Pre-Effective Amendment to Registration Statement of a Closed-End Investment Company — Form N-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-2/A Nuveen Municipal High Income Opportunity Fund 118 547K
2: EX-99.G Investment Management Agreement Betweeen 6 16K
Registrant and Nuveen
3: EX-99.H.1 Underwriting Agreement 56 132K
4: EX-99.H.2 A.G. Edwards & Sons, Inc. Master Selected Dealer 6 22K
Agreement
5: EX-99.H.3 Nuveen Master Selected Dealer Agreement 6 24K
6: EX-99.H.4 A.G. Edwards & Sons, Inc. Master Agreement Among 23 85K
Underwriters
7: EX-99.H.5 Dealer Letter Agreement 3 11K
8: EX-99.J Master Custodian Agreement 51 164K
9: EX-99.K.1 Shareholder Transfer Agency and Service Agreement 23 80K
10: EX-99.K.2 Expense Reimbursement Agreement 3 12K
11: EX-99.L.3 Consent of Bell, Boyd & Lloyd LLC 1 8K
12: EX-99.L.4 Consent of Bingham McCutchen LLP 1 9K
13: EX-99.N Consent of Ernst & Young 1 8K
14: EX-99.P Subscription Agreement 3 12K
15: EX-99.S Powers of Attorney 12 43K
N-2/A — Nuveen Municipal High Income Opportunity Fund
Document Table of Contents
As filed with the Securities and Exchange Commission on November 18, 2003
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1933 Act File No. 333-109801
1940 Act File No. 811-21449
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 3
[ ] Post-Effective Amendment No. _
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 3
Nuveen Municipal High Income Opportunity Fund
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
Jessica R. Droeger
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Stacy H. Winick Eric F. Fess Thomas A. Hale
Bell, Boyd & Lloyd LLC Chapman and Cutler LLP Skadden, Arps, Slate, Meagher
70 W. Madison St. 111 W. Monroe & Flom (Illinois)
Chicago, IL 60602 Chicago, IL 60603 333 W. Wacker Dr.
Chicago, IL 60606
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
--------------------
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
[Enlarge/Download Table]
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Proposed Maximum
Title of Securities Being Amount Proposed Maximum Aggregate Offering Amount of
Registered Being Registered Offering Price Per Unit Price (1) Registration Fee (2)
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Common Shares, $0.01 par value 23,500,000 Shares $15.00 $352,500,000 $28,517.25
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) $4,854 of which has already been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated November , 2003
PROSPECTUS
[LOGO] Nuveen Logo
Common Shares
Nuveen Municipal High Income Opportunity Fund
$15.00 per share
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Investment Objectives. Nuveen Municipal High Income Opportunity Fund is a
newly organized, diversified, closed-end management investment company.
. The Fund's primary investment objective is to provide high current income
exempt from regular federal income tax.
. The Fund's secondary investment objective is to seek attractive total
return consistent with its primary objective.
No Prior History. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering.
(continued on following page)
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Investing in common shares involves certain risks. See "Risks" beginning on
page 24.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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[Download Table]
Per Share Total (3)
--------- ---------
Public Offering Price $15.000 $
Sales Load/(1)/ $ 0.675 $
Estimated Offering Expenses/(2)/ $ 0.030 $
Proceeds to the Fund $14.295 $
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(1)Certain underwriters that may also participate in any future offering of
preferred shares of the Fund may receive additional compensation in that
offering based on their participation in this offering. See "Underwriting."
(2)Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $ . Nuveen Investments,
LLC has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
(3)The Fund has granted the underwriters an option to purchase up to
additional common shares at the Public Offering Price less the Sales Load,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Public Offering Price, Sales Load, Estimated Offering
Expenses and Proceeds to the Fund will be $ , $ , $ and
$ , respectively. See "Underwriting."
The underwriters expect to deliver the common shares to purchasers on or
about , 2003.
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[Download Table]
A.G. Edwards & Sons, Inc. Wachovia Securities Nuveen Investments, LLC
Legg Mason Wood Walker Oppenheimer Quick & Reilly, Inc.
Incorporated
RBC Capital Markets TD Waterhouse
Prospectus dated , 2003
Portfolio Contents. Under normal circumstances, the Fund will invest its
Managed Assets (as defined on page 3 of the Prospectus) in a portfolio of
municipal securities that pay interest that is exempt from regular federal
income tax. Under normal circumstances, the Fund expects to be fully invested
in such tax-exempt municipal securities. Up to 30% of the Fund's Managed Assets
may be invested in municipal securities that pay interest that is taxable under
the federal alternative minimum tax applicable to individuals. The Fund will
invest at least 50% of its Managed Assets in municipal securities that at the
time of investment are investment grade quality. A security is considered
investment grade quality if it is rated within the four highest grades by all
nationally recognized statistical rating organizations that rate such security,
or if it is unrated but judged to be of comparable quality by the Fund's
investment adviser. The Fund may invest up to 50% of its Managed Assets in
municipal securities that at the time of investment are rated below investment
grade quality or that are unrated but judged to be of comparable quality by the
Fund's investment adviser. No more than 5% of the Fund's Managed Assets may be
invested in municipal securities rated below B-/B3 or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Municipal
securities 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 achieve its investment objectives.
The common shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The trading or "ticker" symbol of the
common shares is "NMZ."
You should read this Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated , 2003 and as it may
be supplemented, containing additional information about the Fund, has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. You may request a free copy of
the Statement of Additional Information, the table of contents of which is on
page 46 of this Prospectus, by calling (800) 257-8787 or by writing to the
Fund, or you may obtain a copy (and other information regarding the Fund) from
the Securities and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
ii
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this Prospectus and in the Statement of Additional
Information to understand the offering fully.
The Fund.............. Nuveen Municipal High Income Opportunity Fund (the
"Fund") is a newly organized, diversified, closed-end
management investment company. See "The Fund."
The Offering.......... The Fund is offering common shares of
beneficial interest at $15.00 per share through a group
of underwriters (the "Underwriters") led by A.G.
Edwards & Sons, Inc.; Wachovia Capital Markets, LLC;
Nuveen Investments, LLC ("Nuveen"); Legg Mason Wood
Walker, Incorporated; Oppenheimer & Co. Inc.; Quick &
Reilly, Inc., A FleetBoston Financial Company; RBC Dain
Rauscher, Inc. and TD Waterhouse Investor Services,
Inc. The common shares of beneficial interest are
called "Common Shares" in the rest of this Prospectus.
You must purchase at least 100 Common Shares in this
offering. The Fund has given the Underwriters an option
to purchase up to additional Common Shares to
cover orders in excess of Common Shares. See
"Underwriting." Nuveen has agreed to pay (i) all
organizational expenses and (ii) offering costs (other
than sales load) that exceed $0.03 per Common Share.
Investment Objectives. The Fund's primary investment objective is to provide
high current income exempt from regular federal income
tax. The Fund's secondary investment objective is to
seek attractive total return consistent with its
primary objective. The Fund seeks to achieve its
investment objectives by investing in municipal
securities that its investment adviser believes are
underrated and undervalued. The Fund cannot assure you
that it will achieve its investment objectives. See
"The Fund's Investments" and "Risks."
Under normal circumstances, the Fund will invest its
Managed Assets in a portfolio of municipal securities
that pay interest that is exempt from regular federal
income tax. Under normal circumstances, the Fund
expects to be fully invested in such tax-exempt
municipal securities. Up to 30% of the Fund's Managed
Assets may be invested in municipal securities that pay
interest that is taxable under the federal alternative
minimum tax applicable to individuals.
. The Fund will invest at least 50% of its
Managed Assets in municipal securities that at
the time of investment are investment grade
quality. A security is considered investment
grade quality if it is rated within the four
highest grades (Baa or BBB or better by Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation, a division of The McGraw
Hill Companies ("S&P") or Fitch Ratings
("Fitch"))
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by all nationally recognized statistical rating
organizations (each a "NRSRO") that rate such
security, or if it is unrated but judged to be
of comparable quality by the Fund's investment
adviser.
. The Fund may invest up to 50% of its Managed
Assets in municipal securities that, at the
time of investment, are rated below investment
grade or that are unrated but judged to be of
comparable quality by the Fund's investment
adviser. Below investment grade quality
municipal securities include those municipal
securities that are rated investment grade by
one or more NRSROs but rated below investment
grade by at least one NRSRO. No more than 5% of
the Fund's Managed Assets may be invested in
municipal securities rated below B-/B3 or that
are unrated but judged to be of comparable
quality by Nuveen Advisory (as defined below).
This means that the Fund may invest in
municipal securities that are involved in
bankruptcy or insolvency proceedings or are
experiencing other financial difficulties at
the time of acquisition (such securities are
commonly referred to as distressed securities).
. The Fund anticipates that, upon the full
investment of the net proceeds from this
offering (which is expected to occur within two
to three months following the closing of this
offering), it will have invested approximately
55% to 65% of its Managed Assets in investment
grade municipal securities and approximately
35% to 45% of its Managed Assets in below
investment grade municipal securities. The
relative percentages of the value of the Fund's
Managed Assets attributable to investment grade
municipal securities and to below investment
grade municipal securities could change over
time as a result of rebalancing the Fund's
assets by Nuveen Advisory, market value
fluctuations and other events.
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" and
"Risks--Credit and Below Investment Grade Risk."
The Fund may invest in municipal securities in the form
of notes, which are generally used to provide for
short-term capital needs in anticipation of an issuer's
receipt of other revenues or financing, and typically
have maturities of up to three years. Such instruments
may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and
revenue anticipation notes and construction
2
loan notes. In addition, the Fund may invest in
municipal leases, certificates of participation and
"moral obligation" bonds. The Fund also may invest in
municipal securities in the form of tender option
bonds. The Fund will not 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, in effect, a leveraged investment in an
underlying municipal security. See "The Fund's
Investments."
The Fund's assets, including assets attributable to any
MuniPreferred(R) Shares (as defined below) that may be
outstanding, are called "Managed Assets."
Special Tax
Considerations........ The Fund may invest up to 30% of its Managed Assets in
municipal securities that pay interest that is taxable
under the federal alternative minimum tax applicable to
individuals. 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. In addition, distributions of
ordinary taxable income (including any net short-term
capital gain) will be taxable to shareholders as
ordinary income (and not eligible for favorable
taxation as "qualified dividend income"), and capital
gain dividends will be subject to capital gains taxes.
See "Tax Matters."
Proposed Offering of
MuniPreferred(R) Shares Subject to market conditions, approximately one and
one-half to two months after completion of this
offering, the Fund intends to offer preferred shares of
beneficial interest ("MuniPreferred Shares")
representing approximately 32% of the Fund's capital
after their issuance. The issuance of MuniPreferred
Shares will leverage your investment in Common Shares.
Leverage involves special risks. There is no assurance
that the Fund will issue MuniPreferred Shares or that,
if issued, the Fund's leveraging strategy will be
successful. See "Risks--Leverage Risk." The money the
Fund obtains by selling the MuniPreferred Shares will
be invested in long-term municipal securities, which
generally will pay fixed rates of interest over the
life of the security. The MuniPreferred Shares will pay
dividends at rates determined over short- or
intermediate-term periods (ranging from seven days to
up to five years) by providing for periodic
redetermination of the dividend through an auction or
remarketing procedure. So long as the rate of return,
net of applicable Fund expenses, on the long-term bonds
purchased by the Fund exceeds MuniPreferred Share
dividend rates as reset periodically, the investment of
the proceeds of the MuniPreferred Shares will generate
more income than will be needed to pay dividends on the
MuniPreferred Shares. If so, the excess will be used to
pay higher
3
dividends to holders of Common Shares ("Common
Shareholders"). However, the Fund cannot assure you
that the issuance of MuniPreferred Shares will result
in a higher yield on your Common Shares. Once
MuniPreferred Shares are issued, the net asset value
and market price of the Common Shares and the yield to
Common Shareholders will be more volatile. Short- and
intermediate-term interest rates are currently near
historically low levels. In order to seek to reduce the
impact on Common Share net income resulting from
increases in MuniPreferred Share dividend rates that
are based on short-term interest rates, the Fund
intends that, if market conditions are deemed
favorable, a substantial portion of the MuniPreferred
Shares will be initially issued with fixed rate
dividends based on intermediate-term interest rates of
between one and five years (which dividend rates would
be redetermined at the end of each such initial
period). The initial fixed-rate dividends are expected
to be higher than initial short-term floating rate
dividends. See "MuniPreferred Shares and Leverage" and
"Description of Shares--MuniPreferred Shares."
Investment Adviser.... Nuveen Advisory Corp. ("Nuveen Advisory") will be the
Fund's investment adviser. Nuveen Advisory will receive
an annual fee, payable monthly, in a maximum amount
equal to 0.75% of the Fund's average daily Managed
Assets (as previously defined, Managed Assets include
assets attributable to any MuniPreferred Shares that
may be outstanding), with lower fee levels for assets
that exceed $125 million. Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and
expenses in the amount of 0.32% of average daily
Managed Assets of the Fund for the first five full
years of the Fund's operations (through November 30 ,
2008), and for a declining amount for an additional
three years (through November 30, 2011). Nuveen
Advisory is a wholly owned subsidiary of Nuveen
Investments, Inc. See "Management of the Fund."
Distributions......... Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions to
Common Shareholders at a level rate (stated in terms of
a fixed cents per Common Share dividend rate) based on
the projected performance of the Fund. The Fund's
ability to maintain a level Common Share dividend rate
will depend on a number of factors, including dividends
payable on the MuniPreferred Shares. As portfolio and
market conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of its
net investment income (after it pays accrued dividends
on any outstanding MuniPreferred Shares). In addition,
the Fund intends to distribute, at least annually, the
net capital gain and taxable ordinary income, if any,
to Common Shareholders so long as the net capital gain
and taxable ordinary income are not necessary to pay
accrued dividends on, or redeem or liquidate, any
4
MuniPreferred Shares. Your initial distribution is
expected to be declared approximately 50 days, and paid
approximately 60 to 90 days, from the completion of
this offering, depending on market conditions. You may
elect to reinvest automatically some or all of your
distributions in additional Common Shares under the
Fund's Dividend Reinvestment Plan. See "Distributions"
and "Dividend Reinvestment Plan."
Listing............... The Common Shares have been approved for listing on the
American Stock Exchange subject to notice of issuance.
See "Description of Shares--Common Shares." The trading
or "ticker" symbol of the Common Shares is "NMZ."
Because of this exchange listing, the Fund may
sometimes be referred to in public communications as a
"closed-end exchange-traded fund" or an
"exchange-traded fund."
Custodian............. State Street Bank and Trust Company will serve as
custodian of the Fund's assets. See "Custodian and
Transfer Agent."
Market Discount
From Net Asset Value.. Shares of closed-end investment companies frequently
trade at prices lower than net asset value. Shares of
closed-end investment companies like the Fund have
during some periods traded at prices higher than net
asset value and have during other periods traded at
prices lower than net asset value. The Fund cannot
assure you that Common Shares will trade at a price
higher than net asset value in the future. Net asset
value will be reduced immediately following the
offering by the sales load and the amount of
organization and offering expenses paid by the Fund.
See "Use of Proceeds." In addition to net asset value,
market price may be affected by such factors as
dividend levels (which are in turn affected by
expenses), call protection, dividend stability,
portfolio credit quality and liquidity and market
supply and demand. See "MuniPreferred Shares and
Leverage," "Risks," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to Open-End
Fund" and the Statement of Additional Information under
"Repurchase of Fund Shares; Conversion to Open-End
Fund." The Common Shares are designed primarily for
long-term investors, and you should not view the Fund
as a vehicle for trading purposes.
Special Risk
Considerations........ No Operating History. The Fund is a newly organized,
diversified, closed-end management investment company
with no history of operations.
Credit and Below Investment Grade Risk. Credit risk is
the risk that one or more municipal securities in the
Fund's portfolio will decline in price, or the issuer
thereof will fail to pay interest or principal when
due, because the issuer experiences a decline in its
financial status. The Fund may invest up to 50%
(measured at the time of investment) of its Managed
Assets in municipal securities that are rated below
investment
5
grade or that are unrated but judged to be of
comparable quality by Nuveen Advisory; provided, that
no more than 5% of the Fund's Managed Assets may be
invested in municipal securities rated below B-/B3 or
that are unrated but judged to be of comparable quality
by Nuveen Advisory. This means that the Fund may invest
in municipal securities that are involved in bankruptcy
or insolvency proceedings or are experiencing other
financial difficulties at the time of acquisition (such
securities are commonly referred to as distressed
securities). Municipal securities of below investment
grade quality are predominately speculative with
respect to the issuer's capacity to pay interest and
repay principal when due, and are susceptible to
default or decline in market value due to adverse
economic and business developments. The market values
for municipal securities of below investment grade
quality tend to be volatile, and these securities are
less liquid than investment grade municipal securities.
For these reasons, an investment in the Fund is subject
to the following specific risks:
. increased price sensitivity resulting from
changing interest rates and/or a deteriorating
economic environment;
. greater risk of loss due to default or
declining credit quality;
. adverse issuer specific events that are more
likely to render the issuer unable to make
interest and/or principal payments; and
. the possibility that a negative perception of
the below investment grade market develops,
resulting in the price and liquidity of below
investment grade securities becoming depressed,
and this negative perception could last for a
significant period of time.
Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a below investment
grade issuer to make principal payments and interest
payments compared to an investment grade issuer. The
principal amount of below investment grade securities
outstanding has proliferated in the past decade as an
increasing number of issuers have used below investment
grade securities for financing. An economic downturn
could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay
their obligations upon maturity.
The secondary market for below investment grade
securities may not be as liquid as the secondary market
for more highly rated securities, a factor that may
have an adverse effect on the Fund's ability to dispose
of a particular security. There are fewer dealers in
the market for below investment grade municipal
securities than in the market for investment grade
municipal securities. The prices quoted by different
dealers may vary significantly, and the spread between
the bid and ask price is
6
generally much larger for below investment grade
municipal securities than for higher quality
instruments. Under adverse market or economic
conditions, the secondary market for below investment
grade securities could contract further, independent of
any specific adverse changes in the condition of a
particular issuer, and these instruments may become
illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to
sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the
sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used
in calculating the Fund's net asset value.
Issuers of distressed securities may be in transition,
out of favor, financially leveraged or troubled, or
potentially troubled, and may be or have recently been
involved in major strategic actions, restructurings,
bankruptcy, reorganization or liquidation. These
characteristics of these companies can cause their
securities to be particularly risky, although they also
may offer the potential for high returns. These
companies' securities may be considered speculative,
and the ability of the companies to pay their debts on
schedule could be affected by adverse interest rate
movements, changes in the general economic climate,
economic factors affecting a particular industry or
specific developments within the companies. Distressed
securities frequently do not produce income while they
are outstanding and may require the Fund to bear
certain extraordinary expenses in order to protect and
recover its investment. See "Risks--Credit and Below
Investment Grade Risk."
Interest Rate Risk. Generally, when market interest
rates rise, bond prices fall, and vice versa. Interest
rate risk is the risk that the municipal securities in
the Fund's portfolio will decline in value because of
increases in market interest rates. In typical market
interest rate environments, the prices of longer-term
municipal securities generally fluctuate more than
prices of shorter-term municipal securities as interest
rates change. Because the values of lower-rated and
comparable unrated debt securities are affected both by
credit risk and interest rate risk, the price movements
of such lower grade securities in response to changes
in interest rates are not typically highly correlated
to the fluctuations of the prices of investment grade
quality securities in response to such changes in
interest rates. Because the Fund will invest primarily
in long-term municipal securities, the Common Share net
asset value and market price per share will fluctuate
more in response to changes in market interest rates
than if the Fund invested primarily in shorter-term
municipal securities. The Fund's use of leverage, as
described herein, will tend to increase Common Share
interest rate risk. See "Risks--Interest Rate Risk."
7
Municipal Securities Market Risk. The amount of public
information available about the municipal securities in
the Fund's portfolio is generally less than that for
corporate equities or bonds, and the investment
performance of the Fund may therefore be more dependent
on the analytical abilities of Nuveen Advisory than if
the Fund were a stock fund or taxable bond fund. The
secondary market for municipal securities, particularly
the below investment grade bonds in which the Fund may
invest, also tends to be less well-developed or liquid
than many other securities markets, which may adversely
affect the Fund's ability to sell its bonds at
attractive prices.
Reinvestment Risk. Reinvestment risk is the risk that
income from the Fund's portfolio will decline if and
when the Fund invests the proceeds from matured, traded
or called bonds at market interest rates that are below
the portfolio's current earnings rate. A decline in
income could affect the Common Shares' market price or
their overall returns.
Tax Risk. The value of the Fund's investments and its
net asset value may be adversely affected by changes in
tax rates and policies. Because interest income from
municipal securities is normally not subject to regular
federal income taxation, the attractiveness of
municipal securities in relation to other investment
alternatives is affected by changes in federal income
tax rates or changes in the tax-exempt status of
interest income from municipal securities. Any proposed
or actual changes in such rates or exempt status,
therefore, can significantly affect the demand for and
supply, liquidity and marketability of municipal
securities. This could in turn affect the Fund's net
asset value and ability to acquire and dispose of
municipal securities at desirable yield and price
levels. Additionally, the Fund is not a suitable
investment for individual retirement accounts, for
other tax-exempt or tax-deferred accounts or for
investors who are not sensitive to the federal tax
consequences of their investments.
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an opportunity
for increased Common Share net income and returns, but
also creates special risks for Common Shareholders.
There is no assurance that the Fund's leveraging
strategy will be successful. It is anticipated that
MuniPreferred dividends will be based on short-or
intermediate term municipal bond rates of return (which
would be redetermined periodically, pursuant to an
auction or remarketing process), and that the Fund will
invest the proceeds of the MuniPreferred Shares
offering in long-term, typically fixed rate, municipal
securities. The Fund presently intends that, if market
conditions are deemed favorable, a substantial portion
of the MuniPreferred Shares will be issued initially
with fixed rate dividends based on intermediate-term
rates of between one and five years (which dividend
rates would be redetermined at the end of each such
initial period). So long as the Fund's municipal bond
8
portfolio provides a higher rate of return (net of Fund
expenses) than the MuniPreferred dividend rate, as
reset periodically, the leverage will cause Common
Shareholders to receive a higher current rate of return
than if the Fund were not leveraged. If, however,
intermediate and/or short-term rates rise, the
MuniPreferred dividend rates, as they are redetermined
periodically, could exceed the rate of return on
long-term bonds held by the Fund that were acquired
during periods of generally lower interest rates,
reducing return to Common Shareholders. In addition,
the Fund will pay (and Common Shareholders will bear)
any costs and expenses relating to the issuance and
ongoing maintenance of the MuniPreferred Shares,
including, for example, distribution related expenses
in connection with the periodic remarketing or auctions
for MuniPreferred Shares with short-term dividend rate
periods (expected to be an annual rate of 0.25% of
MuniPreferred Share liquidation preference) and
placement or other distribution fees in connection with
MuniPreferred Shares with longer-term dividend rate
periods.
Leverage creates two major types of risks for Common
Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares,
because changes in the value of the Fund's bond
portfolio (including bonds bought with the
proceeds of the MuniPreferred Shares offering)
are borne entirely by the Common Shareholders;
and
. the possibility either that Common Share income
will fall if the MuniPreferred dividend rate
rises, or that Common Share income will
fluctuate because the MuniPreferred dividend
rate varies.
See "Risks--Leverage Risk."
Inflation Risk. Inflation risk is the risk that the
value of assets or income from investment will be worth
less in the future as inflation decreases the value of
money. As inflation increases, the real value of the
Common Shares and distributions can decline. In
addition, during any periods of rising inflation,
MuniPreferred Share dividend rates would likely
increase, which would tend to further reduce returns to
Common Shareholders.
Sector and Industry Risk. The Fund may invest in
municipal securities that are collateralized by the
proceeds from class action or other litigation against
the tobacco industry. Payment by tobacco industry
participants of such proceeds is spread over several
years, and the collection and distribution of such
proceeds to the issuers of municipal securities is
dependent upon the financial health of such tobacco
industry participants, which cannot be assured.
Additional litigation, government regulation or
prohibition on the sales of tobacco products, or the
seeking of protection under the bankruptcy laws by
companies in the tobacco industry, could adversely
affect the tobacco industry which,
9
in turn, could have an adverse affect on
tobacco-related municipal securities. The Fund
presently intends to limit its investment in tobacco
settlement bonds to no more than 10% of the Fund's
Managed Assets.
Subject to guidelines which may be imposed in
connection with the Fund's seeking an investment grade
rating on the MuniPreferred Shares, the Fund may invest
a significant portion of its Managed Assets in broad
segments of the municipal securities market, such as
revenue obligations of hospitals and other health care
facilities, special taxing districts, securities issued
to finance charter schools and other private
educational facilities, municipal utility securities,
industrial development bonds and other private activity
bonds. Subject to the availability of suitable
investment opportunities, Nuveen Advisory will attempt
to minimize the sensitivity of the Fund's portfolio to
credit and other risks associated with a particular
sector or industry. However, if the Fund invests a
significant portion of its Managed Assets in the
segments noted above, the Fund will be more susceptible
to economic, business, political, regulatory and other
developments generally affecting issuers in such
segments of the municipal securities market. See
"Risks--Sector and Industry Risk."
Special Risks Related to Certain Municipal Obligations.
The Fund may invest in municipal leases and
certificates of participation that involve special
risks because the issuer of those securities may not be
obligated to appropriate money annually to make
payments under the lease. Leases and installment
purchase or conditional sale contracts have evolved as
a means for governmental issuers to acquire property
and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. See
"Risks--Special Risks Related to Certain Municipal
Obligations."
Market Disruption Risk. Certain events have a
disruptive effect on the securities markets, such as
terrorist attacks (including the terrorist attacks in
the U.S. on September 11, 2001), war and other
geopolitical events. The Fund cannot predict the
effects of similar events in the future on the U.S.
economy. Below investment grade securities tend to be
more volatile than higher rated securities so that
these events and any actions resulting from them may
have a greater impact on the prices and volatility of
below investment grade securities than on higher rated
securities.
Anti-Takeover Provisions. The Fund's Declaration of
Trust (the "Declaration") includes provisions that
could limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund to
open-end status. The provisions of the Declaration
described above could have the effect of depriving the
Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market
price of the Common Shares. See "Certain Provisions in
the Declaration of Trust" and "Risks--Anti-Takeover
Provisions."
10
SUMMARY OF FUND EXPENSES
The Annual Expenses table below assumes the issuance of MuniPreferred Shares
in an amount equal to 32% of the Fund's capital (after their issuance), and
shows Fund expenses as a percentage of net assets attributable to Common Shares.
[Enlarge/Download Table]
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)..................... 4.50%
Offering Expenses Borne by the Fund (as a percentage of offering price)/(1)(2)/ 0.20%
Dividend Reinvestment Plan Fees................................................ None/(3)/
[Download Table]
Percentage of Net
Assets Attributable
to Common Shares/(4)/
--------------------
Annual Expenses
Management Fees.......................... 1.10%
Other Expenses........................... 0.22%
-----
Total Annual Expenses.................... 1.32%
Fee and Expense Reimbursement (Years 1-5) (0.47)%/(5)/
-----
Total Net Annual Expenses (Years 1-5).... 0.85%/(5)/
=====
--------
(1)Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per Common Share.
(2)If the Fund offers MuniPreferred Shares, costs of that offering, estimated
to be approximately 2.19% of the total amount of the MuniPreferred Share
offering, will effectively be borne by the Common Shareholders and result in
a reduction of the net asset value of the Common Shares. Assuming the
issuance of MuniPreferred Shares in an amount equal to 32% of the Fund's
total capital (after issuance), those offering costs are estimated to be
approximately $0.15 per Common Share (1.02% of the estimated proceeds from
the Fund's Common Share offering, after deducting offering costs).
(3)You will be charged a $2.50 service charge and pay brokerage charges if you
direct State Street Bank and Trust Company, as agent for the Common
Shareholders (the "Plan Agent") to sell your Common Shares held in a
dividend reinvestment account.
(4)Stated as percentages of net assets attributable to Common Shares. Assuming
no issuance of MuniPreferred Shares, the Fund's expenses would be estimated
to be as follows:
[Enlarge/Download Table]
Percentage of Net
Assets Attributable
to Common Shares
-------------------
Annual Expenses
Management Fees....................................................... 0.75%
Other Expenses........................................................ 0.15%
-----
Total Annual Expenses................................................. 0.90%
Fees and Expense Reimbursement (Years 1-5)............................ (0.32)%/(5)/
-----
Total Net Annual Expenses (Years 1-5)................................. 0.58%/(5)/
=====
11
(5)Nuveen Advisory has contractually agreed to reimburse the Fund for fees and
expenses in the amount of 0.32% of average daily Managed Assets for the
first 5 full years of the Fund's operations, 0.24% of average daily Managed
Assets in year 6, 0.16% in year 7 and 0.08% in year 8. Assuming the issuance
of MuniPreferred Shares in an amount equal to 32% of the Fund's total assets
(including the amount obtained from leverage) and calculated as a percentage
of net assets attributable to Common Shares, those amounts would be 0.47%
for the first 5 full years, 0.35% in year 6, 0.24% in year 7 and 0.12% in
year 8. Without the reimbursement, "Total Annual Expenses" would be
estimated to be 1.32% of average daily net assets attributable to Common
Shares (or, assuming no issuance of MuniPreferred Shares, 0.90% of average
daily net assets).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues approximately
20,000,000 Common Shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated
MuniPreferred Share offering costs assuming MuniPreferred Shares are issued
representing 32% of the Fund's total capital (after issuance) of $10) that you
would pay on a $1,000 investment in Common Shares, assuming (1) total net
annual expenses of 0.85% of net assets attributable to Common Shares in years 1
through 5, increasing to 1.32% in years 9 and 10 and (2) a 5% annual
return:/(1)/
1 Year 3 Years 5 Years 10 Years/(2)/
------ ------- ------- ------------
$65 $83 $101 $177
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
--------
(1)The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at Common Share net asset value. Actual expenses may be greater
or less than those assumed. Moreover, the Fund's actual rate of return may
be greater or less than the hypothetical 5% return shown in the example.
(2)Assumes reimbursement of fees and expenses of 0.24% of average daily Managed
Assets in year 6, 0.16% in year 7 and 0.08% in year 8. Nuveen Advisory has
not agreed to reimburse the Fund for any portion of its fees and expenses
beyond November 30, 2011. See footnote 5 above and "Management of the
Fund--Investment Management Agreement."
12
THE FUND
The Fund is a newly organized, diversified, closed-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund was organized as a Massachusetts business trust on
October 8, 2003, pursuant to a Declaration governed by the laws of the
Commonwealth of Massachusetts. As a newly organized entity, the Fund has no
operating history. The Fund's principal office is located at 333 West Wacker
Drive, Chicago, Illinois 60606, and its telephone number is (800) 257-8787.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the over-allotment option
in full) after payment of the estimated organization and offering costs. Nuveen
has agreed to pay (i) all organizational expenses and (ii) offering costs
(other than sales load) that exceed $0.03 per Common Share. 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 securities that meet those investment objectives and policies within
three months after the completion of the offering. Pending such investment, it
is anticipated that the proceeds will be invested in short-term, tax-exempt
securities in accordance with the Fund's investment policies.
THE FUND'S INVESTMENTS
Investment Objectives
The Fund's primary investment objective is to provide high current income
exempt from regular federal income tax. The Fund's secondary investment
objective is to seek attractive total return consistent with its primary
objective. Any capital appreciation realized by the Fund will generally result
in the distribution of taxable capital gains to Common Shareholders. The Fund
seeks to achieve its investment objectives by investing in municipal securities
that Nuveen Advisory believes are underrated and undervalued. The Fund cannot
assure you that it will achieve its investment objectives.
Investment Philosophy and Process
Investment Philosophy. Nuveen Advisory believes that the unique tax
treatment of municipal securities and the structural characteristics in the
municipal securities market create attractive opportunities to enhance the
after-tax total return and diversification of the investment portfolios of
taxable investors. Nuveen Advisory believes that these unique characteristics
also present unique risks that may be managed to realize the benefits of the
asset class.
After-Tax Income Potential: The primary source of total return from
municipal securities comes from the tax-exempt income derived therefrom.
Nuveen Advisory believes that, at acceptable levels of credit risk and
maturity principal risk, the municipal securities market offers the
potential for higher after-tax income when compared with other fixed income
markets.
Managing Multi-Faceted Risks: Risk in the municipal securities market is
derived from multiple sources, including credit risk at the issuer and
sector levels, structural risks such as call risk, yield curve risk, and
legislative and tax-related risks. Nuveen Advisory believes that managing
these risks at both the individual security and Fund portfolio levels is an
important element of realizing the after-tax income and total return
potential of the asset class.
13
Opportunities for Diversification: As of December 31, 2002, the municipal
securities market aggregated approximately $1.76 trillion, with over 50,000
issuers, and a wide array of financing purposes, security terms, offering
structures and credit quality. Nuveen Advisory believes that the size and
depth of the municipal securities market may facilitate the creation of a
diversified portfolio that reduces exposure to the risks of individual
issuers and may lower correlations to other credit and market risks within
an investor's overall portfolio.
Market Inefficiencies: Nuveen Advisory believes that the scale and
intricacy of the municipal securities market often results in pricing
anomalies and other inefficiencies that can be identified and capitalized on
through trading strategies.
Investment Process. Nuveen Advisory believes that a bottom-up,
value-oriented investment strategy that seeks to identify underrated and
undervalued securities and sectors is positioned to capture the opportunities
inherent in the municipal securities market and potentially outperform the
general municipal securities market over time. The primary elements of Nuveen
Advisory's investment process are:
Credit Analysis and Surveillance: Nuveen Advisory focuses on bottom-up,
fundamental analysis of municipal securities issuers. Analysts screen each
sector for issuers that meet the fundamental tests of creditworthiness and
favor those securities with demonstrable growth potential, solid coverage of
debt service and a priority lien on hard assets, dedicated revenue streams
or tax resources. As part of Nuveen Advisory's overall risk management
process, analysts actively monitor the credit quality of portfolio holdings.
