*........................ .30% 2007 ................ .25%
2002 ........................ .30 2008 ................ .20
2003 ........................ .30 2009 ................ .15
2004 ........................ .30 2010 ................ .10
2005 ........................ .30 2011 ................ .05
2006 ........................ .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, 2011.
F-10
77
PORTFOLIO OF INVESTMENTS (Unaudited)
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND (NXJ)
April 30,2001
PRINCIPAL OPTIONAL CALL MARKET
AMOUNT (000) DESCRIPTION PROVISIONS* RATINGS** VALUE
CONSUMER STAPLES - 6.6%
$5,715 The Children's Trust Fund, Tobacco Settlement Asset-Backed Bonds, 7/10 at 100 Aa3 $ 5,949,429
Series 2000, 6.000%, 7/01/26
EDUCATION AND CIVIC ORGANIZATIONS - 6.0%
2,000 New Jersey Educational Facilities Authority, Revenue Bonds 7/11 at 101 AAA 1,920,180
(Rowan University), Series 2001A, 5.000%, 7/01/31
1,565 New Jersey Educational Facilities Authority, Revenue Bonds 7/10 at 100 AAA 1,602,059
(Princeton University), Series 2000E, 5.250%, 7/01/16
1,905 University of Puerto Rico, University System Revenue Bonds, 6/05 at 101 1/2 AAA 1,909,324
Series M, 5.250%, 6/01/25
HEALTHCARE - 6.4%
500 New Jersey Health Care Facilities Financing Authority, 7/10 at 101 BBB- 499,335
Revenue Bonds (Trinitas Hospital Obligated Group Issue),
Series 2000, 7.500%, 7/01/30
6,000 New Jersey Health Care Facilities Financing Authority, Revenue 1/09 at 101 AAA 5,257,920
Bonds (Virtua Health System), Series 1998, 4.500%, 7/01/28
TAX OBLIGATION/GENERAL - 3.7%
Board of Education of the Township of Hamilton, County of Mercer,
New Jersey, General Obligation Bonds, Series 2001:
1,850 4.750%, 8/15/18 8/10 at 100 AAA 1,765,215
1,630 4.750%, 8/15/19 8/10 at 100 AAA 1,546,006
TAX OBLIGATION/LIMITED - 5.4%
New Jersey Economic Development Authority, School Facilities
Construction Bonds, 2001 Series A:
2,500 5.250%, 6/15/19 6/11 at 100 AAA 2,528,225
2,400 5.000%, 6/15/21 6/11 at 100 AAA 2,341,872
TRANSPORTATION - 15.6%
10,000 New Jersey Economic Development Authority, Special Facilities 11/10 at 101 BB 10,155,800
Revenue Bonds (Continental Airlines Inc. Project), Series 2000,
7.000%, 11/15/30 (Alternative Minimum Tax)
4,000 South Jersey Transportation Authority, New Jersey, Transportation 11/09 at 101 AAA 3,958,880
System Revenue Bonds, 1999 Series, 5.125%, 11/01/22
U.S. GUARANTEED - 4.5%
4,000 Puerto Rico Infrastructure Financing Authority, Special Obligation 10/10 at 101 AAA 4,099,920
Bonds, 2000 Series A, 5.500%, 10/01/40
WATER AND SEWER - 18.5%
4,635 New Jersey Economic Development Authority, Water Facilities 5/08 at 102 AAA 4,609,368
Revenue Bonds (New Jersey/American Water Company, Inc. Project),
Series 1997B, 5.375%, 5/01/32
5,000 New Jersey Economic Development Authority, Water Facilities 7/08 at 102 AAA 4,844,850
Revenue Bonds (New Jersey/American Water Company, Inc. Project),
Series 1998A, 5.250%, 7/01/38 (Alternative Minimum Tax)
2,775 New Jersey Environmental Infrastructure Trust, Environmental 9/08 at 101 AAA 2,547,228
Infrastructure Bonds, Series 1998A, 4.500%, 9/01/18
15,840 The North Hudson Sewerage Authority, New Jersey, Sewer Revenue No Opt. Call AAA 4,823,915
Bonds, Series 2001A Refunding, 0.000%, 8/01/23 (WI, settling 5/03/01)
-----------------------------------------------------------------------------------------------------------------------------
$72,315 Total Investments (cost $60,881,237) - 66.7% $60,359,526
-----------------------------------------------------------------------------------------------------------------------------
-------
Short-Term Investments - 2.2%
2,000 The Port Authority of New York and New Jersey, Versatile Structure VMIG-1 2,000,000
Obligations, Series 5, Variable Rate Demand Bonds, 4.300%, 08/01/24+
-----------------------------------------------------------------------------------------------------------------------------
-------
Other Assets Less Liabilities - 31.1% 28,134,550
--------------------------------------------------------------------------------------------------------------------
Net Assets - 100% $90,494,076
====================================================================================================================
78
* 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.
79
APPENDIX A
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS
AND PREFERENCES OF
MUNICIPAL AUCTION RATE
CUMULATIVE PREFERRED SHARES ("MUNIPREFERRED")
A-1
80
NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL FUND
TABLE OF CONTENTS
PAGE
----
DEFINITIONS....................................................................................................A-7
"AA" Composite Commercial Paper Rate........................................................................A-7
Accountant's Confirmation...................................................................................A-8
Affiliate...................................................................................................A-8
Agent Member................................................................................................A-8
All Hold Order..............................................................................................A-8
Anticipation Notes..........................................................................................A-8
Applicable Rate.............................................................................................A-8
Auction.....................................................................................................A-8
Auction Agency Agreement....................................................................................A-8
Auction Agent...............................................................................................A-8
Auction Date................................................................................................A-8
Auction Procedures..........................................................................................A-8
Available MuniPreferred.....................................................................................A-9
Benchmark Rate..............................................................................................A-9
Beneficial Owner............................................................................................A-9
Bid and Bids................................................................................................A-9
Bidder and Bidders..........................................................................................A-9
Board of Trustees...........................................................................................A-9
Broker-Dealer...............................................................................................A-9
Broker-Dealer Agreement.....................................................................................A-9
Business Day................................................................................................A-9
Code........................................................................................................A-9
Commercial Paper Dealers....................................................................................A-9
Common Shares...............................................................................................A-9
Cure Date...................................................................................................A-9
Date of Original Issue.....................................................................................A-10
Declaration................................................................................................A-10
Deposit Securities.........................................................................................A-10
Discounted Value...........................................................................................A-10
Dividend Payment Date......................................................................................A-10
Dividend Period............................................................................................A-10
Existing Holder............................................................................................A-10
Failure to Deposit.........................................................................................A-10
Federal Tax Rate Increase..................................................................................A-11
Fund.......................................................................................................A-11
Gross-Up Payment...........................................................................................A-11
Hold Order and Hold Orders.................................................................................A-11
Holder.....................................................................................................A-11
Independent Accountant.....................................................................................A-11
Initial Rate Period........................................................................................A-11
Interest Equivalent........................................................................................A-11
Issue Type Category........................................................................................A-11
Kenny Index................................................................................................A-11
Late Charge................................................................................................A-11
A-2
81
Liquidation Preference.....................................................................................A-11
Market Value...............................................................................................A-11
Maximum Potential Gross-Up Payment Liability...............................................................A-12
Maximum Rate...............................................................................................A-12
Minimum Rate Period........................................................................................A-13
Moody's....................................................................................................A-13
Moody's Discount Factor....................................................................................A-13
Moody's Eligible Asset.....................................................................................A-13
Moody's Exposure Period....................................................................................A-13
Moody's Volatility Factor..................................................................................A-13
Municipal Obligations......................................................................................A-13
MuniPreferred..............................................................................................A-14
MuniPreferred Basic Maintenance Amount.....................................................................A-14
MuniPreferred Basic Maintenance Cure Date..................................................................A-15
MuniPreferred Basic Maintenance Report.....................................................................A-15
1940 Act...................................................................................................A-15
1940 Act Cure Date.........................................................................................A-15
1940 Act MuniPreferred Asset Coverage......................................................................A-15
Notice of Redemption.......................................................................................A-16
Notice of Special Rate Period..............................................................................A-16
Order and Orders...........................................................................................A-16
Original Issue Insurance...................................................................................A-16
Other Issues...............................................................................................A-16
Outstanding................................................................................................A-16
Permanent Insurance........................................................................................A-16
Person.....................................................................................................A-16
Portfolio Insurance........................................................................................A-16
Potential Beneficial Owner.................................................................................A-16
Potential Holder...........................................................................................A-16
Preferred Shares...........................................................................................A-16
Quarterly Valuation Date...................................................................................A-16
Rate Multiple..............................................................................................A-17
Rate Period................................................................................................A-17
Rate Period Days...........................................................................................A-17
Receivables For Municipal Obligations Sold.................................................................A-17
Redemption Price...........................................................................................A-17
Reference Rate.............................................................................................A-17
Registration Statement.....................................................................................A-17
S&P........................................................................................................A-17
S&P Discount Factor........................................................................................A-17
S&P Eligible Asset.........................................................................................A-17
S&P Exposure Period........................................................................................A-17
S&P Volatility Factor......................................................................................A-18
Secondary Market Insurance.................................................................................A-18
Securities Depository......................................................................................A-18
Sell Order and Sell Orders.................................................................................A-18
Special Rate Period........................................................................................A-18
Special Redemption Provisions..............................................................................A-18
Submission Deadline........................................................................................A-18
Submitted Bid and Submitted Bids...........................................................................A-18
Submitted Hold Order and Submitted Hold Orders.............................................................A-18
A-3
82
Submitted Order and Submitted Orders.......................................................................A-18
Submitted Sell Order and Submitted Sell Orders.............................................................A-18
Subsequent Rate Period.....................................................................................A-19
Substitute Commercial Paper Dealer.........................................................................A-19
Substitute U.S. Government Securities Dealer...............................................................A-19
Sufficient Clearing Bids...................................................................................A-19
Taxable Allocation.........................................................................................A-19
Taxable Equivalent of the Short-Term Municipal Bond Rate...................................................A-19
Taxable Income.............................................................................................A-19
Treasury Bill..............................................................................................A-20
Treasury Bill Rate.........................................................................................A-20
Treasury Note..............................................................................................A-20
Treasury Note Rate.........................................................................................A-20
U.S. Government Securities Dealer..........................................................................A-20
Valuation Date.............................................................................................A-20
Volatility Factor..........................................................................................A-20
Voting Period..............................................................................................A-21
Winning Bid Rate...........................................................................................A-21
PART I .....................................................................................................A-21
1. Number of Authorized Shares.................................................................A-21
2. Dividends...................................................................................A-21
(a) Ranking............................................................................A-21
(b) Cumulative Cash Dividends..........................................................A-21
(c) Dividends Cumulative From Date of Original Issue...................................A-21
(d) Dividend Payment Dates and Adjustment Thereof......................................A-21
(e) Dividend Rates and Calculation of Dividends........................................A-22
(i) Dividend Rates............................................................A-22
(ii) Calculation of Dividends..................................................A-23
(f) Curing a Failure to Deposit........................................................A-24
(g) Dividend Payments by Fund to Auction Agent.........................................A-24
(h) Auction Agent as Trustee of Dividend Payments by Fund..............................A-24
(i) Dividends Paid to Holders..........................................................A-24
(j) Dividends Credited Against Earliest Accumulated But Unpaid Dividends...............A-24
(k) Dividends Designated as Exempt-Interest Dividends..................................A-24
3. Gross-Up Payments...........................................................................A-24
(a) Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or
Fewer..............................................................................A-25
(b) Special Rate Periods of More Than 28 Rate Period Days..............................A-25
(c) No Gross-Up Payments in the Event of a Reallocation................................A-25
4. Designation of Special Rate Periods.........................................................A-25
(a) Length of and Preconditions for Special Rate Period................................A-25
(b) Adjustment of Length of Special Rate Period........................................A-25
(c) Notice of Proposed Special Rate Period.............................................A-26
(d) Notice of Special Rate Period......................................................A-26
(e) Failure to Deliver Notice of Special Rate Period...................................A-27
5. Voting Rights...............................................................................A-27
(a) One Vote Per Share of MuniPreferred................................................A-27
(b) Voting for Additional Trustees.....................................................A-27
(i) Voting Period.............................................................A-27
(ii) Notice of Special Meeting.................................................A-28
A-4
83
(iii) Terms of Office of Existing Trustees......................................A-28
(iv) Terms of Office of Certain Trustees to Terminate Upon Termination
of Voting Period..........................................................A-28
(c) Holders of MuniPreferred to Vote on Certain Other Matters..........................A-29
(i) Increases in Capitalization...............................................A-29
(ii) 1940 Act Matters..........................................................A-29
(d) Board May Take Certain Actions Without Shareholder Approval........................A-30
(e) Voting Rights Set Forth Herein Are Sole Voting Rights..............................A-30
(f) No Preemptive Rights or Cumulative Voting..........................................A-30
(g) Voting for Trustees Sole Remedy for Fund's Failure to Pay Dividends................A-31
(h) Holders Entitled to Vote...........................................................A-31
6. 1940 Act MuniPreferred Asset Coverage.......................................................A-31
7. MuniPreferred Basic Maintenance Amount......................................................A-31
8. [Reserved]..................................................................................A-33
9. Restrictions on Dividends and Other Distributions...........................................A-33
(a) Dividends on Preferred Shares Other Than MuniPreferred.............................A-33
(b) Dividends and Other Distributions with Respect to Common Shares Under the
1940 Act...........................................................................A-33
(c) Other Restrictions on Dividends and Other Distributions............................A-34
10. Rating Agency Restrictions..................................................................A-34
11. Redemption..................................................................................A-35
(a) Optional Redemption................................................................A-35
(b) Mandatory Redemption...............................................................A-36
(c) Notice of Redemption...............................................................A-37
(d) No Redemption Under Certain Circumstances..........................................A-37
(e) Absence of Funds Available for Redemption..........................................A-37
(f) Auction Agent as Trustee of Redemption Payments by Fund............................A-38
(g) Shares for Which Notice of Redemption Has Been Given are No Longer
Outstanding........................................................................A-38
(h) Compliance with Applicable Law.....................................................A-38
(i) Only Whole Shares of MuniPreferred May Be Redeemed.................................A-38
12. Liquidation Rights..........................................................................A-38
(a) Ranking............................................................................A-38
(b) Distributions Upon Liquidation.....................................................A-39
(c) Pro Rata Distributions.............................................................A-39