Sector Analysis: Organized by sector, analysts continually assess the key
issues and trends affecting each sector in order to maintain a sector
outlook. Evaluating such factors as historical default rates and average
credit spreads within each sector, analysts provide top-down analysis that
supports decisions to overweight or underweight a given sector in a
portfolio.
Diversification: Nuveen Advisory seeks to invest in a large number of
sectors, states and specific issuers in order to help insulate a portfolio
from events that affect any individual industry, geographic location or
credit. Portfolio managers normally seek to limit exposure to individual
credits over the long-term. Portfolio managers also seek to diversify other
portfolio level risks, including exposure to calls, and to manage a
portfolio's interest rate sensitivity within tolerance bands relative to the
relevant benchmark.
Trading Strategies: Through its trading strategies, Nuveen Advisory seeks
to enhance portfolio value by trading to take advantage of inefficiencies
found in the municipal market. This may entail selling issues Nuveen
Advisory deems to be overvalued and purchasing issues Nuveen Advisory
considers to be undervalued.
Sell Discipline: Nuveen Advisory generally sells securities when it (i)
determines a security has become overvalued or over-rated, (ii) identifies
credit deterioration, or (iii) modifies a portfolio strategy, such as sector
allocation. Nuveen Advisory may also sell securities when such securities
exceed the portfolio's diversification targets.
Investment Policies
Under normal circumstances, the Fund will invest its Managed Assets in a
portfolio of municipal securities that pay interest that is exempt from regular
federal income tax. It is a fundamental policy of the Fund that its investment
in municipal securities paying interest that is exempt from regular federal
14
income tax will, under normal circumstances, comprise at least 80% of the
Fund's Managed Assets. Under normal circumstances, the Fund expects to be fully
invested (at least 95% of its Managed Assets) in such tax-exempt municipal
securities. Up to 30% of the Fund's Managed Assets may be invested in municipal
securities that pay interest that is taxable under the federal alternative
minimum tax applicable to individuals.
. The Fund will invest at least 50% of its Managed Assets in investment
grade quality municipal securities. A security is considered investment
grade quality if it is rated within the four highest grades (Baa or BBB or
better by Moody's, S&P or Fitch) by all NRSROs that rate such security, or
if it is unrated but judged to be of comparable quality by Nuveen Advisory.
. The Fund may invest up to 50% of its Managed Assets in municipal
securities that at the time of investment are rated below investment
grade. Below investment grade quality municipal securities include those
municipal securities that are rated investment grade by one or more NRSROs
but rated below investment grade by at least one NRSRO. No more than 5% of
the Fund's Managed Assets may be invested in municipal securities rated
below B-/B3 or that are unrated but judged to be of comparable quality by
Nuveen Advisory. This means that the Fund may invest in municipal
securities that are involved in bankruptcy or insolvency proceedings or
are experiencing other financial difficulties at the time of acquisition
(such securities are commonly referred to as distressed securities).
. The Fund anticipates that, upon the full investment of the net proceeds
from this offering (which is expected to occur within two to three months
following the closing of this offering), it will have invested
approximately 55% to 65% of its Managed Assets in investment grade
municipal securities and approximately 35% to 45% of its Managed Assets in
below investment grade municipal securities. The relative percentages of
the value of the Fund's Managed Assets attributable to investment grade
municipal securities and to below investment grade municipal securities
could change over time as a result of rebalancing the Fund's assets by
Nuveen Advisory, market value fluctuations and other events.
Municipal securities 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 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 securities is set forth in Appendix A to the Statement of
Additional Information. The Fund may also invest in securities of other open-
or closed-end investment companies that invest primarily in municipal
securities of the types in which the Fund may invest directly. See "--Other
Investment Companies" and "--Initial Portfolio Composition."
The Fund may purchase municipal securities 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
15
reduce the Fund's income. The Fund may use any insurer, regardless of its
rating. A municipal security will be deemed to have the rating of its insurer.
The insurance feature does not guarantee the market value of the insured
obligations or the net asset value of the Common Shares.
The Fund presently intends to limit its investment in tobacco settlement
bonds to no more than 10% of its Managed Assets. In addition, the Fund will not
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 security.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period
during which the net proceeds of the offering of Common Shares or MuniPreferred
Shares are being invested, the Fund may deviate from its investment objectives
and invest up to 100% of its net assets in short-term investments including
high quality, short-term securities that may be either tax-exempt or taxable.
The Fund intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at reasonable
prices and yields. Investment in taxable short-term investments would result in
a portion of your dividends being subject to regular federal 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, if issued,
MuniPreferred Shares voting together as a single class, and of the holders of a
"majority of the outstanding" MuniPreferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less. See "Description
of Shares--MuniPreferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--MuniPreferred Shares--Voting Rights"
for additional information with respect to the voting rights of holders of
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
gain dividends will be subject to capital gains taxes. See "Tax Matters."
Municipal Securities
Municipal securities 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 securities 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 may also purchase
municipal securities that represent lease obligations, municipal notes,
pre-refunded municipal securities, private activity bonds, tender option bonds
and other forms of municipal securities.
16
The municipal securities in which the Fund will invest are generally issued
by states, cities and local authorities and certain possessions and territories
of the United States (such as Puerto Rico and Guam), and pay interest that, in
the opinion of bond counsel to the issuer (or on the basis of other authority
believed by Nuveen Advisory to be reliable), is exempt from regular federal
income tax, although the interest may be subject to the federal alternative
minimum tax applicable to individuals.
The yields on municipal securities 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
securities 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 securities with long-term
maturities in order to maintain a weighted average maturity of 15 to 30 years,
but the weighted average maturity of obligations held by the Fund may be
shorter, depending on market conditions. Likewise, the Fund anticipates that
its duration following the invest up period will be in the range of 8 to 10
years, depending on market conditions. In comparison to maturity (which is the
date on which a debt instrument ceases and the issuer is obligated to repay the
principal amount), duration is a measure of the price volatility of a debt
instrument as a result of changes in market rates of interest, based on the
weighted average timing of the instrument's expected principal and interest
payments. Duration differs from maturity in that it considers a security's
yield, coupon payments, principal payments and call features in addition to the
amount of time until the security finally matures. As the value of a security
changes over time, so will its duration. Prices of securities with longer
durations tend to be more sensitive to interest rate changes than securities
with shorter durations. In general, a portfolio of securities with a longer
duration can be expected to be more sensitive to interest rate changes than a
portfolio with a shorter duration.
Municipal Leases and Certificates of Participation. The Fund also may
purchase municipal securities that represent lease obligations and certificates
of participation in such leases. These carry special risks because the issuer
of the securities may not be obligated to appropriate money annually to make
payments under the lease. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the issuer is prevented from maintaining occupancy of the leased
premises or utilizing the leased equipment or facilities. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering, or the failure to recover fully, the Fund's original investment. To
the extent that the Fund invests in unrated municipal leases or participates in
such leases, the credit quality rating and risk of cancellation of such unrated
leases will be monitored on an ongoing basis. In order to reduce this risk, the
Fund will only purchase municipal securities
17
representing lease obligations where Nuveen Advisory believes the issuer has a
strong incentive to continue making appropriations until maturity.
A certificate of participation represents an undivided interest in an
unmanaged pool of municipal leases, an installment purchase agreement or other
instruments. The certificates are typically issued by a municipal agency, a
trust or other entity that has received an assignment of the payments to be
made by the state or political subdivision under such leases or installment
purchase agreements. Such certificates provide the Fund with the right to a pro
rata undivided interest in the underlying municipal securities. In addition,
such participations generally provide the Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of the Fund's
participation interest in the underlying municipal securities, plus accrued
interest.
Municipal Notes. Municipal securities in the form of notes generally are
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue anticipation notes
and construction loan notes. Tax anticipation notes are issued to finance the
working capital needs of governments. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, property, use and
business taxes, and are payable from these specific future taxes. Revenue
anticipation notes are issued in expectation of receipt of other kinds of
revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long- term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the bond anticipation notes. Tax
and revenue anticipation notes combine the funding sources of both tax
anticipation notes and revenue anticipation notes. Construction loan notes are
sold to provide construction financing. Mortgage notes insured by the Federal
Housing Authority secure these notes; however, the proceeds from the insurance
may be less than the economic equivalent of the payment of principal and
interest on the mortgage note if there has been a default. The anticipated
revenues from taxes, grants or bond financing generally secure the obligations
of an issuer of municipal notes. An investment in such instruments, however,
presents a risk that the anticipated revenues will not be received or that such
revenues will be insufficient to satisfy the issuer's payment obligations under
the notes or that refinancing will be otherwise unavailable.
Pre-Refunded Municipal Securities. The principal of and interest on
pre-refunded municipal securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically an
escrow fund consisting of U.S. government securities. The assets in the escrow
fund are derived from the proceeds of refunding bonds issued by the same issuer
as the pre-refunded municipal securities. Issuers of municipal securities use
this advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or are
redeemed by the issuer.
Private Activity Bonds. Private activity bonds, formerly referred to as
industrial development bonds, are issued by or on behalf of public authorities
to obtain funds to provide privately operated
18
housing facilities, airport, mass transit or port facilities, sewage disposal,
solid waste disposal or hazardous waste treatment or disposal facilities and
certain local facilities for water supply, gas or electricity. Other types of
private activity bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal securities, although the current federal
tax laws place substantial limitations on the size of such issues. The Fund's
distributions of its interest income from private activity bonds may subject
certain investors to the federal alternative minimum tax applicable to
individuals.
Tender Option Bonds. A tender option bond is a municipal security (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing
short-term, tax-exempt rates. The bond is typically issued with the agreement
of a third party, such as a bank, broker-dealer or other financial institution,
which grants the security holders the option, at periodic intervals, to tender
their securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term, tax-exempt rate. However, an
institution will not be obligated to accept tendered bonds in the event of
certain defaults or a significant downgrade in the credit rating assigned to
the issuer of the bond. The Fund intends to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by Nuveen Advisory, be exempt from
regular federal income tax. However, because there can be no assurance that the
IRS will agree with such counsel's opinion in any particular case, there is a
risk that the Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of
these investments, including the proper tax treatment of tender option bonds
and the associated fees in relation to various regulated investment company tax
provisions, is unclear. The Fund intends to manage its portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Special Taxing Districts. Special taxing districts are organized to plan and
finance infrastructure developments to induce residential, commercial and
industrial growth and redevelopment. The bond financing methods such as tax
increment finance, tax assessment, special services district and Mello-Roos
bonds, are generally payable solely from taxes or other revenues attributable
to the specific projects financed by the bonds without recourse to the credit
or taxing power of related or overlapping municipalities. They often are
exposed to real estate development-related risks and can have more taxpayer
concentration risk than general tax-supported bonds, such as general obligation
bonds. Further, the fees, special taxes, or tax allocations and other revenues
that are established to secure such financings are generally limited as to the
rate or amount that may be levied or assessed and are not subject to increase
pursuant to rate covenants or municipal or corporate guarantees. The bonds
could default if development failed to progress as anticipated or if larger
taxpayers failed to pay the assessments, fees and taxes as provided in the
financing plans of the districts.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
municipal securities 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
19
no interest accrues on the bonds prior to settlement and, because bonds are
subject to market fluctuations, the value of the bonds at time of delivery may
be less (or more) than cost. A 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.
Zero Coupon Bonds. A zero coupon bond is a bond that does not pay interest
either for the entire life of the obligation or for an initial period after the
issuance of the obligation. When held to its maturity, its return comes from
the difference between the purchase price and its maturity value. A zero coupon
bond is normally issued and traded at a deep discount from face value. Zero
coupon bonds allow an issuer to avoid or delay the need to generate cash to
meet current interest payments and, as a result, may involve greater credit
risk than bonds that pay interest currently or in cash. The Fund would be
required to distribute the income on any of these instruments as it accrues,
even though the Fund will not receive all of the income on a current basis or
in cash. Thus, the Fund may have to sell other investments, including when it
may not be advisable to do so, to make income distributions to its shareholders.
Structured Notes. The Fund may utilize structured notes and similar
instruments for investment purposes and also for hedging purposes. Structured
notes are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset,
market or interest rate (an "embedded index"), such as selected securities, an
index of securities or specified interest rates, or the differential
performance of two assets or markets. The terms of such structured instruments
normally provide that their principal and/or interest payments are to be
adjusted upwards or downwards (but not ordinarily below zero) to reflect
changes in the embedded index while the structured instruments are outstanding.
As a result, the interest and/or principal payments that may be made on a
structured product may vary widely, depending upon a variety of factors,
including the volatility of the embedded index and the effect of changes in the
embedded index on principal and/or interest payments. The rate of return on
structured notes may be determined by applying a multiplier to the performance
or differential performance of the referenced index or indices or other assets.
Application of a multiplier involves leverage that will serve to magnify the
potential for gain and the risk of loss.
Other Investment Companies
The Fund may invest up to 10% of its Managed Assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
securities of the types in which the Fund may invest directly. In addition, the
Fund may invest a portion of its Managed Assets in pooled investment vehicles
(other than investment companies) that invest primarily in municipal securities
of the types in which the Fund may invest directly. The Fund generally expects
that it may invest in other investment companies and/or other pooled investment
vehicles 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 securities available in the
market. As a stockholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses, and would remain subject
to payment of the Fund's advisory and administrative fees with respect to
assets so invested. 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 an investment company relative to
available municipal security
20
investments. In addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage risks described
herein. As described in the section entitled "Risks," the net asset value and
market value of leveraged shares will be more volatile and the yield to Common
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
55% to 65% of its initial portfolio will consist of investment grade quality
municipal securities, rated as such at the time of investment. A security is
considered investment grade quality if it is rated within the four highest
grades by all NRSROs that rate such security, or if it is unrated but judged to
be of comparable quality by Nuveen Advisory. The Fund also expects that
approximately 35% to 45% of its initial portfolio will consist of below
investment grade quality municipal securities, rated as such at the time of
investment or unrated but judged to be of comparable quality by Nuveen
Advisory. In addition, the Fund anticipates that the initial average credit
quality of the portfolio will be BBB, including securities that are not rated
by any NRSROs but have ratings assigned to them by Nuveen Advisory. As
previously noted, the Fund anticipates that its duration following the invest
up period will be in the range of 8 to 10 years, depending on market
conditions. See the Statement of Additional Information under "Other Investment
Policies and Techniques--Portfolio Trading and Turnover Rate." See
"--Investment Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one and one-half to two months
after the completion of the offering of the Common Shares, the Fund intends to
offer MuniPreferred Shares representing approximately 32% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares. The MuniPreferred
Shares will have seniority over the Common Shares. The issuance of
MuniPreferred Shares will leverage the Common Shares. Leverage involves special
risks. There is no assurance that the Fund's leveraging strategy will be
successful. Although the timing and other terms of the offering of the
MuniPreferred Shares will be determined by the Fund's Board of Trustees, the
Fund expects to invest the proceeds of the MuniPreferred Shares offering in
long-term municipal securities. The MuniPreferred Shares will pay dividends at
rates based on short- or intermediate-term periods (ranging from seven days to
five years) (which would be redetermined periodically by an auction or
remarketing procedure). So long as the Fund's portfolio is invested in
securities that provide a higher rate of return than the dividend rate of the
MuniPreferred Shares (after taking expenses into consideration), the leverage
will cause you to receive a higher current rate of return than if the Fund were
not leveraged. Short- and intermediate-term interest rates are currently near
historically low levels. In order to seek to reduce the impact on Common Share
net income resulting from increases in MuniPreferred Share dividend rates that
are based on short-term interest rates, the Fund intends that, if market
conditions are deemed favorable, a substantial portion of the MuniPreferred
Shares will be initially issued with fixed rate dividends based on
intermediate-term interest rates of between one and five years (which dividend
rates would be redetermined at the end of each such initial period). The
initial fixed-rate dividends are expected to be higher than initial short-term
floating rate dividends.
Changes in the value of the Fund's bond portfolio (including bonds bought
with the proceeds of the MuniPreferred Shares offering) will be borne entirely
by the Common Shareholders. If there is a net decrease (or increase) in the
value of the Fund's investment portfolio, the leverage will decrease (or
increase) the net asset value per Common Share to a greater extent than if the
Fund were not leveraged.
21
During periods in which the Fund is using leverage, the fees paid to Nuveen
Advisory for advisory services will be higher than if the Fund did not use
leverage because the fees paid will be calculated on the basis of the Fund's
total net assets, including the proceeds from the issuance of MuniPreferred
Shares.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between the Common Shares and
MuniPreferred Shares in proportion to total dividends paid to each class for
the year in which the net capital gain or other taxable income is realized. If
net capital gain or other taxable income is allocated to MuniPreferred Shares
(instead of solely tax-exempt income), the Fund will likely have to pay higher
total dividends to MuniPreferred Shareholders or make special payments to
MuniPreferred Shareholders to compensate them for the increased tax liability.
This would reduce the total amount of dividends paid to the Common
Shareholders, but would increase the portion of the dividend that is
tax-exempt. On an after-tax basis, Common Shareholders may still be better off
than if they had been allocated all of the Fund's net capital gain or other
taxable income (resulting in a higher amount of total dividends), but received
a lower amount of tax-exempt income. If the increase in dividend payments or
the special payments to MuniPreferred Shareholders are not entirely offset by a
reduction in the tax liability of, and an increase in the tax-exempt dividends
received by, the Common Shareholders, the advantage of the Fund's leveraged
structure to Common Shareholders will be reduced.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after such issuance, the value of the Fund's asset coverage
is at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the Fund's asset coverage).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless, at the time of such declaration, the
value of the Fund's asset coverage is at least 200% of such liquidation value.
If MuniPreferred Shares are issued, the Fund intends, to the extent possible,
to purchase or redeem MuniPreferred Shares from time to time to the extent
necessary in order to maintain coverage of any MuniPreferred Shares of at least
200%. If the Fund has MuniPreferred Shares outstanding, two of the Fund's
trustees will be elected by the holders of MuniPreferred Shares, voting
separately as a class. The remaining trustees of the Fund will be elected by
holders of Common Shares and MuniPreferred Shares voting together as a single
class. In the event the Fund failed to pay dividends on MuniPreferred Shares
for two years, MuniPreferred Shareholders would be entitled to elect a majority
of the trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of one
or more rating agencies which may issue ratings for MuniPreferred Shares issued
by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the Fund
by the 1940 Act. It is not anticipated that these covenants or guidelines will
impede Nuveen Advisory from managing the Fund's portfolio in accordance with
the Fund's investment objectives and policies.
The Fund may also borrow money for repurchase of its shares or as a
temporary measure for extraordinary or emergency purposes, including the
payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
Assuming that the MuniPreferred Shares will represent in the aggregate 32%
of the Fund's capital and pay dividends at an annual average rate of 2.00%, the
incremental income generated by the Fund's portfolio (net of estimated
expenses) must exceed 0.64% in order to cover such dividend payments and
22
other expenses specifically related to the MuniPreferred Shares. Of course,
these numbers are merely estimates, used for illustration. Actual MuniPreferred
Share dividend rates may vary frequently and may be significantly higher or
lower than the rate assumed above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Fund's portfolio net of expenses) of -10%, -5%, 0%, 5% and 10%. These assumed
investment portfolio returns are hypothetical figures and are not necessarily
indicative of the investment portfolio returns expected to be experienced by
the Fund. The table further reflects the issuance of MuniPreferred Shares
representing 32% of the Fund's total capital and the Fund's currently projected
annual average MuniPreferred Share dividend rate of 2.00%. See "Risks" and
"MuniPreferred Shares and Leverage."
[Download Table]
Assumed Portfolio Total Return (10.00)% (5.00)% 0.00 % 5.00% 10.00%
Common Share Total Return..... (15.65)% (8.29)% (0.94)% 6.41% 13.76%
Common Share total return is composed of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on MuniPreferred
Shares) and gains or losses on the value of the securities the Fund owns. As
required by Securities and Exchange Commission rules, the table assumes that
the Fund is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0%, the Fund must assume
that the tax-exempt interest it receives on its municipal securities
investments is entirely offset by losses in the value of those securities.
Unless and until MuniPreferred Shares are issued, the Common Shares will not
be leveraged and this section will not apply.
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RISKS
The net asset value of the Common Shares will fluctuate with and be affected
by, among other things, credit and below investment grade risk, interest rate
risk, municipal securities market risk, reinvestment risk, tax risk, leverage
risk, inflation risk, market disruption risk and special risks related to
certain municipal obligations, and an investment in Common Shares will be
subject to, among other things, market discount risk, each of which is more
fully described below.
Newly Organized. The Fund is a newly organized, diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Credit and Below Investment Grade Risk. Credit risk is the risk that one or
more municipal securities in the Fund's portfolio will decline in price, or the
issuer thereof will fail to pay interest or principal when due, because the
issuer of the security experiences a decline in its financial status. In
general, lower-rated municipal securities carry a greater degree of risk that
the issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the Fund's net asset value or dividends. The
Fund may invest up to 50% of its Managed Assets in municipal securities that
are rated below investment grade at the time of investment or that are unrated
but judged to be of comparable quality by Nuveen Advisory. No more than 5% of
the Fund's Managed Assets may be invested in municipal securities rated below
B-/B3 or that are unrated but judged to be of comparable quality by Nuveen
Advisory. This means that the Fund may invest in municipal securities that are
involved in bankruptcy or insolvency proceedings or are experiencing other
financial difficulties at the time of acquisition (such securities are commonly
referred to as distressed securities). Municipal securities of below investment
grade quality, commonly referred to as junk bonds, are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal when due, and are susceptible to default or
decline in market value due to adverse economic and business developments. The
market values for municipal securities of below investment grade quality tend
to be volatile, and these securities are less liquid than investment grade
municipal securities. For these reasons, an investment in the Fund is subject
to the following specific risks:
. increased price sensitivity resulting from changing interest rates and/or
a deteriorating economic environment;
. greater risk of loss due to default or declining credit quality;
. adverse issuer specific events that are more likely to render the issuer
unable to make interest and/or principal payments; and
. the possibility that a negative perception of the below investment grade
market develops, resulting in the price and liquidity of below investment
grade securities becoming depressed, and this negative perception could
last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a weakened
capacity of a below investment grade issuer to make principal payments and
interest payments compared to an investment grade issuer. The principal amount
of below investment grade securities outstanding has proliferated in the past
decade as an increasing number of issuers have used below investment grade
securities for
24
financing. An economic downturn could severely affect the ability of highly
leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. If the national economy enters into a recessionary
phase during 2003 or 2004, potentially decreasing the tax and other revenue of
municipal issuers, or interest rates rise sharply, increasing the interest cost
on variable rate instruments and negatively impacting economic activity, the
number of defaults by below investment grade municipal issuers is likely to
increase. Similarly, down-turns in profitability in specific industries could
adversely affect private activity bonds. The market values of lower quality
debt securities tend to reflect individual developments of the issuer to a
greater extent than do higher quality securities, which react primarily to
fluctuations in the general level of interest rates. Factors having an adverse
impact on the market value of lower quality securities may have an adverse
impact on the Fund's net asset value and the market value of its Common Shares.
In addition, the Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings. In certain circumstances, the Fund may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such circumstances, the Fund would incur additional costs in
disposing of such assets and potential liabilities from operating any business
acquired.
The secondary market for below investment grade securities may not be as
liquid as the secondary market for more highly rated securities, a factor that
may have an adverse effect on the Fund's ability to dispose of a particular
security. There are fewer dealers in the market for below investment grade
municipal securities than the market for investment grade municipal securities.
The prices quoted by different dealers for below investment grade municipal
securities may vary significantly, and the spread between the bid and ask price
is generally much larger for below investment grade municipal securities than
for higher quality instruments. Under adverse market or economic conditions,
the secondary market for below investment grade securities could contract
further, independent of any specific adverse changes in the condition of a
particular issuer, and these instruments may become illiquid. As a result, the
Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's net asset value.
Issuers of such below investment grade securities are highly leveraged and
may not have available to them more traditional methods of financing.
Therefore, the risk associated with acquiring the securities of such issuers
generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of below investment grade securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific developments, the issuer's inability to meet specific projected
forecasts or the unavailability of additional financing. The risk of loss from
default by the issuer is significantly greater for the holders of below
investment grade securities because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. Prices and yields of
below investment grade securities will fluctuate over time and, during periods
of economic uncertainty, volatility of below investment grade securities may
adversely affect the Fund's net asset value. In addition, investments in below
investment grade zero coupon bonds rather than income-bearing below investment
grade securities, may be more speculative and may be subject to greater
fluctuations in value due to changes in interest rates.
The Fund may invest in distressed securities, which are securities issued by
companies that are involved in bankruptcy or insolvency proceedings or are
experiencing other financial difficulties at the
25
time of acquisition by the Fund. The issuers of such securities may be in
transition, out of favor, financially leveraged or troubled, or potentially
troubled, and may be or have recently been involved in major strategic actions,
restructurings, bankruptcy, reorganization or liquidation. These
characteristics of these companies can cause their securities to be
particularly risky, although they also may offer the potential for high
returns. These companies' securities may be considered speculative, and the
ability of the companies to pay their debts on schedule could be affected by
adverse interest rate movements, changes in the general economic climate,
economic factors affecting a particular industry or specific developments
within the companies. Distressed securities frequently do not produce income
while they are outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its investment.
Investments in lower rated or unrated securities may present special tax
issues for the Fund to the extent that the issuers of these securities default
on their obligations pertaining thereto, and the federal income tax
consequences to the Fund as a holder of such distressed securities may not be
clear.
Interest Rate Risk. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in interest rates.
Generally, municipal securities will decrease in value when interest rates rise
and increase in value when interest rates decline. This means that the net
asset value of the Common Shares will fluctuate with interest rate changes and
the corresponding changes in the value of the Fund's municipal security
holdings. In typical market interest rate environments, prices of the
longer-term municipal securities generally fluctuate more in response to
changes in interest rates than do the prices of shorter-term municipal
securities. Because the values of lower-rated and comparable unrated debt
securities are affected both by credit risk and interest rate risk, the price
movements of such lower grade securities in response to changes in interest
rates are not typically highly correlated to the fluctuations of the prices of
investment grade quality securities in response to such changes in interest
rates. Because the Fund will invest primarily in long-term municipal
securities, the Common Share net asset value and market price per share will
fluctuate more in response to changes in market interest rates than if the Fund
invested primarily in shorter-term municipal securities. The Fund's use of
leverage, as described below, will tend to increase Common Share interest rate
risk.
Municipal Securities Market Risk. Investing in the municipal securities
market involves certain risks. The amount of public information available about
the municipal securities in the Fund's portfolio is generally less than that
for corporate equities or bonds, and the investment performance of the Fund may
therefore be more dependent on the analytical abilities of Nuveen Advisory than
if the Fund were a stock fund or taxable bond fund. The secondary market for
municipal securities, particularly the below investment grade bonds in which
the Fund may invest, also tends to be less well-developed or liquid than many
other securities markets, which may adversely affect the Fund's ability to sell
its municipal securities at attractive prices or at prices approximating those
at which the Fund currently values them.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal and/or
interest, or impose other constraints on enforcement of such obligations, or on
the ability of municipalities to levy taxes. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce
26
its rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses. Any income derived from the Fund's ownership or
operation of such assets may not be tax-exempt.
Reinvestment Risk. Reinvestment risk is the risk that income from the Fund's
portfolio will decline if and when the Fund invests the proceeds from matured,
traded or called bonds at market interest rates that are below the portfolio's
current earnings rate. A decline in income could affect the Common Shares'
market price or their overall returns.
Tax Risk. The value of the Fund's investments and its net asset value may be
adversely affected by changes in tax rates and policies. Because interest
income from municipal securities is normally not subject to regular federal
income taxation, the attractiveness of municipal securities in relation to
other investment alternatives is affected by changes in federal income tax
rates or changes in the tax-exempt status of interest income from municipal
securities. Any proposed or actual changes in such rates or exempt status,
therefore, can significantly affect the demand for and supply, liquidity and
marketability of municipal securities. This could in turn affect the Fund's net
asset value and ability to acquire and dispose of municipal securities at
desirable yield and price levels. Additionally, the Fund is not a suitable
investment for individual retirement accounts, for other tax-exempt or
tax-deferred accounts or for investors who are not sensitive to the federal tax
consequences of their investments.
Leverage Risk. Leverage risk is the risk associated with the issuance of the
MuniPreferred Shares to leverage the Common Shares. There can be no assurance
that the Fund's leveraging strategy will be successful. Once the MuniPreferred
Shares are issued, the net asset value and market value of Common Shares will
be more volatile, and the yield to Common Shareholders will tend to fluctuate
with changes in the short- or intermediate-term dividend rates on the
MuniPreferred Shares. Long-term municipal bond rates of return are typically,
although not always, higher than short- or intermediate-term municipal bond
rates of return. If the dividend rate on the MuniPreferred Shares approaches
the net rate of return on the Fund's investment portfolio, the benefit of
leverage to Common Shareholders would be reduced. If the dividend rates, as
they are redetermined periodically, on the MuniPreferred Shares exceeds the net
rate of return on the Fund's portfolio, the leverage will result in a lower
rate of return to Common Shareholders than if the Fund were not leveraged.
Because the long-term bonds included in the Fund's portfolio will typically pay
fixed rates of interest while the dividend rate on the MuniPreferred Shares
will be adjusted periodically, this could occur even when both long-term and
short- or intermediate-term municipal rates rise. In addition, the Fund will
pay (and Common Shareholders will bear) any costs and expenses relating to the
issuance and ongoing maintenance of the MuniPreferred Shares, including, for
example, distribution related expenses in connection with the periodic
remarketing or auctions for MuniPreferred Shares with short-term dividend rate
periods (expected to be an annual rate of 0.25% of MuniPreferred Share
liquidation preference) and placement or other distribution fees in connection
with MuniPreferred Shares with longer-term dividend rate periods. Accordingly,
the Fund cannot assure you that the issuance of MuniPreferred Shares will
result in a higher yield or return to Common Shareholders.
Similarly, any decline in the net asset value of the Fund's investments will
be borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines, the leverage will result in a greater decrease in
net asset value to Common Shareholders than if the Fund were not leveraged.
Such greater net asset value decrease will also tend to cause a greater decline
in the market
27
price for the Common Shares. The Fund might be in danger of failing to maintain
the required 200% asset coverage or of losing its expected AAA/Aaa ratings on
the MuniPreferred Shares or, in an extreme case, the Fund's current investment
income might not be sufficient to meet the dividend requirements on the
MuniPreferred Shares. In order to counteract such an event, the Fund might need
to liquidate investments in order to fund a redemption of some or all of the
MuniPreferred Shares. Liquidation at times of low municipal bond prices may
result in capital loss and may reduce returns to Common Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common Shares
and distributions can decline. In addition, during any periods of rising
inflation, MuniPreferred Share dividend rates would likely increase, which
would tend to further reduce returns to Common Shareholders.
Sector and Industry Risk. The Fund may invest in municipal securities that
are collateralized by the proceeds from class action or other litigation
against the tobacco industry. Payment by tobacco industry participants of such
proceeds is spread over several years, and the collection and distribution of
such proceeds to the issuers of municipal securities is dependent upon the
financial health of such tobacco industry participants, which cannot be
assured. Additional litigation, government regulation or prohibition on the
sales of tobacco products, or the seeking of protection under the bankruptcy
laws by companies in the tobacco industry, could adversely affect the tobacco
industry which, in turn, could have an adverse affect on tobacco-related
municipal securities. The Fund presently intends to limit its investment in
tobacco settlement bonds to no more than 10% of the Fund's Managed Assets.
Subject to guidelines which may be imposed in connection with the Fund's
seeking an investment grade rating on the MuniPreferred Shares, the Fund may
invest a significant portion of its Managed Assets in broad segments of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, special taxing districts, securities issued to finance
charter schools and other private educational facilities, municipal utility
securities, industrial development bonds, and other private activity bonds.
Subject to the availability of suitable investment opportunities, Nuveen
Advisory
28
will attempt to minimize the sensitivity of the Fund's portfolio to credit and
other risks associated with a particular sector or industry. However, if the
Fund invests a significant portion of its Managed Assets in the segments noted
above, the Fund will be more susceptible to economic, business, political,
regulatory and other developments generally affecting issuers in such segments
of the municipal securities market. To the extent that the Fund focuses its
Managed Assets in the hospital and healthcare facilities sector, the Fund will
be subject to risks associated with such sector, including adverse government
regulation and reduction in reimbursement rates, as well as government approval
of products and services and intense competition. Securities issued with
respect to special taxing districts will be subject to various risks, including
real-estate development related risks and taxpayer concentration risk. Further,
the fees, special taxes or tax allocations and other revenues established to
secure the obligations of securities issued with respect to special taxing
districts are generally limited as to the rate or amount that may be levied or
assessed and are not subject to increase pursuant to rate covenants or
municipal or corporate guarantees. Securities issued to finance charter schools
and other private educational facilities will be subject to various risks,
including the reversal of legislation authorizing or funding charter schools,
the failure to renew or secure a charter, the failure of a funding entity to
appropriate necessary funds and competition from alternatives such as voucher
programs. Issuers of municipal utility securities can be significantly affected
by government regulation, financing difficulties, supply and demand of services
or fuel and natural resource conservation. The transportation sector, including
airports, airlines, ports and other transportation facilities, can be
significantly affected by changes in the economy, fuel prices, labor relations,
insurance costs and government regulation.
Special Risks Related to Certain Municipal Obligations. The Fund may invest
in municipal leases and certificates of participation in such leases. Municipal
leases and certificates of participation involve special risks not normally
associated with general obligations or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of debt.