(d) Rights of Junior Shares............................................................A-39
(e) Certain Events Not Constituting Liquidation........................................A-39
13. Miscellaneous...............................................................................A-39
(a) Amendment of Appendix A to Add Additional Series...................................A-39
(b) Appendix A Incorporated By Reference...............................................A-40
(c) No Fractional Shares...............................................................A-40
(d) Status of Shares of MuniPreferred Redeemed, Exchanged or Otherwise
Acquired by the Fund...............................................................A-40
(e) Board May Resolve Ambiguities......................................................A-40
(f) Headings Not Determinative.........................................................A-40
(g) Notices............................................................................A-40
PART II.......................................................................................................A-41
1. Orders......................................................................................A-41
2. Submission of Orders by Broker-Dealers to Auction Agent.....................................A-43
A-5
84
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.............A-44
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares........................................................................A-46
5. Notification of Allocations.................................................................A-48
6. Auction Agent...............................................................................A-48
7. Transfer of Shares of MuniPreferred.........................................................A-49
8. Global Certificate..........................................................................A-49
Appendix A....................................................................................................A-50
Section 1. Designation as to Series........................................................................A-50
Section 2. Number of Authorized Shares Per Series..........................................................A-50
Section 3. Exceptions to Certain Definitions...............................................................A-50
Section 4. Certain Definitions.............................................................................A-50
Section 5. Initial Rate Periods............................................................................A-57
Section 6. Date for Purposes of Paragraph (zzz) Contained Under the Heading "Definitions"
in this Statement...............................................................................A-57
Section 7. Party Named for Purposes of the Definition of "Rate Multiple" in this Statement.................A-57
Section 8. Additional Definitions..........................................................................A-57
Section 9. Dividend Payment Dates..........................................................................A-57
Section 10. Amount for Purposes of Subparagraph (c)(i) of Section 5 of Part I of this Statement.............A-57
Section 11. Redemption Provisions Applicable to Initial Rate Periods........................................A-57
Section 12. Applicable Rate for Purposes of Subparagraph (b)(iii) of Section 3 of Part II of
this Statement..................................................................................A-57
Section 13. Certain Other Restrictions and Requirements.....................................................A-58
A-6
85
NUVEEN NEW JERSEY 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
A-7
86
"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 same 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.
A-8
87
(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.
(z) "DATE OF ORIGINAL ISSUE," with respect to shares of a
series of MuniPreferred, shall mean the date on which the Fund initially issued
such shares.
(aa) "DECLARATION" shall have the meaning specified on the
first page of this Statement.
A-9
88
(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.
A-10
89
(ll) "GROSS-UP PAYMENT" shall have the meaning specified in
Section 4 of Appendix A hereto.
(mm) "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.
(nn) "HOLD ORDER" and "HOLD ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this Statement.
(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:
A-11
90
(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.
A-12
91
(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
RATE INCREASE VOLATILITY 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 New Jersey
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.
A-13
92
(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
A-14
93
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.
A-15
94
(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.
A-16
95
(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.
A-17
96
(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 INCOME" shall have the meaning specified in
Section 12 of Appendix A hereto.
(ccccc) "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
A-18
97
evaluations at par of short-term bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny S&P Evaluation Services or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57 (a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per
annum rate expressed on an interest equivalent basis equal to the most recent
Kenny Index so made available for any preceding Business Day, divided by (B)
1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
(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.
A-19
98
(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.
A-20
99
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.
A-21
100
(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
A-22
101
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
A-23
102
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:
A-24
103
(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
A-25
104
MuniPreferred" in Section 1 of Appendix A hereto, (c) a Thursday that is a
Business Day in the case of a series of MuniPreferred designated as "Series W
MuniPreferred" in Section 1 of Appendix A hereto, (d) a Friday that is a
Business Day in the case of a series of MuniPreferred designated as "Series TH
MuniPreferred" in Section 1 of Appendix A hereto, or (e) a Monday that is a
Business Day in the case of a series of MuniPreferred designated as "Series F
MuniPreferred" in Section 1 of Appendix A hereto, then the Fund shall designate
such Subsequent Rate Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately preceding Rate
Period and ending (a) on the first Monday that is followed by a Tuesday that is
a Business Day preceding what would otherwise be such last day, in the case of
Series M MuniPreferred, (b) on the first Tuesday that is followed by a Wednesday
that is a Business Day preceding what would otherwise be such last day, in the
case of Series T MuniPreferred, (c) on the first Wednesday that is followed by a
Thursday that is a Business Day preceding what would otherwise be such last day,
in the case of Series W MuniPreferred, (d) on the first Thursday that is
followed by a Friday that is a Business Day preceding what would otherwise be
such last day, in the case of Series TH MuniPreferred, and (e) on the first
Sunday that is followed by a Monday that is a Business Day preceding what would
otherwise be such last day, in the case of Series F MuniPreferred.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Fund
proposes to designate any succeeding Subsequent Rate Period of shares of a
series of MuniPreferred as a Special Rate Period pursuant to paragraph (a) of
this Section 4, not less than 20 (or such lesser number of days as may be agreed
to from time to time by the Auction Agent) nor more than 30 days prior to the
date the Fund proposes to designate as the first day of such Special Rate Period
(which shall be such day that would otherwise be the first day of a Minimum Rate
Period), notice shall be (i) published or caused to be published by the Fund in
a newspaper of general circulation to the financial community in The City of New
York, New York, which carries financial news, and (ii) mailed by the Fund by
first-class mail, postage prepaid, to the Holders of shares of such series. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the Fund will, by 11:00
A.M., New York City time, on the second Business Day next preceding such date
(or by such later time or date, or both, as may be agreed to by the Auction
Agent) notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Rate Period designated, or (y) its determination not to
exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M.,
New York City time, on the second Business Day next preceding the first day of
any proposed Special Rate Period of shares of a series of MuniPreferred as to
which notice has been given as set forth in paragraph (c) of this Section 4 (or
such later time or date, or both, as may be agreed to by the Auction Agent), the
Fund shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period")
stating (A) that the Fund has determined to designate the next
succeeding Rate Period of shares of such series as a Special Rate
Period, specifying the same and the first day thereof, (B) the Auction
Date immediately prior to the first day of such Special Rate Period,
(C) that such Special Rate Period shall not commence if (1) an Auction
for shares of such series shall not be held on such Auction Date for
any reason or (2) an Auction for shares of such series shall be held on
such Auction Date but Sufficient Clearing Bids for shares of such
series shall not exist in such Auction, (D) the scheduled Dividend
Payment Dates for shares of such series during such Special Rate Period
and (E) the Special Redemption Provisions, if any, applicable to shares
of such series in respect of such Special Rate Period, such notice to
be accompanied by a MuniPreferred Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P Eligible Assets
A-26
105
(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
A-27
106
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.
A-28
107
(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
A-29
108
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.
A-30
109
(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.
A-31
110
(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) that, in such Report (and in such
randomly selected Report), the Fund determined whether the Fund had, at such
Quarterly Valuation Date (and at the Valuation Date addressed in such randomly
selected Report) in accordance with this Statement, S&P Eligible Assets of an
aggregate Discounted Value at least equal to the MuniPreferred Basic Maintenance
Amount and Moody's Eligible Assets of an aggregate Discounted Value at least
equal to the MuniPreferred Basic Maintenance Amount, (iv) 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, (v) 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), (vi) 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 (vii) 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
A-32
111
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
A-33
112
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
A-34
113
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
A-35
114
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
A-36
115
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
A-37
116
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
A-38
117
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.