The debt issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
relieve the governmental issuer of any obligation to make future payments under
the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. In addition,
such leases or contracts may be subject to the temporary abatement of payments
in the event the governmental issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might prove
difficult, time consuming and costly, and may result in a delay in recovering
or the failure to fully recover the Fund's original investment. In the event of
non-appropriation, the issuer would be in default and taking ownership of the
assets may be a remedy available to the Fund, although the Fund does not
anticipate that such a remedy would normally be pursued. To the extent that the
Fund invests in unrated municipal leases or participates in such leases, the
credit quality rating and risk of cancellation of such unrated leases will be
monitored on an ongoing basis. Certificates of participation, which represent
interests in unmanaged pools of municipal leases or installment contracts,
involve the same risks as the underlying municipal leases. In addition, the
Fund may be dependent upon the municipal authority issuing the certificates of
participation to exercise remedies with respect to the underlying securities.
Certificates of participation also entail a risk of default or bankruptcy, both
of the issuer of the municipal lease and also the municipal agency issuing the
certificate of participation.
29
Market Disruption Risk. Certain events have a disruptive effect on the
securities markets, such as terrorist attacks (including the terrorist attacks
in the U.S. on September 11, 2001), war and other geopolitical events. The Fund
cannot predict the effects of similar events in the future on the U.S. economy.
Below investment grade securities tend to be more volatile than higher rated
securities so that these events and any actions resulting from them may have a
greater impact on the prices and volatility of below investment grade
securities than on higher rated securities.
Certain Affiliations. Certain broker-dealers may be considered to be
affiliated persons of the Fund, Nuveen Advisory and/or Nuveen. Absent an
exemption from the Securities and Exchange Commission or other regulatory
relief, the Fund is generally precluded from effecting certain principal
transactions with affiliated brokers, and its ability to purchase securities
being underwritten by an affiliated broker or a syndicate including an
affiliated broker, or to utilize affiliated brokers for agency transactions, is
subject to restrictions. This could limit the Fund's ability to engage in
securities transactions and take advantage of market opportunities. In
addition, unless and until the underwriting syndicate is broken in connection
with the initial public offering of the Common Shares, the Fund will be
precluded from effecting principal transactions with brokers who are members of
the syndicate.
Anti-Takeover Provisions. The Fund's Declaration includes provisions that
could limit the ability of other entities or persons to acquire control of the
Fund or convert the Fund to open-end status. These provisions could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common
Shares.
30
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, if issued, MuniPreferred
Shares voting together as a single class, and the approval of the holders of a
"majority of the outstanding" MuniPreferred Shares voting as a separate class.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less.
The Fund may become subject to guidelines which are more limiting than the
investment limitations referred to above in order to obtain and maintain
ratings from Moody's, S&P or Fitch on the MuniPreferred Shares that it intends
to issue, including with respect to the Fund's hedging strategies described
below. The Fund does not anticipate that such guidelines would have a material
adverse effect on the Fund's Common Shareholders or the Fund's ability to
achieve its investment objectives. See "Investment Objectives" in the Statement
of Additional Information for information about these guidelines and a complete
list of the fundamental and non-fundamental investment policies of the Fund.
Limited Issuance of MuniPreferred Shares
Under the 1940 Act, the Fund could issue MuniPreferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the asset
coverage of the Fund. If the total liquidation value of the MuniPreferred
Shares was ever more than one-half of the value of the Fund's asset coverage,
the Fund would not be able to declare dividends on the Common Shares until the
liquidation value, as a percentage of the Fund's assets, was reduced. The Fund
intends to issue MuniPreferred Shares representing approximately 32% of the
Fund's total capital immediately after the time of issuance. This higher than
required margin of net asset value provides a cushion against later
fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than if the Fund
were more leveraged. The Fund intends to purchase or redeem MuniPreferred
Shares, if necessary, to keep the liquidation value of the MuniPreferred Shares
below one-half of the value of the Fund's asset coverage.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The MuniPreferred Shares will pay dividends at rates determined over short-
or intermediate-term periods (ranging from seven days to up to five years) by
providing for periodic redetermination of the dividend through an auction or
remarketing procedure. Short- and intermediate-term rates are currently near
historically low levels. In order to seek to reduce the impact on Common Share
net income resulting from increases in MuniPreferred Share dividend rates that
are based on short-term interest rates, the Fund intends that, if market
conditions are deemed favorable, a substantial portion of the MuniPreferred
Shares will be initially issued with fixed rate dividends based on
intermediate-term interest rates of between one and five years (which dividend
rates would be redetermined at the end of each such initial period). The
initial fixed-rate dividends are expected to be higher than initial short-term
floating rate dividends. The Fund may take certain actions if short- or
intermediate-term interest
31
rates increase or market conditions otherwise change (or the Fund anticipates
such an increase or change) and the Fund's leverage begins (or is expected) to
adversely affect Common Shareholders. In order to attempt to offset such a
negative impact of leverage on Common Shareholders, the Fund may shorten the
average maturity of its investment portfolio (by investing in short-term, high
quality securities) or may extend the maturity of outstanding MuniPreferred
Shares. The Fund may also attempt to reduce the leverage by redeeming or
otherwise purchasing MuniPreferred Shares. As explained above under
"Risks--Leverage Risk," the success of any such attempt to limit leverage risk
depends on Nuveen Advisory's ability to accurately predict interest rate or
other market changes. Because of the difficulty of making such predictions, the
Fund may never attempt to manage its capital structure in the manner described
above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
The Fund may not 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 security. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
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 credit default swaps, interest-rate swaps on taxable tax-exempt
indices, forward starting rate swaps and options on interest rate swaps,
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. These hedging strategies may generate taxable income.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
Investment Adviser
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the municipal
securities 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 $45 billion in assets under management. See the Statement of
Additional Information under "Investment Adviser."
32
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. John V. Miller is the portfolio manager of the Fund and will
provide daily oversight for, and execution of, the Fund's investment
activities. He became a Vice President of Nuveen Advisory in 2003. Prior
thereto, he was a credit analyst with Nuveen (since 1996). Mr. Miller currently
manages investments for three Nuveen-sponsored investment companies.
Nuveen Advisory is a wholly owned subsidiary of Nuveen Investments, Inc.
Founded in 1898, Nuveen through its various affiliates manages $90 billion in
assets for clients in separate accounts, registered investment companies, and
other collective investment vehicles as of September 30, 2003. Nuveen
Investments, Inc. is a publicly traded company and is a majority-owned
subsidiary of The St. Paul Companies, Inc. ("St. Paul"), a publicly-traded
company which is principally engaged in providing property-liability insurance
through subsidiaries.
On November 17, 2003, St. Paul and Travelers Property Casualty Corp.
("Travelers") announced that they have signed a definitive merger agreement,
under which holders of Travelers common stock will each receive common shares
of St. Paul in exchange for their Travelers shares. The transaction is subject
to customary closing conditions, including approval by the shareholders of both
companies as well as certain regulatory approvals.
If this merger transaction were to constitute a change of control of Nuveen
Advisory it would operate as an "assignment", as defined in the 1940 Act, of
the Fund's investment management agreement (as discussed further below), which
would cause the investment management agreement to terminate. In the event of
such a termination, it is expected that the Fund's Board would meet to consider
both an interim investment management agreement (as permitted under the 1940
Act) and a new investment management agreement, the latter of which, if
approved by the Board, would be submitted to a vote of the Fund's shareholders
and take effect only upon such approval. There is no assurance that these
approvals would be obtained. The Fund and Nuveen Advisory currently expect that
they will receive advice of counsel to the effect that the merger will not
constitute a change of control of Nuveen Advisory and will not operate as an
"assignment", and that therefore the Fund's investment management agreement
would not terminate as a result of the merger. There is no assurance that the
Fund will receive such advice of counsel.
As a result of the current ownership by Citigroup Inc. ("Citigroup") and its
affiliates of voting securities of Travelers and St. Paul, if the transaction
occurs on currently contemplated terms, Citigroup may indirectly own a
sufficient percentage of voting securities of the combined entity to make
Citigroup an indirect affiliate of Nuveen, Nuveen Advisory and the Fund. Such
an affiliation could result, pursuant to the 1940 Act, in restrictions on
transactions between the Fund and Citigroup and possibly its affiliates. In
particular, principal trades between the Fund and Citigroup and its affiliates
could be prohibited. Such a prohibition could have an adverse impact on the
Fund's ability to efficiently invest its portfolio.
33
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:
[Download Table]
Management
Average Daily Managed Assets Fee
---------------------------- ----------
Up to $125 million......................................... 0.7500%
$125 million to $250 million............................... 0.7375%
$250 million to $500 million............................... 0.7250%
$500 million to $1 billion................................. 0.7125%
$1 billion to $2 billion................................... 0.7000%
$2 billion and over........................................ 0.6750%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 32% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
[Download Table]
Management
Net Assets Attributable to Common Shares Fee
---------------------------------------- ----------
Up to $125 million......................................... 1.1029%
$125 million to $250 million............................... 1.0846%
$250 million to $500 million............................... 1.0662%
$500 million to $1 billion................................. 1.0478%
$1 billion to $2 billion................................... 1.0294%
$2 billion and over........................................ 0.9926%
In addition to the fee of Nuveen Advisory, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with Nuveen Advisory), custodian, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of issuing any MuniPreferred Shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
For the first eight full years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
[Download Table]
Percentage Percentage
Reimbursed Reimbursed
(as a percentage (as a percentage
Years Ending of Managed Years Ending of Managed
November 30, Assets) November 30, Assets)
------------ ---------------- ------------ ----------------
2003/(1)/.. 0.32% 2008.... 0.32%
2004....... 0.32% 2009.... 0.24%
2005....... 0.32% 2010.... 0.16%
2006....... 0.32% 2011.... 0.08%
2007....... 0.32%
--------
(1)From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond November 30, 2011.
34
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
regular session trading (normally 4:00 p.m. eastern time) on each day the New
York Stock Exchange is open for business. Net asset value is calculated by
taking the fair value of the Fund's total assets, including interest or
dividends accrued but not yet collected, less all liabilities, and dividing by
the total number of shares outstanding. The result, rounded to the nearest
cent, is the net asset value per share.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are
valued at market value. The prices of municipal securities 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
securities), the pricing service establishes a fair market value based on
prices of comparable municipal securities or other valuation methodologies
applicable to municipal securities, including evaluations of anticipated cash
flows or collateral. All valuations are subject to review by the Fund's Board
of Trustees or its delegate, Nuveen Advisory.
DISTRIBUTIONS
Commencing with the first dividend, the Fund intends to make regular monthly
cash distributions to Common Shareholders at a level rate (stated in terms of a
fixed cents per Common Share dividend rate) that reflects the past and
projected performance of the Fund. Distributions can only be made from net
investment income after paying any accrued dividends to MuniPreferred
Shareholders. The Fund's ability to maintain a level dividend rate will depend
on a number of factors, including the rate at which dividends are payable on
the MuniPreferred Shares. The net income of the Fund consists of all interest
income accrued on portfolio assets less all expenses of the Fund. Expenses of
the Fund are accrued each day. Over time, all the net investment income of the
Fund will be distributed. At least annually, the Fund also intends to
distribute net capital gain and ordinary taxable income, if any, after paying
any accrued dividends or making any liquidation payments to MuniPreferred
Shareholders. Initial distributions to Common Shareholders are expected to be
declared approximately 50 days, and paid approximately 60 to 90 days, from the
completion of this offering, depending on market conditions. Although it does
not now intend to do so, the Board of Trustees may change the Fund's dividend
policy and the amount or timing of the distributions, based on a number of
factors, including the amount of the Fund's undistributed net investment income
and historical and projected investment income and the amount of the expenses
and dividend rates on the outstanding MuniPreferred Shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value.
35
DIVIDEND REINVESTMENT PLAN
If the Common Shares are registered directly with the Fund or if you hold
your Common Shares with a brokerage firm that participates in the Fund's
Dividend Reinvestment Plan (the "Plan"), you may elect to have all dividends,
including any capital gain dividends, on your Common Shares automatically
reinvested by the Plan Agent in additional Common Shares under the Plan. You
may elect to participate in the Plan by completing the Dividend Reinvestment
Plan Application Form. If you do not participate, you will receive all
distributions in cash paid by check mailed directly to you or your brokerage
firm by State Street Bank and Trust Company as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the American Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per share
paid by the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the valuation date.
Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive whole
shares in your account under the Plan and you will receive a cash payment for
any fraction of a share in your account. If you wish, the Plan Agent will sell
your shares and send you the proceeds, minus brokerage commissions and a $2.50
service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. Any proxy you receive will include all
Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that you
do not have to pay income taxes due upon receiving dividends and distributions.
If you hold your Common Shares with a brokerage firm that does not
participate in the Plan, you will not be able to participate in the Plan and
any dividend reinvestment may be effected on different terms than those
described above. Consult your financial advisor for more information.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however,
36
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants. Additional information about the Plan may be
obtained from State Street Bank and Trust Company, Attn: Equiserve Nuveen
Investments, P.O. Box 43071, Providence, Rhode Island 02940-3071, (800)
257-8787.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $0.01 per share
and, subject to the rights of holders of MuniPreferred Shares, if issued, have
equal rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Declaration of
Trust," non-assessable, and will have no pre-emptive or conversion rights or
rights to cumulative voting. Whenever MuniPreferred Shares are outstanding,
Common Shareholders will not be entitled to receive any cash distributions from
the Fund unless all accrued dividends on MuniPreferred Shares have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to
MuniPreferred Shares would be at least 200% after giving effect to the
distributions. See "--MuniPreferred Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing. The Fund will not issue share certificates.
The Fund's net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to be greater because the Fund, if market conditions are deemed favorable,
likely will have a leveraged capital structure. Net asset value will be reduced
immediately following the offering by the amount of the sales load and offering
expenses paid by the Fund. Nuveen has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade on
an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund have during some periods traded at prices
higher than net asset value and have during other periods traded at prices
lower than net asset value. Because the market value of the Common Shares may
be influenced by such factors as dividend levels (which are in turn affected by
expenses), call protection, dividend stability, portfolio credit quality, net
asset value, relative demand for and supply of such shares in the market,
general market and economic conditions, and other factors beyond the control of
the Fund, the Fund cannot assure you that Common Shares will trade at a price
equal to or higher than net asset value in the future. The Common Shares are
designed primarily for long-term investors, and investors in the Common Shares
should not view the Fund as a vehicle for trading purposes. See "MuniPreferred
Shares and Leverage" and the Statement of Additional Information under
"Repurchase of Fund Shares; Conversion to Open-End Fund."
37
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares in one or more classes or series, with rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has authorized an offering of MuniPreferred
Shares (representing approximately 32% of the Fund's capital immediately after
the time the MuniPreferred Shares are issued) that the Fund expects will likely
be issued within approximately one and one-half to two months after completion
of the offering of Common Shares. Any final decision to issue MuniPreferred
Shares is subject to market conditions and to the Board of Trustee's continuing
belief that leveraging the Fund's capital structure through the issuance of
MuniPreferred Shares is likely to achieve the benefits to the Common
Shareholders described in this Prospectus. The Board has determined that a
substantial portion of the MuniPreferred Shares, at least initially if market
conditions are deemed favorable, would pay cumulative dividends at rates
determined over intermediate term periods (of between one and five years, which
will reset periodically), through an auction or remarketing procedure. The
Board of Trustees has indicated that the preference on distribution,
liquidation preference, voting rights and redemption provisions of the
MuniPreferred Shares will be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund could
issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred Shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such dividend
or distribution) immediately after the distribution. If the Fund sells all the
Common Shares and MuniPreferred Shares discussed in this Prospectus, the
liquidation value of the MuniPreferred Shares is expected to be approximately
32% of the value of the Fund's total net assets. The Fund intends to purchase
or redeem MuniPreferred Shares, if necessary, to keep that percentage below 50%.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to Common Shareholders.
Voting Rights. MuniPreferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the Statement of Additional Information and except as
otherwise required by applicable law, holders of MuniPreferred Shares will vote
together with Common Shareholders as a single class.
Holders of MuniPreferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees (following the establishment of
the Fund by an initial trustee, the Declaration provides for a total of no less
than two and no more than 12 trustees). The remaining trustees will be elected
by
38
Common Shareholders and holders of MuniPreferred Shares, voting together as a
single class. In the unlikely event that two full years of accrued dividends
are unpaid on the MuniPreferred Shares, the holders of all outstanding
MuniPreferred Shares, voting as a separate class, will be entitled to elect a
majority of the Fund's trustees until all dividends in arrears have been paid
or declared and set apart for payment. In order for the Fund to take certain
actions or enter into certain transactions, a separate class vote of holders of
MuniPreferred Shares will be required, in addition to the single class vote of
the holders of MuniPreferred Shares and Common Shares. See the Statement of
Additional Information under "Description of Shares--MuniPreferred
Shares--Voting Rights."
Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the
MuniPreferred Shares provide that they may be redeemed by the issuer at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any
issuance of shares by the Fund will increase such leverage. See "MuniPreferred
Shares and Leverage."
The discussion above describes the Board of Trustees' present intention with
respect to an offering of MuniPreferred Shares. The terms of the MuniPreferred
Shares may be the same as, or different from, the terms described above,
subject to applicable law and the Fund's Declaration.