A-39
118
(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.
A-40
119
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) (i) A Bid by a Beneficial Owner or an Existing Holder
of shares of a series of MuniPreferred subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
A-41
120
(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.
A-42
121
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:
A-43
122
(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) (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:
A-44
123
(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;
A-45
124
(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
A-46
125
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
A-47
126
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
A-48
127
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.
IN WITNESS WHEREOF, NUVEEN NEW JERSEY DIVIDEND ADVANTAGE MUNICIPAL
FUND, has caused these presents to be signed on __________ ___, 2001 in its name
and on its behalf by its Vice President and attested by its Assistant Secretary.
The Fund's Declaration of Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and the said officers of the Fund have executed
this Statement as officers and not individually, and the obligations and rights
set forth in this Statement are not binding upon any such officers, or the
trustees or shareholders of the Fund, individually, but are binding only upon
the assets and property of the Fund.
NUVEEN NEW JERSEY DIVIDEND
ADVANTAGE MUNICIPAL FUND
By:
----------------------------------
Nicholas Dalmaso
Assistant Vice President
ATTEST:
-----------------------------
Alan G. Berkshire
Assistant Secretary
A-49
128
APPENDIX A
NUVEEN NEW JERSEY 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
1,920 shares of Series T MuniPreferred issued on __________ ___, 2001
shall, for purposes hereof, be deemed to have a Date of Original Issue of
__________ ___, 2001; have an Applicable Rate for its Initial Rate Period equal
to _____% per annum; have an initial Dividend Payment Date of __________ ___,
2001; 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.
SECTION 2. NUMBER OF AUTHORIZED SHARES PER SERIES. The number of
authorized shares constituting Series T 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 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
A-50
129
income of such Holder. Such Gross-up Payment shall be calculated (i) without
consideration being given to the time value of money; (ii) assuming that no
Holder of shares of MuniPreferred is subject to the Federal alternative minimum
tax with respect to dividends received from the Fund; and (iii) assuming that
each Taxable Allocation and each Gross-up Payment (except to the extent such
Gross-up Payment is designated as an exempt-interest dividend under Section
852(b)(5) of the Code or successor provisions) would be taxable in the hands of
each Holder of shares of MuniPreferred at the maximum marginal combined regular
Federal and New Jersey 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
issuer that is directly or indirectly guaranteed by the State of New Jersey or
its political subdivisions. Utility issuers are included in the general
obligation issue category if the issuer is directly or indirectly guaranteed by
the State of New Jersey or its political subdivisions. Municipal Obligations in
the utility issuer 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 issues does not
A-51
130
include an electric issue); and (iii) irrigation, resource recovery, solid waste
and other utilities, provided that Municipal Obligations included in this
sub-category (iii) must be rated by S&P in order to be included in S&P Eligible
Assets. Municipal Obligations in the transportation issue category will be
classified within one of the two following sub-categories: (i) streets and
highways, toll roads, bridges and tunnels, airports and multi-purpose port
authorities (multiple revenue streams generated by toll roads, airports, real
estate, bridges); (ii) mass transit, parking seaports and others.
"MOODY'S DISCOUNT FACTOR" shall mean, for purposes of
determining the Discounted Value of any Moody's Eligible Asset, the percentage
determined by reference to 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 week................. 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................ 158 163 170 177 192 138 150 240
----------
* 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.
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
A-52
131
12% of total Moody's Eligible Assets; such Other Securities, if any, together
with any Municipal Obligations falling within a particular Issue Type Category
and rated Baa by Moody's or A by S&P, may comprise no more than 20% of total
Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated A by Moody's or AA by S&P, may comprise
no more than 40% of total Moody's Eligible Assets; and such Other Securities,
Baa, A and AA-rated Municipal Obligations, if any, together with any Municipal
Obligations falling within 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., Chase Manhattan 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.
"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-53
132
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 New Jersey 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 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-54
133
RATING CATEGORY
------------------------------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* HIGH YIELD
--------------- ---- --- -- ---- ----------
45 Business Days....... 202% 207% 222% 262% 232%
25 Business Days....... 182 187 202 242 232
10 Business Days....... 167 172 187 227 232
7 Business Days........ 162 167 182 222 232
3 Business Days........ 142 147 162 202 232
----------
* 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-55
134
is part of an issue of Municipal Obligations with an original issue size of at
least $10 million or, if of an issue with an original issue size below $10
million (but in no event below $5 million), is issued by an issuer with a total
of at least $50 million of securities outstanding. Solely for purposes of this
definition, the term "Municipal Obligation" means any obligation the interest on
which is exempt from regular Federal income taxation and which is issued by any
of the fifty United States, the District of Columbia or any of the territories
of the United States, their subdivisions, counties, cities, towns, villages,
school districts and agencies (including authorities and special districts
created by the states), and federally sponsored agencies such as local housing
authorities. Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any
one issuer or guarantor (excluding bond insurers) shall be considered
S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations (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
(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.
A-56
135
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 __________ ___, 2001.
SECTION 6. DATE FOR PURPOSES OF PARAGRAPH (ZZZ) CONTAINED UNDER THE
HEADING "DEFINITIONS" IN THIS STATEMENT. __________ ___, 2001.
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE
MULTIPLE" IN THIS STATEMENT.
PARTY SERIES OF MUNIPREFERRED
----- -----------------------
Series T
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
__________, __________ ___, 2001, and on each __________ thereafter.
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (C)(I) OF SECTION 5 OF
PART I OF THIS STATEMENT. $48,000,000.
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 New Jersey personal
income tax rate applicable to ordinary income (taking into account the Federal
income tax deductibility of state and local taxes paid or incurred) or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to shares of such series in
such Rate Period any net capital gains or other income taxable for Federal
income tax purposes ("Taxable Income"), the Applicable Rate for shares of such
series for such Rate Period will be (i) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if
the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal combined regular Federal and New Jersey 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
A-57
136
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 terms of such futures
contract or option thereon unless the Fund holds the securities
deliverable under such terms; and
A-58
137
(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 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);
A-59
138
(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.
(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
A-60
139
(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-61
140
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation--A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's
capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated "AA" differs from the
highest-rated obligations only in small degree. The
obligor's capacity to meet its financial commitment
on the obligation is very strong.
B-1
141
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
142
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to
purchase tendered bonds if the long-term credit rating of the
issuer is below an investment-grade level and/or the issuer's
bonds are deemed taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on
the likelihood of or the risk of default upon failure of such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience
high volatility or high variability in expected returns as a
result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and
options; and interest-only and principal-only mortgage
securities. The absence of an "r" symbol should not be taken
as an indication that an obligation will exhibit no volatility
or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "BBB", commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note rating reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule -- the larger the final maturity
relative to other maturities, the more likely it will be
treated as a note; and
o Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
B-3
143
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 A short-term obligation rated "A-1" is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet
its financial commitment on these obligations is extremely
strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" exhibits adequate
protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on
the obligation.
B A short-term obligation rated "B" is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its
financial commitment on the obligation.
D A short-term obligation rated "D" is in payment default. The
"D" rating category is used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poor's believes that such
payments will be
B-4
144
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
145
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
146
-- 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
147
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
148
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 IBCA does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
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
149
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various
defensive hedging techniques.
FUTURES AND INDEX TRANSACTIONS
FINANCIAL FUTURES
A financial future is an agreement between two parties to buy and sell
a security for a set price on a future date. They have been designed by boards
of trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a
Fund's existing or anticipated holdings of long-term debt securities. When 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
150
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
151
APPENDIX D
FACTORS PERTAINING TO NEW JERSEY
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 New Jersey. It should be noted
that the creditworthiness of obligations issued by local New Jersey issuers may
be unrelated to the creditworthiness of obligations issued by the State of New
Jersey, and there is no obligation on the part of the State to make payment on
such local obligations in the event of default.
DEMOGRAPHIC AND ECONOMIC INFORMATION
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,134 persons per square mile, it is
the most densely populated of all the states. New Jersey is located at the
center of the megalopolis which extends from Boston to Washington, and which
includes over one-fifth of the country's population. The extensive facilities of
the Port Authority of New York and New Jersey, the Delaware River Port Authority
and the South Jersey Port Corporation across the Delaware River from
Philadelphia augment the air, land and water transportation complex which has
influenced much of the State's economy. This central location in the
northeastern corridor, the transportation and port facilities and proximity to
New York City make the State an attractive location for corporate headquarters
and international business offices. A number of Fortune Magazine's top 500
companies maintain headquarters or major facilities in New Jersey, and many
foreign-owned firms have located facilities in the State.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic seashore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. Since 1976,
casino gambling in Atlantic City has been an important State tourist attraction.
New Jersey's population grew rapidly in the years following World War
II, before slowing to an annual rate of 0.27 percent in the 1970's. Between 1980
and 1990, the annual rate of growth rose to 0.51 percent and between 1990 and
2000, accelerated to 0.83 percent. While this rate of growth is less than that
for the United States, it compares favorably with other Middle Atlantic States.
New York has shown a 0.54 percent annual rate of increase since 1990 and
Pennsylvania's population has increased at a rate of 0.33 percent per year.
The increase in the State's total population during the past quarter
century masks the redistribution of population within the State. There has been
a significant shift from the northeastern industrial areas towards the four
coastal counties (Cape May, Atlantic, Ocean and Monmouth) and towards the
central New Jersey counties of Hunterdon, Somerset and Middlesex.
NEW JERSEY'S ECONOMIC OUTLOOK
Employment within the State increased by 1.6% in 2000, resulting in an
increase of over 60,000 jobs. Job gains were primarily spread across the service
producing industries with particularly strong growth in wholesale and retail
trade (17,300). The engineering/consulting/research sector and the computer/data
processing services sector accounted for 10,000 of 28,600 gained in the services
sub-sector.
During the past decade, New Jersey's job growth has been concentrated
in five major "growth clusters": health, high technology, logistics, financial
and entertainment. Combined, these five growth
D-1
152
clusters added over 200,000 jobs during the ten years from 1988 to 1998, a 19%
growth rate compared to a 4% growth rate for all other industries in the State.
These growth clusters grew by 2.6% in 1999, over twice the rate of 1.2% for all
other industries in New Jersey.
With strong labor market conditions, New Jersey's personal income
increased at a pace of 5.4% in 2000, substantially stronger than the 4% rate in
1999. The strong State economy also led to a 9.0% growth in retail sales, just
slightly lower than the 1999 rate. Low inflation, approximately 3%, continues to
benefit New Jersey consumers and businesses, and low interest rates have
increased spending on housing and other consumer durables. In 2000, home
building decreased slightly from the level of 1999 which was an 11 year high.
New vehicle registrations grew 10% in 2000 to the highest level since 1986.
New Jersey's unemployment rate fell below 4% in 2000, a rate which was
below the national average. Joblessness, in terms of both absolute level and its
rate, has been falling steadily since its peak in 1992.
The economic outlook for the future is for slower but positive growth.
Employment is expected to increase by approximately 1% or 40,000 jobs each year,
reflecting a slower growing national economy and shortages in skilled technical
specialties. The outlook also anticipates moderate but fairly steady growth in
State personal income at 5.3% in 2001 and 5.5% in 2002.
The consumer is facing widespread evidence of a national economic
slowdown that started late last year. Increased cost pressure for food and
energy coupled with employer restraint on wage growth and adverse wealth effects
from the financial markets have led consumers to restrain spending growth in the
near term. Businesses face a profit squeeze from rising employee health costs
and moderating sales growth. While both these trends reflect a slowing economy,
action by the Federal Reserve to substantially reduce interest rates, prospects
for a major tax cut and more positive news from the financial markets work as
offsetting forces. As a result, the U.S. slowdown and the corresponding
moderation in New Jersey's growth are not expected to be severe or prolonged.
However, uncertainties in the international economy are likely to
remain due to oil price and currency issues. Other areas of concern include the
volatility in the stock market, the possibility of further deterioration in
consumer and investor confidence, unstable and potentially deflationary
international economic conditions and the prospect of a more prolonged period of
lean U.S. corporate profits. In addition, the restructuring of major industries
will continue due to cost containment, globalization of competition, and
deregulation concerns. Although the forecasts for 2001/2002 contain more
uncertainty than in the recent past, the basic fundamentals of the State's
economic health remain favorable.
The New Jersey outlook is based on expected national economic
performance and on recent State strategic policy actions aimed at infrastructure
improvements, effective education and training of the State's workforce and
maintaining a competitive business environment. Investments in each of these
policy areas are critical to maintaining the long-term health of the State's
economy.
BONDED INDEBTEDNESS OF THE STATE
General Obligation Bonds. The State finances certain capital projects
through the sale of general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State. Certain state tax revenues and
certain other fees are pledged to meet the principal, interest, and redemption
premium payments, if any, required to fully pay the bonds. The bonded
indebtedness which was authorized and outstanding as of June 30, 2000, was
$3,790,569,598. The appropriation for the debt service obligation on outstanding
projected indebtedness is $530.0 million for Fiscal Year 2001.
D-2
153
New Jersey's general obligation bonds are rated Aa1 by Moody's, AA+ by
S&P and AA+ by Fitch. These ratings reflect the State's credit quality only, and
do not indicate the creditworthiness of other tax-exempt securities in which the
Fund may invest. Furthermore, it cannot be assumed that the State of New Jersey
will maintain its current credit ratings.
"Moral Obligation" Financing. The authorizing legislation for certain
State entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal of and interest on the
obligations, and a State appropriation in the amount of the deficiency is to be
made. However, the State Legislature is not legally bound to make such an
appropriation. Bonds issued pursuant to authorizing legislation of this type are
sometimes referred to as "moral obligation" bonds. There is no statutory
limitation on the amount of "moral obligation" bonds which may be issued by
eligible state entities. The amount of "moral obligation" bonded indebtedness
issued by State entities which was outstanding as of June 30, 2000, was
$709,391,414.75.
Obligations Guaranteed by the State. The New Jersey Sports and
Exposition Authority ("NJSEA") has issued State guaranteed bonds of which
$86,070,000 were outstanding as of June 30, 2000. To date, the NJSEA has not had
a revenue deficiency requiring the State to make debt service payments pursuant
to its guarantee. It is anticipated that the NJSEA's revenues will continue to
be sufficient to pay debt service on these bonds without recourse to the State's
guarantee.