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 of
the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of
all or substantially all of the Fund's assets (other than in the regular course
of the Fund's investment activities), (4) in certain circumstances, a
termination of the Fund, or a series or class of the Fund, or (5) a removal of
trustees by shareholders, and then only for cause, unless, with respect to (1)
through (4), such transaction has already been authorized by the affirmative
vote of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, is required;
provided, however, that where only a particular class or series is affected
(or, in the case of removing a trustee, when the trustee has been elected by
only one class), only the required vote by the applicable class or series will
be
39
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. In the case of the conversion of the Fund to an
open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred Shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
MuniPreferred Shares outstanding at the time, voting as a separate class, or,
if such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the
By-laws, the affirmative vote of the holders of at least a majority of the
Fund's MuniPreferred Shares outstanding at the time, voting as a separate
class. None of the foregoing provisions may be amended except by the vote of at
least two-thirds of the Common Shares and MuniPreferred Shares, voting together
as a single class. The votes required to approve the conversion of the Fund
from a closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders. See the
Statement of Additional Information under "Certain Provisions in the
Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
investment objectives and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
40
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers will actually
reduce market discount.
If the Fund converted to an open-end investment company, it would be
required to redeem all MuniPreferred Shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the Common Shares
would no longer be listed on the American Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable to
the conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of 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
The following discussion of federal income tax matters is based on the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The discussions below and in the Statement of Additional Information provide
general tax information related to an investment in the Common Shares. Because
tax laws are complex and often change, you should consult your tax advisor
about the tax consequences of an investment in the Fund.
The Fund intends to elect to be treated and to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and intends to distribute substantially all of its net
income and gains to its shareholders. Therefore, it is not expected that the
Fund will be subject to any federal income tax.
41
The Fund primarily invests in municipal securities issued by states, cities
and local authorities and certain possessions and territories of the United
States (such as Puerto Rico or Guam) or in municipal securities whose income is
otherwise exempt from regular federal income tax. Thus, substantially all of
the Fund's dividends to you 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 the federal alternative minimum tax
imposed on the shareholder. Different federal alternative minimum tax rules
apply to individuals and to corporations. If you are subject to the federal
alternative minimum tax, a portion of your regular monthly dividends may be
taxable.
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time
to time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any ordinary taxable income or net capital gain.
Distributions of net short-term capital gain are taxable as ordinary income.
Distributions of net capital gain (the excess of net long-term capital gain
over net short-term capital loss) are taxable as long-term capital gains
regardless of how long you have owned your investment. The Fund will allocate
distributions to shareholders that are treated as tax-exempt interest and as
long-term capital gain and ordinary income, if any, among the Common Shares and
MuniPreferred Shares in proportion to total dividends paid to each class for
the year. As long as the Fund qualifies as a regulated investment company,
distributions paid by the Fund generally will not be eligible for the dividends
received deduction allowed to corporations.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act")
reduced the maximum rate of tax on long-term capital gains of noncorporate
investors from 20% to 15%. The Act also reduced to 15% the maximum rate of tax
on "qualified dividend income" received by noncorporate shareholders who
satisfy certain holding period and other requirements. None of the Fund's
distributions are expected to be eligible for treatment as qualified dividend
income. Without further legislative change, the rate reductions enacted by the
Act will lapse, and the previous rates will be reinstated, for taxable years
beginning on or after January 1, 2009.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the source
of investment income by state and the portion of income that is subject to the
federal alternative minimum tax applicable to individuals. You will receive
this statement from the firm where you purchased your Common Shares if you hold
your investment in street name; the Fund will send you this statement if you
hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund must meet certain Internal Revenue Service ("I.R.S.")
requirements that govern the Fund's sources of income, diversification of
assets and distribution of earnings to shareholders. The Fund intends to meet
these requirements. If the Fund failed to do so, the Fund would be required to
pay corporate taxes on its earnings and all your distributions would be taxable
as ordinary income to the extent of the Fund's earnings and profits. In
particular, in order for the Fund to pay exempt-interest dividends, at least
50% of the value of the Fund's total assets must consist of tax-exempt
obligations at the close of each quarter of its taxable year. The Fund intends
to meet this requirement. If the Fund failed to do so, it would not be able to
pay exempt-interest dividends and your distributions attributable to interest
received by the Fund from any source would be taxable as ordinary income.
42
The sale or other disposition of Common Shares will result in capital gain
or loss to you if you hold such Common Shares as capital assets. Present law
taxes both long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, however, long-term
capital gains are eligible for reduced rates of taxation.
The Fund may be required to withhold a percentage of certain of your
dividends if you have not provided the Fund with your correct taxpayer
identification number (normally your Social Security number) and certain
certifications, or if you are otherwise subject to backup withholding. The
backup withholding percentage is 28% for amounts paid through 2010, after which
time the rate will increase to 31% absent legislative change. If you receive
Social Security benefits, you should be aware that exempt-interest dividends
are taken into account in calculating the amount of these benefits that may be
subject to federal income tax. If you borrow money to buy Fund shares, you may
not deduct the interest on that loan. Under I.R.S. rules, Fund shares may be
treated as having been bought with borrowed money even if the purchase of the
Fund shares cannot be traced directly to borrowed money.
43
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through A.G.
Edwards & Sons, Inc. and Wachovia Capital Markets, LLC, as lead managers;
Nuveen Investments, LLC ("Nuveen"); Legg Mason Wood Walker, Incorporated;
Oppenheimer & Co. Inc.; Quick & Reilly, Inc., A FleetBoston Financial Company;
RBC Dain Rauscher, Inc. and TD Waterhouse Investor Services, Inc., as their
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement with the Fund and Nuveen
Advisory (the "Underwriting Agreement"), to purchase from the Fund the number
of Common Shares set forth below opposite their respective names.
[Download Table]
Number of
Underwriters Shares
------------ ---------
A.G. Edwards & Sons, Inc..............................................
Wachovia Capital Markets, LLC.........................................
Nuveen Investments, LLC...............................................
Legg Mason Wood Walker, Incorporated..................................
Oppenheimer & Co. Inc.................................................
Quick & Reilly, Inc., A FleetBoston Financial Company.................
RBC Dain Rauscher, Inc................................................
TD Waterhouse Investor Services, Inc..................................
-
Total..............................................................
=
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions, including the absence of any materially
adverse change in the Fund's business and the receipt of certain certificates,
opinions and letters from the Fund and the Fund's attorneys and independent
accountants. The nature of the Underwriters' obligation is such that they are
committed to purchase all Common Shares offered hereby if any of the Common
Shares are purchased.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to an aggregate of
additional Common Shares to cover over-allotments, if any, at the initial
offering price. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the Common Shares
offered hereby. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a form commitment, subject to certain conditions,
to purchase an additional number of Common Shares proportionate to such
Underwriter's initial commitment.
The Representatives have advised the Fund that the Underwriters propose to
offer some of the Common Shares directly to investors at the offering price of
$15.00 per Common Share, and may offer some of the Common Shares to certain
dealers at the offering price less a concession not in excess of $ per
Common Share, and such dealers may reallow a concession not in excess of
$ per Common Share on sales to certain other dealers. The Fund has
agreed to reimburse the Underwriters for certain legal expenses in an amount
which will not exceed $15,000 (or less than % of the aggregate offering price
of the Common Shares). The Fund has also agreed to pay the Underwriters $20,000
plus $0.0025 per Common Share sold in excess of two million Common Shares as
reimbursement of the Underwriters' expenses (or less than % of the aggregate
offering price of the Common Shares). The Common Shares are offered by the
Underwriters, subject to prior sale, when, as and if delivered to and accepted
by the Underwriters, and subject to their right to reject orders in whole or in
part.
44
Certain Underwriters participating in the Common Share offering may be
invited, some period of time after completion of this offering, to participate
in the offering of the MuniPreferred Shares and will receive compensation for
their participation in that MuniPreferred Share offering. The number of Common
Shares purchased by each Underwriter in this offering may be a factor in
determining (i) whether that Underwriter is selected to participate in the
offering of the MuniPreferred Shares, (ii) the number of MuniPreferred Shares
allocated to that Underwriter in that offering, and (iii) the amount of certain
additional MuniPreferred Share underwriting compensation available to that
Underwriter. The offering costs associated with the issuance of MuniPreferred
Shares are currently estimated to be approximately 2.19% of the total amount of
the MuniPreferred Share offering. These costs will effectively be borne by the
Common Shareholders.
The Fund will pay all of its offering costs up to and including $0.03 per
Common Share. Nuveen has agreed to pay (i) all of the Fund's organizational
costs and (ii) offering costs of the Fund (other than sales load) that exceed
$0.03 per Common Share.
The Fund's Common Shares have been approved for listing on the American
Stock Exchange, subject to notice of issuance. The trading or "ticker" symbol
of the Common Shares is "NMZ." In order to meet the requirements for listing
the Common Shares on the American Stock Exchange, the Underwriters have
undertaken to sell lots of 100 or more Common Shares to a minimum of 400
beneficial owners. The minimum investment requirement is 100 Common Shares
($1,500). Prior to this offering, there has been no public market for the
Common Shares or any other securities of the Fund. Consequently, the offering
price for the Common Shares was determined by negotiation among the Fund and
the Representatives.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters for or to contribute to the losses arising out of certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Fund has agreed not to offer or sell any additional Common Shares of the
Fund, other than as contemplated by this Prospectus, for a period of 180 days
after the date of the Underwriting Agreement without the prior written consent
of the Representatives.
The Representatives have informed the Fund that the Underwriters do not
intend to confirm any sales to any accounts over which they exercise
discretionary authority.
The Fund anticipates that the Representatives and certain other Underwriters
may from time to time act as brokers or dealers in connection with the
execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may so act while they are
Underwriters.
Until the distribution of Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Shares. As
an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Shares. Such
transactions may consist of short sales, stabilizing transactions and purchases
to cover positions created by short sales. Short sales
45
involve the sale by the Underwriters of a greater number of Common Shares than
they are required to purchase in the offering. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or retarding a
decline in the market price of the Common Shares while the offering is in
progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the other Underwriters all or a portion of the
underwriting discount received by it because the Representatives have
repurchased shares sold by or for the account of such Underwriter in
stabilizing or short covering transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Common Shares. As a result, the price of the
Common Shares may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
Underwriters without notice at any time. These transactions may be effected on
the American Stock Exchange, or otherwise.
Prior to the public offering of Common Shares, Nuveen Advisory purchased
Common Shares from the Fund in an amount satisfying the net worth requirements
of Section 14(a) of the 1940 Act. As of the date of this Prospectus, Nuveen
Advisory owned 100% of the outstanding Common Shares. Nuveen Advisory may be
deemed to control the Fund until such time as it owns less than 25% of the
outstanding Common Shares, which is expected to occur as of the completion of
the offering of Common Shares.
Nuveen, 333 West Wacker Drive, Chicago, Illinois, 60606, one of the
representatives of the Underwriters, is the parent company of Nuveen Advisory.
The addresses of the lead managing underwriters are: A.G. Edwards & Sons,
Inc., One North Jefferson Avenue, St. Louis, Missouri 63103 and Wachovia
Capital Markets, LLC, 7 St. Paul Street, 1st Floor, Baltimore, Maryland 21202.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services. The
Fund's transfer, shareholder services and dividend paying agent is also State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois. Bell, Boyd & Lloyd LLC and Skadden, Arps, Slate, Meagher & Flom
(Illinois) may rely as to certain matters of Massachusetts law on the opinion
of Bingham McCutchen LLP, Boston, Massachusetts.
46
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
[Download Table]
Page
----
Use of Proceeds.................................................. 3
Investment Objectives............................................ 5
Investment Policies and Techniques............................... 9
Other Investment Policies and Techniques......................... 17
Management of the Fund........................................... 20
Investment Adviser............................................... 26
Portfolio Transactions........................................... 27
Distributions.................................................... 28
Description of Shares............................................ 29
Certain Provisions in the Declaration of Trust................... 32
Repurchase of Fund Shares; Conversion to Open-End Fund........... 33
Tax Matters...................................................... 36
Experts.......................................................... 40
Custodian........................................................ 40
Additional Information........................................... 40
Report of Independent Auditors................................... 42
Financial Statements............................................. 43
Appendices
Appendix A--Ratings of Investments............................ A-1
Appendix B--Taxable Equivalent Yield Tables................... B-1
Appendix C--Hedging Strategies and Risks...................... C-1
Appendix D--Performance Related and Comparative Information... D-1
47
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--------------------------------------------------------------------------------
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
[Download Table]
Page
----
Prospectus Summary...................... 1
Summary of Fund Expenses................ 11
The Fund................................ 13
Use of Proceeds......................... 13
The Fund's Investments.................. 13
MuniPreferred Shares and Leverage....... 21
Risks................................... 24
How the Fund Manages Risk............... 31
Management of the Fund.................. 32
Net Asset Value......................... 35
Distributions........................... 35
Dividend Reinvestment Plan.............. 36
Description of Shares................... 37
Certain Provisions in the Declaration of
Trust................................. 39
Repurchase of Fund Shares; Conversion to
Open-End Fund......................... 41
Tax Matters............................. 41
Underwriting............................ 44
Custodian and Transfer Agent............ 46
Legal Opinions.......................... 46
Table of Contents for the Statement of
Additional Information................ 47
-------------
Until , 2003 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the Common Shares, 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.
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Shares
Nuveen
Municipal High Income Opportunity
Fund
Common Shares
---------------
PROSPECTUS
---------------
A.G. Edwards & Sons, Inc.
Wachovia Securities
Nuveen Investments, LLC
Legg Mason Wood Walker
Incorporated
Oppenheimer
Quick & Reilly, Inc.
RBC Capital Markets
TD Waterhouse
, 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-MHIO-1103
SUBJECT TO COMPLETION, DATED NOVEMBER , 2003
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
Nuveen Municipal High Income Opportunity Fund
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Municipal High Income Opportunity Fund (the "Fund") is a newly
organized, diversified closed-end management investment company. The Fund was
organized on October 8, 2003 as Nuveen Municipal High Yield Opportunity Fund,
but changed its name to Nuveen Municipal High Income Opportunity Fund effective
October 15, 2003.
This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") does not constitute a prospectus, but should be read in
conjunction with the Fund's Prospectus relating thereto dated ____________, 2003
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
Common Shares. Investors should obtain and read the Fund's Prospectus prior to
purchasing such shares. A copy of the Fund's Prospectus may be obtained without
charge by calling (800) 257-8787. You may also obtain a copy of the Fund's
Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
1
TABLE OF CONTENTS
[Download Table]
Page
--------
Use of Proceeds 3
Investment Objectives 5
Investment Policies and Techniques 9
Other Investment Policies and Techniques 17
Management of the Fund 20
Investment Adviser 26
Portfolio Transactions 27
Distributions 28
Description of Shares 29
Certain Provisions in the Declaration of Trust 32
Repurchase of Fund Shares; Conversion to Open-End Fund 33
Tax Matters 36
Experts 40
Custodian 40
Additional Information 40
Report of Independent Auditors 42
Financial Statements 43
Ratings of Investments (Appendix A) A-1
Taxable Equivalent Yield Tables (Appendix B) B-1
Hedging Strategies and Risks (Appendix C) C-1
Performance Related and Comparative Information (Appendix D) D-1
This Statement of Additional Information is dated ____________, 2003
2
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be
approximately: $__________ ($__________ if the Underwriters exercise the
over-allotment option in full) after payment of estimated organization and
offering costs.
3
For the Fund, Nuveen Advisory has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share.
Pending investment in municipal securities that meet the Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal securities with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the Fund
may also purchase, as temporary investments, short-term taxable investments of
the type described under "Investment Policies and Techniques--Investment
Policies," the income on which is subject to regular federal income tax and
securities of other open or closed-end investment companies that invest
primarily in municipal securities of the type in which the Fund may invest
directly.
4
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to provide high current income exempt
from regular federal income tax. The Fund's secondary investment objective is to
seek attractive total return consistent with its primary objective. Any capital
appreciation realized by the Fund will generally result in the distribution of
taxable capital gains to Common Shareholders. The Fund seeks to achieve its
investment objectives by investing in municipal securities that Nuveen Advisory
believes are underrated and undervalued. The Fund cannot assure you that it will
achieve its investment objectives. The Fund's investment objectives are
fundamental policies of the Fund.
5
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, if issued, MuniPreferred Shares (as hereinafter defined) voting
together as a single class, and of the holders of a majority of the outstanding
MuniPreferred Shares voting as a separate class:
(1) Under normal circumstances, invest less than 80% of the Fund's net
assets (plus any borrowings for investment purposes) in investments the
income from which is exempt from regular federal income tax;
(2) Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred Shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the Prospectus;
(3) Borrow money, except as permitted by the Investment Company Act of
1940 and exemptive orders granted under the Investment Company Act of 1940;
(4) Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
(5) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal securities other than those municipal securities backed
only by the assets and revenues of non-governmental users;
6
(6) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal securities secured by real estate or interests
therein or foreclosing upon and selling such real estate;
(7) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts or
derivative instruments or from investing in securities or other instruments
backed by physical commodities);
(8) Make loans, except as permitted by the Investment Company Act of
1940 and exemptive orders granted under the Investment Company Act of 1940;
(9) With respect to 75% of the value of the Fund's total assets,
purchase any securities (other than obligations issued or guaranteed by the
United States government or by its agencies or instrumentalities), if as a
result more than 5% of the Fund's total assets would then be invested in
securites 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; and
(10) Invest in securities other than municipal securities and
short-term securities, as described in the Prospectus, except the Fund may
invest up to 5% of its net assets in tax-exempt or taxable fixed-income or
equity securities for the purpose of acquiring control of an issuer whose
municipal securities (a) the Fund already owns and (b) have deteriorated or
are expected shortly to deteriorate significantly in credit quality,
provided Nuveen Advisory determines such investment should enable the Fund
to maximize better its existing investment in such issuer.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is
less.