Obligations Supported by State Revenue Subject to Annual Appropriation.
The State has entered into a number of lease purchase and other contracts
(collectively, the "Agreements") with several governmental authorities to secure
the financing of various State projects. Under the terms of the Agreements, the
State has agreed to make payments equal to the debt service on, and other costs
related to, the obligations sold to finance the projects. The State's obligation
to make payments under the Agreements is subject to and dependent upon annual
appropriations being made by the State Legislature for such purposes. The State
has no legal obligation to enact such appropriations, but has done so to date
for all such obligations.
The total amount of obligations supported by State lease purchase and
other contracts subject to annual appropriation outstanding as of June 30, 2000,
was $10,738,770,178.62.
NEW JERSEY TAX REVENUES
Sales and Use Tax. The revised estimate forecasts Sales and Use Tax
collections for Fiscal Year 2001 as $5,839.0 million, a 6.0% increase from
Fiscal Year 2000. The Fiscal Year 2002 estimate of $6,247.0 million is a 7.0%
increase from the Fiscal Year 2001.
Gross Income Tax. The revised estimate forecasts Gross Income Tax
collections for Fiscal Year 2001 as $8,310.0 million, a 15.3% increase from
Fiscal Year 2000. The Fiscal Year 2002 estimate of $8,916.0 million is a 7.3%
increase from the Fiscal Year 2001.
Corporation Business Tax. The revised estimate forecasts Corporation
Business Tax collections for Fiscal Year 2001 as $1,413.7 million, a 2.6%
increase from Fiscal Year 2000. The Fiscal Year 2002 estimate of $1,548.0
million is a 9.5% increase from Fiscal Year 2001.
General Considerations. Estimated receipts from State taxes and
revenues, including the three principal taxes set forth above, are forecasts
based on the best information available at the time of such forecasts. Changes
in economic activity in the State and the nation, consumption of durable goods,
corporate financial performance and other factors that are difficult to predict
may result in actual collections being more or less than forecasted.
D-3
154
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where sufficient revenues are on hand or anticipated,
as certified by the Governor, to meet such appropriation. In the past when
actual revenues have been less than the amount anticipated in the budget, the
Governor has exercised his or her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent.
SUMMARY OF STATE APPROPRIATIONS
Of the $23,153.4 million appropriated for Fiscal Year 2002 from various
State funds, $9,150.0 million (39.5%) is recommended for State Aid to Local
Governments, $7,395.3 million (31.9%) is recommended for Grants-in-Aid, $4,900.4
million (21.1%) is recommended for Direct State Services, $529.4 million (2.3%)
is recommended for Debt Service on State general obligation bonds and $1,177.3
million (5.1%) is recommended for Capital Construction.
STATE AID TO LOCAL GOVERNMENTS
State Aid to Local Governments is the largest portion of Fiscal Year
2002 appropriation. In Fiscal Year 2002, $9,150.0 million of the State's
proposed appropriations consist of funds which are distributed to
municipalities, counties and school districts.
The largest recommended State Aid appropriation, in the amount of
$7,451.0 million, is provided for local elementary and secondary education
programs. Of this amount, $3,077.7 million is for core curriculum standards;
$328.6 million is for early childhood aid; $439.8 million is Abbot v. Burke
Parity Remedy aid; $301.5 million is for pupil transportation aid; $895.5
million is for special education; $97.0 million is for nonpublic school aid and
$154.3 million is for debt service on school bonds. Other significant amounts
are $253.1 million for supplemental core curriculum standards aid and $197.5
million for demonstrably effective program aid. In addition, $904.0 million is
appropriated on behalf of school districts as the employers' share of the social
security and teachers' pensions and benefit programs.
Recommended appropriations to the Department of Community Affairs
("DCA") total $994.3 million in State Aid monies for Fiscal Year 2002.
Consolidated Municipal Property Tax Relief Aid is recommended in the amount of
$818.5 million. In addition, there is $17.4 million recommended for housing
programs, $33.8 million for the municipal block grant program, and $25.0 million
for extraordinary aid.
Appropriations recommended for the Department of the Treasury total
$496.9 million in State Aid monies for Fiscal Year 2002. The principal programs
funded by these appropriations are aid to county colleges ($203.9 million); the
cost of senior citizens, disabled and veterans property tax deductions and
exemptions ($92.0 million); $54.0 million for debt service for county
investments in solid waste management facilities, and $13.1 million for business
personal property tax depreciation adjustment. Also, $182.0 million is
recommended for school renovations and construction funded by a portion of the
increased cigarette tax ($50.0 million), lottery proceeds ($62.0 million),
Tobacco Settlement Funds ($65.5 million) and earnings on the Fund for Free
Public Schools ($4.5 million).
GRANTS-IN-AID
The second largest portion of appropriations in Fiscal Year 2002 is for
grants-in-aid. These represent payments to individuals or public or private
agencies for benefits to which a recipient is entitled to by law, or for the
provision of services on behalf of the State, including medical services under
D-4
155
Medicaid, programs for the developmentally disabled and mentally ill, other
medical programs, pharmaceutical assistance, the homestead rebate program, bus
and railroad subsidies, higher education building programs and prison building
programs.
DIRECT STATE SERVICES
The third largest portion of appropriations in Fiscal Year 2002 is
applied to Direct State Services which supports the operation of State
government's departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. These programs include medical support programs,
higher education assistance and transportation programs.
DEBT SERVICE
The State finances certain capital projects through the sale of general
obligation bonds of the State. These bonds are backed by the full faith and
credit of the State. Certain state tax revenues and certain other fees are
pledged to meet the principal payments, interest payments, and redemption
premium payments, if any, required to fully pay the bonds. The appropriation for
the debt service obligation on outstanding projected indebtedness is $29.4
million for Fiscal Year 2002. For additional information regarding debt service
payments, see "Appropriations" above.
CAPITAL CONSTRUCTION
In addition to payments from bond proceeds, capital construction can
also be funded by appropriation of current revenues on a pay-as-you-go basis. In
Fiscal Year 2002, the amount appropriated for this purpose is $1,177.3 million.
All appropriations for such capital projects and all proposals for
State bond authorization are subject to the review and recommendation of the New
Jersey Commission on Capital Budgeting and Planning. This permanent commission
was established in November 1975, and is charged with the preparation of the
State Capital Improvement Plan, which contains proposals for State spending for
capital projects.
BUDGET LIMITATIONS
The State Constitution provides, in part, that no money shall be drawn
from the State Treasury but for appropriations made by law and that no law
appropriating money for any State purpose shall be enacted if the appropriations
contained therein, together with all prior appropriations made for the same
fiscal period, shall exceed the total amount of the revenue on hand and
anticipated to be available to meet such appropriations during such fiscal
period, as certified by the Governor.
DEBT LIMITATIONS
The State Constitution further provides, in part, that the State
Legislature shall not, in any manner, create in any fiscal year a debt or
liability of the State, which, together with any previous debts or liabilities,
shall exceed at any time one percent of the total appropriations for such year,
unless the same shall be authorized by a law for some single object or work
distinctly specified therein, or shall have been approved by the voters.
STATE FINANCES
New Jersey's Accounting System. The State prepares its financial
statements on a "modified accrual" basis utilizing the fund method of
accounting, pursuant to which the State establishes funds that are segregated
for the purpose of carrying on specific activities or attaining certain
objectives in accordance with special regulations, restrictions or limitations.
D-5
156
The General Fund is the fund into which all State revenues, not
otherwise restricted by statute, are deposited and from which appropriations are
made. The largest part of the total financial operations of the State is
accounted for in the General Fund. Revenues received from taxes and unrestricted
by statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund. The Appropriations Act provides the basic
framework for the operation of the General Fund.
Special Revenue Funds are used to account for resources legally
restricted to expenditure for specified purposes. Debt Service Funds are used to
account for the accumulation of resources for, and the payment of, principal and
redemption premium, if any, and interest on general obligation bonds. Capital
Project Funds are used to account for financial resources to be used for the
acquisition or construction of major State capital facilities. Trust and Agency
Funds are used to account for assets held in a trust capacity or as an agent for
individuals, private organizations, other governments and/or other funds. The
General Fixed Asset Account Group accounts for the State's fixed assets acquired
or constructed for general governmental purposes. The General Long-Term Debt
Account Group accounts for the unmatured general long-term liabilities of the
State.
The Property Tax Relief Fund, the largest of the Special Revenue Funds,
is used to account for revenues from the New Jersey Gross Income Tax. Revenues
realized from the Gross Income Tax are dedicated by the State Constitution. All
receipts from taxes levied on personal income of individuals, estates and trusts
must be appropriated exclusively for the purpose of reducing or offsetting
property taxes. Annual appropriations are made from the fund, pursuant to
formulas established by the State Legislature, to counties, municipalities and
school districts.
New Jersey's Budget and Appropriation System. The State operates on a
fiscal year beginning July 1 and ending June 30.
Pursuant to Article VIII, Section II, par. 2 of the State Constitution,
no money may be drawn from the State Treasury except for appropriations made by
law. In addition, all monies for the support of State government and all other
State purposes, as far as can be ascertained or reasonably foreseen, must be
provided for in one general appropriation law covering one and the same fiscal
year. No general appropriations law or other law appropriating money for any
State purpose shall be enacted if the amount of money appropriated therein,
together with all other prior appropriations made for the same fiscal year,
exceeds the total amount of revenue on hand and anticipated to be available for
such fiscal year, as certified by the Governor.
In addition to the Constitutional provisions, the New Jersey Statutes
contain provisions concerning the budget and appropriation system. On or before
October 1 in each year, each Department, Board, Commission, Office or other
Agency of the State must file with the Budget Director a request for
appropriation or permission to spend specifying all expenditures proposed to be
made by such spending agency during the following fiscal year. The Budget
Director then examines each request and determines the necessity or advisability
of the appropriation request. The Budget Director may hold hearings, open to the
public, during the months of October, November and December and reviews the
budget requests with the agency heads. On or before December 31 of each year or
such other time as the Governor may request, after review and examination, the
Budget Director submits the requests, together with his or her findings,
comments and recommendations, to the Governor. It is then the responsibility of
the Governor to examine and consider all requests and formulate his or her
budget recommendations.
The Governor's budget message is then transmitted on or before the
third Tuesday following the first meeting of the State Legislature in each year
except in the year when a Governor is inaugurated, when it must be transmitted
on or before February 15. The Governor's budget message must embody the proposed
complete financial program of the State government for the next ensuing fiscal
year and must set forth in detail each source of anticipated revenue and the
purposes of recommended expenditures for each spending agency (N.J.S.A.
52:27B-20). After a process of legislative committee review (including
D-6
157
testimony from the State Treasurer), the budget, in the form of an
appropriations bill, must be approved by the Senate and Assembly and must be
submitted to the Governor for review. Upon such submissions, the Governor may
approve the bill, revise the estimate of anticipated revenues contained therein,
delete or reduce appropriation items contained in the bill through the exercise
of his or her line-item veto power, or veto the bill in its entirety. Like any
gubernatorial veto, such action may be reversed by a two-thirds vote of each
House of the State Legislature. In addition to anticipated revenues, the
Appropriations Act also provides for the appropriation of non-budgeted revenue
to the extent such revenue may be received and permits the corresponding
increase of appropriation balances from which expenditures may be made.
REVENUE BONDS
The State has created a number of State agencies and authorities that
have bond issuing capacity. The purposes for which obligations may be issued by
such agencies and authorities include (i) economic development, (ii)
acquisition, construction, renovation, and rehabilitation of various State
office buildings, historic buildings and correctional facilities, (iii) grants
to the State's public and private institutions of higher education for the
development, construction and improvement of instructional, laboratory,
communication, technology and research facilities, (iv) development of the
State's sports and exposition potential, (v) improvement of the State's
transportation system, (vi) preservation of open space, farmland, and historic
properties, (vii) acquisition of equipment, services and real property to be
used by various State agencies and departments, (viii) construction and
renovation of school facilities by local school districts within the State, (ix)
construction of county college facilities, and (x) aid to non-profit community
mental health service providers.
The payment of principal and interest on obligations issued by these
State agencies and authorities are generally payable from the revenues derived
from the operations of the facilities financed with the proceeds of such bonds
(such as toll road authorities, ports, airports, sports facilities) or from the
revenues derived from private companies that receive the proceeds of such bonds
(such as hospitals, colleges and universities and small manufacturing
businesses). Under these circumstances, the ability of the agencies and
authorities to pay debt service on the bonds is dependent upon the ability to
operate the facilities in a manner necessary to produce sufficient revenues or
to receive sufficient amounts from the private enterprises that are the
beneficiaries of the bonds.
Under certain circumstances, agencies and authorities may enter into an
Agreement with the State to secure financings. See "BONDED INDEBTEDNESS OF THE
STATE -- Obligations Supported by State Revenue Subject to Annual
Appropriations" above.
LOCAL BOND LAW
The New Jersey Local Bond Law (N.J.S. Section 40A:2-1 et seq.) governs
the issuance of bonds and notes by local units (including counties) for
financing improvements. The statute provides that (i) the power and obligation
to pay any and all bonds and notes issued pursuant to the Local Bond Law shall
be unlimited; (ii) the county or municipality shall levy ad valorem taxes upon
all taxable property therein for the payment of the principal of and interest on
such bonds and notes, without limitation as to rate or amount; (iii) the
proceeds shall be used essentially for capital projects having useful lives of
not less than five years; and (iv) after issuance, all bonds and notes shall be
conclusively presumed to be fully authorized and issued under all of the laws of
the State, after an estoppel period, and not subject to suit as to legality.
Debt Limits. The debt of any county or municipality is limited by the
Local Bond Law to an amount equal to 2% and 3.5%, respectively, of its equalized
valuation basis. The equalized valuation basis of the county or municipality is
set by statute as the average value of all taxable real property and
improvements within its boundaries as annually determined by the State Board of
Taxation for each of the
D-7
158
three most recent years. Certain categories of debt are permitted by statute to
be deducted for purposes of computing the statutory debt limit.
The debt limit of any county or municipality may be exceeded with the
approval of the Local Finance Board, which is a State run entity. If all or any
part of a proposed debt authorization would exceed its debt limit, any county or
municipality must apply to the Local Finance Board for an extension of credit.
If the Local Finance Board determines that a proposed debt authorization would
materially impair the ability of any county or municipality to meet its
obligations or to provide essential services, approval is denied.