For the purpose of applying the limitation set forth in subparagraph (9)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), 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 security 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 security 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
securities insured by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up to
10% of its Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed Assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
stockholder in any investment company, the Fund will bear its ratable share of
7
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of Common Shares would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "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.
In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in kind and amount to the securities sold at
no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 or any
exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control, except as otherwise permitted in the Fund's prospectus and
statement of additional information.
(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 in effect a
leveraged investment in an underlying municipal security).
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.
The Fund intends to apply for ratings for its preferred shares (called
"MuniPreferred Shares" herein) from Fitch, Moody's and/or S&P. In order to
obtain and maintain the required ratings, the Fund may be required to comply
with investment quality, diversification and other guidelines established by
Fitch, Moody's or S&P. Such guidelines will likely be more restrictive than the
restrictions set forth above, including with respect to the Fund's hedging
strategies. The Fund does not anticipate that such guidelines would have a
material
8
adverse effect on its Common Shareholders or its ability to achieve its
investment objectives. The Fund presently anticipates that any MuniPreferred
Shares that it intends to issue would be initially given the highest ratings by
Fitch ("AAA"), by Moody's ("Aaa") or by S&P ("AAA"), but no assurance can be
given that such ratings will be obtained. No minimum rating is required for the
issuance of MuniPreferred Shares by the Fund. Fitch, Moody's and S&P receive
fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
Investment Philosophy and Process
Investment Philosophy. Nuveen Advisory believes that the unique tax treatment of
municipal securities and the structural characteristics in the municipal
securities market create attractive opportunities to enhance the after-tax total
return and diversification of the investment portfolios of taxable investors.
Nuveen Advisory believes that these unique characteristics also present unique
risks that may be managed to realize the benefits of the asset class.
After-Tax Income Potential: The primary source of total return from
municipal securities comes from the tax-exempt income derived therefrom.
Nuveen Advisory believes that, at acceptable levels of credit risk and
maturity principal risk, the municipal securities market offers the
potential for higher after-tax income when compared with other fixed income
markets.
Managing Multi-Faceted Risks: Risk in the municipal securities market is
derived from multiple sources, including credit risk at the issuer and
sector levels, structural risks such as call risk, yield curve risk, and
legislative and tax-related risks. Nuveen Advisory believes that managing
these risks at both the individual security and Fund portfolio levels is an
important element of realizing the after-tax income and total return
potential of the asset class.
Opportunities for Diversification: As of December 31, 2002, the municipal
securities market aggregated approximately $1.76 trillion, and over 50,000
issuers, collectively with a wide array of financing purposes, security
terms, offering structures, and credit quality. Nuveen Advisory believes
that the size and depth of the municipal securities market may facilitate
the creation of a diversified portfolio that reduces exposure to the risks
of individual issuers and may lower correlations to other credit and market
risks within an investor's overall portfolio.
Market Inefficiencies: Nuveen Advisory believes that the scale and
intricacy of the municipal securities market often results in pricing
anomalies and other inefficiencies that can be identified and capitalized
on through trading strategies.
Investment Process. Nuveen Advisory believes that a bottom-up, value-oriented
investment strategy that seeks to identify underrated and undervalued securities
and sectors is positioned to capture the opportunities inherent in the municipal
securities market and potentially outperform the general municipal securities
market over time. The primary elements of Nuveen Advisory's investment process
are:
Credit Analysis and Surveillance: Nuveen Advisory focuses on bottom-up,
fundamental analysis of municipal securities issuers. Analysts screen each
sector for issuers that meet the fundamental tests of creditworthiness and
favor those securities with demonstrable growth potential, solid coverage
of debt service and a priority lien on hard assets, dedicated revenue
streams or tax resources. As part of Nuveen Advisory's overall risk
management process, analysts actively monitor the credit quality of
portfolio holdings.
Sector Analysis: Organized by sector, analysts continually assess the key
issues and trends affecting each sector in order to maintain a sector
outlook. Evaluating such factors as historical default rates and average
credit spreads within each sector, analysts provide top-down analysis that
supports decisions to overweight or underweight a given sector in a
portfolio.
Diversification: Nuveen Advisory seeks to invest in a large number of
sectors, states and specific issuers in order to help insulate a portfolio
from events that affect any individual industry, geographic location or
credit. Portfolio managers normally seek to limit exposure to individual
credits over the long-term. Portfolio managers also seek to diversify other
portfolio level risks, including exposure to calls, and to manage a
portfolio's interest rate sensitivity within tolerance bands relative to
the relevant benchmark.
Trading Strategies: Through its trading strategies, Nuveen Advisory seeks
to enhance portfolio value by trading to take advantage of inefficiencies
found in the municipal market. This may entail selling issues Nuveen
Advisory deems to be overvalued and purchasing issues Nuveen Advisory
considers to be undervalued.
Sell Discipline: Nuveen Advisory generally sells securities when it
(i) determines a security has become overvalued or over-rated,
(ii) identifies credit deterioration, or (iii) modifies a portfolio
strategy, such as sector allocation. Nuveen Advisory may also sell
securities when such securities exceed the portfolio's diversification
targets.
Investment Policies
Under normal circumstances, the Fund will invest its Managed Assets in a
portfolio of municipal securities that pay interest that is exempt from regular
federal income tax. It is a fundamental policy of the Fund that its investment
in municipal securities paying interest that is exempt from regular federal
income tax will, under normal circumstances, comprise at least 80% of the Fund's
Managed Assets.
Under normal circumstances, and except for the temporary investments
described below, the Fund expects to be fully invested (at least 95% of its
Managed Assets) in such tax-exempt municipal securities described above. Up to
30% of the Fund's Managed Assets may be invested in municipal securities that
pay interest that is taxable under the federal alternative minimum tax
applicable to individuals.
. The Fund will invest at least 50% of its Managed Assets in investment
grade quality municipal securities. A security is considered
investment grade quality if it is rated within the four highest grades
(Baa or BBB or better by Moody's, S&P or Fitch) by all NRSROs that rate
such security, or if it is unrated but judged to be of comparable
quality by Nuveen Advisory.
. The Fund may invest up to 50% of its Managed Assets in municipal
securities that at the time of investment are rated below investment
grade. Below investment grade quality municipal securities include
those municipal securities that are rated investment grade by one or
more NRSROs but rated below investment grade by at least one NRSRO. No
more than 5% of the Fund's Managed Assets may be invested in municipal
securities rated below B-/B3 or that are unrated but judged to be of
comparable quality by Nuveen Advisory. This means that the Fund may
invest in municipal securities that are involved in bankruptcy or
insolvency proceedings or are experiencing other financial difficulties
at the time of acquisition (such securities are commonly referred to as
distressed securities).
. The Fund anticipates that, upon the full investment of the net proceeds
from this offering (which is expected to occur within two to three
months following the closing of this offering), it will have invested
approximately 55% to 65% of its Managed Assets in investment grade
municipal securities and approximately 35% to 45% of its Managed Assets
in below investment grade municipal securities. The relative percentages
of the value of the Fund's Managed Assets attributable to investment
grade municipal securities and to below investment grade municipal
securities could change over time as a result of rebalancing the Fund's
assets by Nuveen Advisory, market value fluctuations and other events.
9
Municipal securities 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 securities 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 may also purchase municipal
securities that represent lease obligations, municipal notes, pre-refunded
municipal securities, private activity bonds, tender option bonds and other
forms of municipal securities.
Municipal securities of below investment grade quality (Ba/BB or below) are
commonly referred to as junk bonds. Issuers of securities 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 securities rated Baa or BBB are
considered "investment grade" securities; municipal securities rated Baa are
considered medium grade obligations which lack outstanding investment
characteristics and have speculative characteristics, while municipal securities
rated BBB are regarded as having adequate capacity to pay principal and
interest. Municipal securities rated Aaa or 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 securities
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
securities rated below investment grade tend to be less marketable than
higher-quality securities because the market for them is less broad. The market
for unrated municipal securities 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.
The Fund may invest in distressed securities, which are securities issued
by companies that are involved in bankruptcy or insolvency proceedings or are
experiencing other financial difficulties at the time of acquisition by the
Fund. The issuers of such securities may be in transition, out of favor,
financially leveraged or troubled, or potentially troubled, and may be or have
recently been involved in major strategic actions, restructurings, bankruptcy,
reorganization or liquidation. These characteristics of these companies can
cause their securities to be particularly risky, although they also may offer
the potential for high returns. These companies' securities may be considered
speculative, and the ability of the companies to pay their debts on schedule
could be affected by adverse interest rate movements, changes in the general
economic climate, economic factors affecting a particular industry or specific
developments within the companies. Distressed securities frequently do not
produce income while they are outstanding and may require the Fund to bear
certain extraordinary expenses in order to protect and recover its investment.
Investments in lower rated or unrated securities may present special tax
issues for the Fund to the extent that the issuers of these securities default
on their obligations pertaining thereto, and the federal income tax consequences
to the Fund as a holder of such distressed securities may not be clear.
A general description of Moody's, S&P's and Fitch's ratings of municipal
securities is set forth in Appendix A hereto. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of the municipal securities
they rate. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, municipal securities 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.
10
The Fund will primarily invest in municipal securities with long-term
maturities in order to maintain a weighted average maturity of 15 to 30 years,
but the weighted average maturity of obligations held by the Fund may be
shorter, depending on market conditions. As a result, the Fund's portfolio at
any given time may include both long-term and intermediate-term municipal
securities. 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 securities market adversely affect the
price at which long-term or intermediate-term municipal securities 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 Managed Assets in securities of other open or
closed-end investment companies that invest primarily in municipal securities 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 A for a general description of Moody's, S&P's and Fitch's ratings of
securities in such categories. Taxable short-term investments of the Fund may
include certificates of deposit issued by U.S. banks with assets of at least $1
billion, or commercial paper or corporate notes, bonds or debentures with a
remaining maturity of one year or less, or repurchase agreements. See "Other
Investment Policies and Techniques--Repurchase Agreements." To the extent the
Fund invests
11
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.
Obligations of issuers of municipal securities 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 securities may be materially affected.
The Fund presently intends to limit its investment in tobacco settlement
bonds to no more than 10% of its Managed Assets. In addition, the Fund will not
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 in effect a leveraged investment
in an underlying municipal security.
Subject to guidelines which may be imposed in connection with the Fund's
seeking an investment grade rating on the MuniPreferred Shares, the Fund may
invest a significant portion of its Managed Assets in broad segments of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, special taxing districts, securities issued to finance
charter schools and other private educational facilities, municipal utility
securities, industrial development bonds and other private activity bonds.
Subject to the availability of suitable investment opportunities, Nuveen
Advisory will attempt to minimize the sensitivity of the Fund's portfolio to
credit and other risks associated with a particular sector or industry. However,
if the Fund invests a significant portion of its Managed Assets in the segments
noted above, the Fund will be more susceptible to economic, business, political,
regulatory and other developments generally affecting issuers in such segments
of the municipal securities market. To the extent that the Fund focuses its
Managed Assets in the hospital and healthcare facilities sector, the Fund will
be subject to risks associated with such sector, including adverse government
regulation and reduction in reimbursement rates, as well as government approval
of products and services and intense competition. Securities issued to finance
charter schools and other private educational facilities will be subject to
various risks, including the reversal of legislation authorizing or funding
charter schools, the failure to renew or secure a charter, the failure of a
funding entity to appropriate necessary funds and competition from alternatives
such as voucher programs. Issuers of municipal utility securities can be
significantly affected by government regulation, financing difficulties, supply
and demand of services or fuel and natural resource conservation.
Up to 30% of the Fund's Managed Assets may be invested in municipal
securities subject to the federal alternative minimum tax applicable to
individuals. Special federal alternative minimum tax rules apply to corporate
investors. See "Tax Matters."
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period during
which the net proceeds of the offering of Common Shares or MuniPreferred Shares
are being invested, the Fund may deviate from its investment objectives and
invest up to 100% of its Managed 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.
Municipal Leases and Certificates of Participation. Also included within the
general category of municipal securities described in the Fund's Prospectus are
municipal leases, certificates of participation in such 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
12
purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer
has a strong incentive to continue making appropriations until maturity.
Pre-Refunded Municipal Securities. The principal of and interest on pre-refunded
municipal securities are no longer paid from the original revenue source for the
securities. Instead, the source of such payments is typically an escrow fund
consisting of U.S. government securities. The assets in the escrow fund are
derived from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded municipal securities. Issuers of municipal securities use this
advance refunding technique to obtain more favorable terms with respect to
securities that are not yet subject to call or redemption by the issuer. For
example, advance refunding enables an issuer to refinance debt at lower market
interest rates, restructure debt to improve cash flow or eliminate restrictive
covenants in the indenture or other governing instrument for the pre-refunded
municipal securities. However, except for a change in the revenue source from
which principal and interest payments are made, the pre-refunded municipal
securities remain outstanding on their original terms until they mature or are
redeemed by the issuer.
Private Activity Bonds. Private activity bonds, formerly referred to as
industrial development bonds, are issued by or on behalf of public authorities
to obtain funds to provide privately operated housing facilities, airport, mass
transit or port facilities, sewage disposal, solid waste disposal or hazardous
waste treatment or disposal facilities and certain local facilities for water
supply, gas or electricity. Other types of private activity bonds, the proceeds
of which are used for the construction, equipment, repair or improvement of
privately operated industrial or commercial facilities, may constitute municipal
securities, although the current federal tax laws place substantial limitations
on the size of such issues. The Fund's distributions of its interest income from
private activity bonds may subject certain investors to the federal alternative
minimum tax applicable to individuals.
Tender Option Bonds. A tender option bond is a municipal security (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing
short-term, tax-exempt rates. The bond is typically issued with the agreement of
a third party, such as a bank, broker-dealer or other financial institution,
which grants the security holders the option, at periodic intervals, to tender
their securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the bond's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term, tax-exempt rate. However, an
institution will not be obligated to accept tendered bonds in the event of
certain defaults or a significant downgrade in the credit rating assigned to the
issuer of the bond. The Fund intends to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by Nuveen Advisory, be exempt from
regular federal income tax. However, because there can be no assurance that the
IRS will agree with such counsel's opinion in any particular case, there is a
risk that the Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the proper tax treatment of tender option bonds and the
associated fees in relation to various regulated investment company tax
provisions, is unclear. The Fund intends to manage its portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Special Taxing Districts. Special taxing districts are organized to plan and
finance infrastructure development to induce residential, commercial and
industrial growth and redevelopment. The bond financing methods such as tax
increment finance, tax assessment, special services district and Mello-Roos
bonds, are generally payable solely from taxes or other revenues attributable to
the specific projects financed by the bonds without recourse to the credit or
taxing power of related or overlapping municipalities. They often are exposed to
real estate development-related risks and can have more taxpayer concentration
risk than general tax-supported bonds, such as general obligation bonds.
Further, the fees, special taxes, or tax allocations and other revenues that are
established to secure such financings are generally limited as to the rate or
amount that may be levied or assessed and are not subject to increase pursuant
to rate covenants or municipal or corporate guarantees. The bonds could default
if development failed to progress as anticipated or if larger taxpayers failed
to pay the assessments, fees and taxes as provided in the financing plans of the
districts.
13
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.
(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
* These securities are not backed by the full faith and credit of the United
States Government.
14
temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans to
the seller, collateralized by the underlying securities. The risk to the
Fund is limited to the ability of the seller to pay the agreed-upon sum on
the repurchase date; in the event of default, the repurchase agreement
provides that the Fund is entitled to sell the underlying collateral. If
the seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. Nuveen Advisory 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. Nuveen Advisory does so
in an effort to determine that the value of the collateral always equals or
exceeds the agreed-upon repurchase price to be paid to the Fund. If the
seller were to be subject to a federal bankruptcy proceeding, the ability
of the Fund to liquidate the collateral could be delayed or impaired
because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. Nuveen Advisory will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity measures)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.
Short-Term Tax-Exempt Municipal Securities
Short-term tax-exempt municipal 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 municipal 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.
15
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies, such
as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term
unsecured, negotiable promissory notes issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities of municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of Municipal Paper.
Certain municipal securities may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market index.
While the various types of notes described above as a group represent the
major portion of the short-term tax-exempt note market, other types of notes are
available in the marketplace and the Fund may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.
Hedging Strategies
The Fund may periodically engage in hedging transactions. Hedging is a
term used for various methods of seeking to preserve portfolio capital value by
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments partially to hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in
16
financial futures and index futures as well as related put and call options on
such instruments. Both parties entering into an index or financial futures
contract are required to post an initial deposit of 1% to 5% of the total
contract price. Typically, option holders enter into offsetting closing
transactions to enable settlement in cash rather than take delivery of the
position in the future of the underlying security. The Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in the Fund's
portfolio. In addition, futures and options markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
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. For further information
regarding these investment strategies and risks presented thereby, see Appendix
C to this Statement of Additional Information.