Any county or municipality must report all new authorizations of debt
or changes in previously authorized debt to the Division of Local Government
Services. Through annual and supplemental debt statements, the Division monitors
all local borrowing. Even though a county or municipality's authorizations are
within its debt limits, the Division is able to enforce state regulations as to
the amounts and purposes for local borrowing.
SCHOOL BONDS
School Debt Subject to Voter Approval. State law permits a local school
district, upon approval of the voters to authorize school district debt, up to
its applicable debt limit, which is calculated as a percentage of the equalized
valuation basis. If such debt is in excess of the school district debt limit,
the excess is then applied to the three and one-half percent debt limit of the
municipality. When this calculation results in the municipality exceeding its
three and one-half percent debt limit, the State Commissioner of Education and
the Local Finance Board must approve the proposed debt authorization before it
is submitted to the voters.
Each local board of education annually prepares an operating and
maintenance capital outlay and debt service budget. The amounts to be raised by
taxation for operating and maintenance expenses and capital outlay projects are
submitted to the voters for approval. School operations are based on a July 1
through June 30 fiscal year and are accounted for in the current fund of the
local board of education. Taxes for school purposes are raised on a calendar
year basis.
State law limits the annual increase of any district's net current
expense budget. The Commissioner may grant a higher level of increase if he
determines that the sums provided by the district's budget would be insufficient
to meet the district's identified goals and needs, or that an anticipated
enrollment increase requires additional funds. The Commissioner also reviews
every proposed annual school district budget, and examines each appropriation or
capital outlay against the district's identified goals and needs; if in his or
her view they are insufficient, he or she may order remedial action or order a
change in the district's budget. Every local board of education is required by
State law to provide an annual audit of the district's accounts and financial
transactions.
QUALIFIED BONDS
Whenever a local board of education or the governing body of a
municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, also with
the Commissioner of Education, to qualify bonds pursuant to the Acts. Upon
approval of such application, the State Treasurer shall withhold from certain
State revenues or other State aid payable to the municipalities, or from State
school aid payable to the school district, an amount sufficient to pay debt
service on such bonds. These qualified bonds are not direct, guaranteed or moral
obligations of the State, and debt service on such bonds will be paid by the
State only to the extent that the State aid or State school aid has been
appropriated by the State Legislature. As of June 30, 2000, the aggregate
amounts of school district and municipal qualified bonds outstanding were
$313,045,900 and $815,082,461, respectively.
D-8
159
LITIGATION
A lawsuit was filed on December 28, 2000, in the Superior Court of
Bergen County (Lonegan v. State of New Jersey, Superior Court, Law Division,
Bergen County) challenging the constitutionality of laws permitting debt to be
issued and secured by Agreements. The plaintiffs sought a judgment declaring the
Act unconstitutional under the State Constitution. The plaintiffs alleged that
the issuance of bonds contemplated by such laws involved the issuance of state
debt without prior voter approval, in violation of the Debt Limitation Clause of
the State Constitution. Based upon prior holdings of the New Jersey Supreme
Court, the Superior Court held that the issuance of bonds by an independent
agency, coupled with explicit statutory language disclaiming any obligation or
liability on the part of the State regarding payment of the bonds so issued,
precludes the application of the Debt Limitation Clause, since no debt of the
State is created. On January 24, 2001, the Superior Court entered an order
dismissing this complaint with prejudice.
In February 2001, the plaintiffs filed a Notice of Appeal with the
Superior Court, Appellate Division and moved before the Superior Court, Bergen
County for a stay pending appeal. It is not known whether the appeal will be
successful. If the plaintiffs are successful, it could have a negative impact on
obligations secured by Agreements that are subject to appropriation.
NEW JERSEY TAX MATTERS
The Fund is designed to provide tax benefits to investors who are
residents of New Jersey. See "The Fund." Reference in this Prospectus and
Statement of Additional Information to New Jersey income tax shall mean the New
Jersey Gross Income Tax. The tax treatment of New Jersey corporate shareholders
differs. Corporate shareholders are urged to consult their tax advisors.
The following is based upon the advice of Riker, Danzig, Scherer,
Hyland & Perretti, LLP, special New Jersey counsel to the Fund.
The following is a general, abbreviated summary of certain provisions
of the applicable New Jersey tax law as presently in effect as it directly
governs the taxation of New Jersey resident individual shareholders of the Fund.
This summary does not address the taxation of other shareholders nor does it
discuss any local taxes that may be applicable. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to the Fund's transactions.
The following is based on the assumptions that the Fund (i) will at all
times qualify under Subtitle A, Chapter 1, Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), as a regulated investment company and at
all times meet the requirements of Subtitle A, Chapter 1, Subchapter M of the
Code, (ii) at all times has made and shall maintain in effect all necessary
elections to be a regulated investment company, (iii) will at all times satisfy
all the conditions which will cause distributions of the Fund to qualify as
exempt-interest dividends to shareholders, (iv) will at all times satisfy the
requirements of Section 852(a) of the Code and (v) will distribute all interest,
dividends and gains it receives to the Fund's shareholders.
The following is also based on the assumptions that the Fund (i) at all
times has no investments other than interest-bearing obligations, obligations
issued at a discount, and cash and cash items, including receivables, and
financial options, futures, forward contracts, or other similar financial
instruments related to interest bearing obligations, obligations issued at a
discount or bond indices related thereto; (ii) at all times has not less than
80% of the aggregate principal amount of all of its investments, excluding
financial options, futures, forward contracts or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indices related thereto to the extent such instruments are
authorized by Section 851(b) of the Code, cash and cash items, which cash items
shall include receivables, in obligations issued by or on behalf of the State of
New Jersey or any county,
D-9
160
municipality, school or other district, agency, authority, commission,
instrumentality, public corporation, body corporate and politic or political
subdivision of the State of New Jersey or those obligations which are
statutorily free from State or local taxation under any act of New Jersey or
under the laws of the United States; (iii) complies with all applicable
certification, disclosure and reporting requirements to the New Jersey Division
of Taxation and shareholders; (iv) at all times is an investment company or
trust registered with the Securities and Exchange Commission; and (v) at all
times is registered and regulated under the Investment Company Act of 1940, as
amended.
Distributions by the Fund attributable to interest or gain from
obligations of the State of New Jersey and its political subdivisions, and
agencies and instrumentalities thereof will not be subject to the New Jersey
Gross Income Tax. In addition, distributions by the Fund that are attributable
to interest or gain from obligations of the United States exempt from State
income tax under United States law will not be subject to the New Jersey Gross
Income Tax. All other distributions will be subject to the New Jersey Gross
Income Tax.
Net gain derived from the sale of shares of the Fund will not be
subject to the New Jersey Gross Income Tax. Losses from the sale of shares of
the Fund may not be able to be used to offset other New Jersey gains.
Shares of the Fund may be subject to New Jersey death taxes if owned by
a New Jersey decedent at the time of death.
Distributions by the Fund and gains on the sale of shares of the Fund
will generally be subject to the New Jersey Corporation Business Tax. Corporate
shareholders are urged to consult their tax advisors.
The Fund will be subject to the New Jersey Corporation Business Tax
only if it has sufficient nexus with New Jersey for purposes of the New Jersey
Corporation Business Tax. If it is subject to the New Jersey Corporation
Business Tax, it does not expect to pay a material amount of such tax.
Shareholders are advised to consult with their own tax advisors for
more detailed information concerning New Jersey State and local tax matters.
D-10