The Fund may utilize structured notes and similar instruments for
investment purposes and also for hedging purposes. Structured notes are
privately negotiated debt obligations where the principal and/or interest is
determined by reference to the performance of a benchmark asset, market or
interest rate (an "embedded index"), such as selected securities, an index of
securities or specified interest rates, or the differential performance of two
assets or markets. The terms of such structured instruments normally provide
that their principal and/or interest payments are to be adjusted upwards or
downwards (but not ordinarily below zero) to reflect changes in the embedded
index while the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a structured product may
vary widely, depending upon a variety of factors, including the volatility of
the embedded index and the effect of changes in the embedded index on principal
and/or interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index or indices or other assets. Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.
Other hedging strategies include using credit default swaps, interest-rate
swaps on taxable or tax-exempt indices, forward starting interest rate swaps and
options on interest rate swaps. These hedging strategies may also generate
taxable income.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may be resold only pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act") that are deemed to be
illiquid, and certain repurchase agreements.
17
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. To the extent that the Board of Trustees or its delegatee determines that
the price of any illiquid security provided by the pricing service is
inappropriate, such security will be priced at a fair value as determined in
good faith by the Board of Trustees or its delegatee.
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 20%.
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 20% in
particular years.
Other Investment Companies
The Fund may invest up to 10% of its Managed Assets in securities of other
open or closed-end investment companies that invest primarily in municipal
securities of the types in which the Fund may invest directly. In addition, the
Fund may invest a portion of its Managed Assets in pooled investment vehicles
other than investment companies that invest primarily in municipal securities of
the types in which the Fund may invest directly. The Fund generally expects that
it may invest in other investment companies and/or other pooled investment
vehicles 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 securities available in the
market. As a stockholder in an investment company, the Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of the Fund's management, advisory and administrative fees with respect
to assets so invested. Common Shareholders would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. Nuveen Advisory will take expenses into account when evaluating the
investment merits of an investment in an investment company relative to
available municipal security investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein. As described in the Fund's Prospectus in
the section entitled "Risks," the net asset value and market value of leveraged
shares will be more
18
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 securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Commission to maintain in a separate account liquid assets,
consisting of cash, cash equivalents or liquid securities having a market value,
at all times, of at least equal to the amount of the commitment. Income
generated by any such assets which provide taxable income for federal income tax
purposes is includable in the taxable income of the Fund. The Fund may enter
into contracts to purchase municipal securities 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 securities) agrees to repurchase the
same security at a specified price on a future date agreed upon by the parties.
The agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and MuniPreferred Shares, if any. The Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of Nuveen Advisory, present minimal credit risk. The risk to the
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds
the agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will
19
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. When held to its maturity, its return
comes from the difference between the purchase price and its maturity value. The
market prices of zero coupon bonds are affected to a greater extent by changes
in prevailing levels of interest rates and thereby tend to be more volatile in
price than securities that pay interest periodically and may be more speculative
than such securities. In addition, because the Fund accrues income with respect
to these securities prior to the receipt of such interest, it may have to
dispose of portfolio securities under disadvantageous circumstances in order to
obtain cash needed to pay income dividends in amounts necessary to avoid
unfavorable tax consequences.
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at twelve. None of the trustees who are not "interested" persons
of the Fund has ever been a director or employee of, or consultant to, Nuveen or
its affiliates. The names and business addresses of the trustees and officers of
the Fund, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
[Enlarge/Download Table]
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Trustee who is an interested person of the Fund:
-----------------------------------------------
Timothy R. Schwertfeger* Chairman of the Chairman and Director (since 1996) of 141
3/28/49 Board and Nuveen Investments, Inc., Nuveen Investments,
333 West Wacker Drive Trustee 2003 LLC, Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Chairman and Director (since
1997) of Nuveen Asset Management Inc.;
Director (since 1996) of Institutional Capital
Corporation; Chairman and Director (since 1999)
of
* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, because he is an officer and director of
Nuveen Advisory.
20
[Enlarge/Download Table]
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Trustee
------------ -------
Rittenhouse Asset Management, Inc.;
Chairman (since 2002) of Nuveen Investment
Advisers Inc.
Trustees who are not interested persons of the Fund:
---------------------------------------------------
William E. Bennett Trustee Private Investor; previously, President and 141
10/16/46 2003 Chief Executive Officer, Draper & Kramer, Inc.,
333 West Wacker Drive a private company that handles mortgage banking,
Chicago, IL 60606 real estate development, pension advisory and
real estate management (1995-1998). Prior thereto,
Executive Vice President and Chief Credit Officer
of First Chicago Corporation and its principal
subsidiary, The First National Bank of Chicago.
Robert P. Bremner Trustee Private Investor and Management Consultant. 140
8/22/40 2003
333 West Wacker Drive
Chicago, IL 60606
Lawrence H. Brown Trustee Retired (August 1989) as Senior Vice President 140
7/29/34 2003 of The Northern Trust Company; Director of the
333 West Wacker Drive United Way Highland Park-Highwood (since 2002).
Chicago, IL 60606
Jack B. Evans Trustee President, The Hall-Perrine Foundation, a 131
10/22/48 2003 private philanthropic corporation (since 1996);
333 West Wacker Drive Director, Alliant Energy; Director and Vice
Chicago, IL 60606 Chairman, United Fire & Casualty Company; Director,
Federal Reserve Bank of Chicago; formerly,
President and Chief Operating Officer, SCI Financial
Group, Inc., a regional financial services firm.
Anne E. Impellizzeri Trustee Retired; formerly, Executive Director (1998-2001) 140
1/26/33 2003 of Manitoga (Center for Russel Wright's
333 West Wacker Drive Design with Nature); formerly, President and
Chicago, IL 60606 Executive Officer of Blanton-Peale Institutes
of Religion and Health (since 1990); prior thereto,
Vice President, Metropolitan Life Insurance Co.
William L. Kissick Trustee Professor Emeritus, School of Medicine and the 131
7/29/32 2003 Wharton School of Management and former Chairman,
333 West Wacker Drive Leonard Davis Institute of Health Economics,
Chicago, IL 60606 University of Pennsylvania; Adjunct Professor,
Health Policy and Management, Yale University.
Thomas E. Leafstrand(1) Trustee Retired; previously, Vice President in charge of 131
11/11/31 2003 Municipal Underwriting and Dealer Sales at The
333 West Wacker Drive Northern Trust Company.
Chicago, IL 60606
Peter R. Sawers Trustee Adjunct Professor of Business and Economics, 140
4/3/33 2003 University of Dubuque, Iowa; formerly
333 West Wacker Drive (1991-2000) Adjunct Professor, Lake Forest
Chicago, IL 60606 Graduate School of Management, Lake Forest,
Illinois; prior thereto, Executive Director,
Towers Perrin Australia, a management consulting
firm; Chartered Financial Analyst; Director,
Executive Service Corps. of Chicago, a not-for-
profit organization; Certified Management Consultant.
William J. Schneider Trustee Senior Partner and Chief Operating Officer, 140
9/24/44 2003 Miller-Valentine Group, Vice President,
333 West Wacker Drive Miller-Valentine Realty, a construction company;
Chicago, IL 60606 Chair, Miami Valley Hospital; Chair, Dayton
Development Coalition; formerly, Member, Community
Advisory Board, National City Bank, Dayton, Ohio
and Business Advisory Council, Cleveland Federal
Reserve Bank.
Judith M. Stockdale Trustee Executive Director, Gaylord and Dorothy 140
12/29/47 2003 Donnelley Foundation (since 1994); prior
333 West Wacker Drive thereto, Executive Director, Great Lakes
Chicago, IL 60606 Protection Fund (from 1990 to 1994).
Sheila W. Wellington(1) Trustee Retired. Formerly President (since 1993) 131
2/24/32 2003 of Catalyst (a not-for-profit organization
333 West Wacker Drive focusing on women's leadership development
Chicago, IL 60606 in business and the professions).
(1) Mr. Leafstrand and Ms. Wellington will retire as trustees effective July 1,
2004, in accordance with the retirement policy currently in place.
21
[Enlarge/Download Table]
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- ---------------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Officers of the Fund:
--------------------
Gifford R. Zimmerman Chief Administrative Managing Director (since 2002), Assistant 141
9/9/56 Officer Secretary and Associate General Counsel, formerly,
333 W. Wacker Drive 2003 Vice President and Assistant General Counsel, of
Chicago, IL 60606 Nuveen Investments, LLC; Managing Director (since
2002), General Counsel (since 1998) and Assistant
Secretary, formerly, Vice President of Nuveen
Advisory Corp. and Nuveen Institutional Advisory
Corp.; Managing Director (since 2002) and Assistant
Secretary and Associate General Counsel, formerly,
Vice President (since 2000) of Nuveen Asset
Management, Inc.; Assistant Secretary of Nuveen
Investments, Inc. (since 1994); Assistant Secretary
of NWQ Investment Management Company, LLC (since
2002); Vice President and Assistant Secretary of
Nuveen Investments Advisers Inc. (since 2002);
Managing Director, Associate General Counsel and
Assistant Secretary of Rittenhouse Asset Management,
Inc. (since May 2003); Chartered Financial Analyst;
Assistant Secretary (since 2003) of Symphony Asset
Management LLC.
Michael T. Atkinson Vice President and Vice President (since 2002), formerly, Assistant 141
2/3/66 Assistant Secretary Vice President (since 2000), previously, Associate
333 W. Wacker Drive 2003 of Nuveen Investments.
Chicago, IL 60606
Paul L. Brennan Vice President Vice President (since 2002), formerly, Assistant 127
11/10/66 2003 Vice President (since 1997), of Nuveen Advisory
333 W. Wacker Drive Corp.; Chartered Financial Analyst and Certified
Chicago, IL 60606 Public Accountant.
Peter H. D'Arrigo Vice President and Vice President of Nuveen Investments, LLC (since 141
11/28/67 Treasurer 1999), prior thereto, Assistant Vice President
333 W. Wacker Drive 2003 (from 1997); Vice President and Treasurer
Chicago, IL 60606 (since 1999) of Nuveen Investments, Inc.; Vice
President and Treasurer (since 1999) of Nuveen
Advisory Corp. and Nuveen Institutional Advisory
Corp.; Vice President and Treasurer of Nuveen
Asset Management, Inc. (since 2002) and of Nuveen
Investment Advisers Inc. (since 2002); Assistant
Treasurer of NWQ Investment Management Company,
LLC (since 2002); Treasurer (since 2003) of
Symphony Asset Management LLC; Chartered Financial
Analyst.
Susan M. DeSanto Vice President Vice President of Nuveen Advisory Corp. (since 141
9/8/54 2003 2001); previously, Vice President of Van Kampen
333 W. Wacker Drive Investment Advisory Corp. (since 1998).
Chicago, IL 60606
Jessica R. Droeger Vice President and Vice President (since 2002) and Assistant 141
9/24/64 Assistant Secretary Secretary and Assistant General Counsel (since
333 W. Wacker Drive 2003 1998); formerly, Assistant Vice President (since
Chicago, IL 60606 1998) of Nuveen Investments, LLC; Vice President
(since 2002) and Assistant Secretary
(since 1998), formerly, Assistant Vice President
of Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp.
Lorna C. Ferguson Vice President Vice President of Nuveen Investments, LLC; Vice 141
10/24/45 2003 President (since 1998) of Nuveen Advisory Corp.
333 W. Wacker Drive and Nuveen Institutional Advisory Corp.
Chicago, IL 60606
William M. Fitzgerald Vice President Managing Director (since 2002), formerly, Vice 141
3/2/64 2003 President of Nuveen Investments; Managing Director
333 W. Wacker Drive (since 1997), of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; Managing Director of
Nuveen Asset Management, Inc. (since 2001); Vice
President of Nuveen Investments Advisers Inc.
(since 2002); Chartered Financial Analyst.
Stephen D. Foy Vice President and Vice President (since 1993) and Funds Controller 141
5/31/54 Controller (since 1998) of Nuveen Investments, LLC;
333 W. Wacker Drive 2003 Certified Public Accountant.
Chicago, IL 60606
J. Thomas Futrell Vice President Vice President of Nuveen Advisory Corp.; 127
7/5/55 2003 Chartered Financial Analyst.
333 W. Wacker Drive
Chicago, IL 60606
22
[Enlarge/Download Table]
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Steven J. Krupa Vice President Vice President of Nuveen Advisory Corp. 127
8/21/57 2003
333 W. Wacker Drive
Chicago, IL 60606
David J. Lamb Vice President Vice President (since 2000) of Nuveen 127
3/22/63 2003 Investments, LLC, previously Assistant Vice
333 W. Wacker Drive President (since 1999); prior thereto,
Chicago, IL 60606 Associate of Nuveen Investments; Certified
Public Accountant.
Tina M. Lazar Vice President Vice President of Nuveen Investments, LLC (since 141
8/27/61 2003 1999); prior thereto, Assistant Vice President
333 W. Wacker Drive (since 1993).
Chicago, IL 60606
Larry W. Martin Vice President and Vice President, Assistant Secretary and Assistant 141
7/27/51 Assistant Secretary General Counsel of Nuveen Investments, LLC; Vice
333 W. Wacker Drive 2003 President and Assistant Secretary of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.; Assistant Secretary of Nuveen Investments
Inc.; Assistant Secretary of Nuveen Asset
Management, Inc., (since 1997); Vice President
(since 2000), Assistant Secretary and Assistant
General Counsel (since 1998) of Rittenhouse Asset
Management, Inc.; Vice President and Assistant
Secretary of Nuveen Investments Advisers Inc.
(since 2002); Assistant Secretary of NWQ
Investment Management Company, LLC (since 2002);
Assistant Secretary (since 2003) of Symphony
Asset Management LLC.
John V. Miller Vice President Vice President (since 2003), previously, credit 127
4/10/67 2003 analyst (since 1996), of Nuveen Advisory Corp.;
333 W. Wacker Drive Chartered Financial Analyst.
Chicago, IL 60606
Edward F. Neild, IV Vice President Managing Director (since 2002), formerly, Vice 141
7/7/65 2003 President of Nuveen Investments; Managing Director
333 W. Wacker Drive (since 1997) of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; Managing Director of
Nuveen Asset Management, Inc. (since 1999);
Chartered Financial Analyst.
Thomas J. O'Shaughnessy Vice President Vice President (since January 2002), 127
9/4/60 2003 formerly, Assistant Vice President (since 1998),
333 W. Wacker Drive of Nuveen Advisory Corp.; prior thereto,
Chicago, IL 60606 portfolio manager.
23
[Enlarge/Download Table]
Name, Birthdate Positions and Principal Occupations Number of
--------------- ------------- --------------------- ---------
and Address Offices with the Including Other Directorships Portfolios in
----------- ---------------- ----------------------------- -------------
Fund and Year During Past Five Years Fund Complex
------------- ---------------------- ------------
First Elected Overseen by
------------- -----------
or Appointed Officer
------------ -------
Thomas C. Spalding Vice President Vice President of Nuveen Advisory Corp. and 127
7/31/51 2003 Nuveen Institutional Advisory Corp.; Chartered
333 W. Wacker Drive Financial Analyst.
Chicago, IL 60606
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the valuation committee. Because the Fund is newly
organized, none of the committees have met during the Fund's last fiscal year.
The executive committee met once prior to the commencement of the Fund's
operations.
Robert P. Bremner, Anne E. Impellizzeri and Timothy R. Schwertfeger, Chair,
serve as members of the executive committee of the Board of Trustees of the
Fund. The executive committee, which meets between regular meetings of the Board
of Trustees, is authorized to exercise all of the powers of the Board of
Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are William J. Schneider, Chair, William E.
Bennett, Robert P. Bremner, Lawrence H. Brown, Jack B. Evans, Thomas E.
Leafstrand and Peter R. Sawers.
The nominating and governance committee is responsible for Board selection
and tenure; selection and review of committees; and Board education and
operations. In addition, the committee monitors performance of legal counsel and
other service providers; periodically reviews and makes recommendations about
any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities--including retaining special counsel
and other experts or consultants at the expense of the Fund. In the event of a
vacancy on the Board, the nominating and governance committee receives
suggestions from various sources as to suitable candidates. Suggestions should
be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen
Investments, LLC, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations
for new trustees and reserves the right to interview all candidates and to make
the final selection of any new trustees. The members of the nominating and
governance committee are Robert P. Bremner, Lawrence H. Brown, Jack B. Evans,
Anne E. Impellizzeri, William L. Kissick, Thomas E. Leafstrand, Peter R. Sawers,
William J. Schneider, Judith M. Stockdale and Sheila W. Wellington.
The dividend committee is authorized to declare distributions on the Fund's
shares including, but not limited to, regular and special dividends, capital
gains and ordinary income distributions. The members of the dividend committee
are Timothy R. Schwertfeger, Chair, Lawrence H. Brown, Jack B. Evans and Thomas
E. Leafstrand.
The valuation committee oversees the Fund's Pricing Procedures including,
but not limited to, the review and approval of fair value pricing determinations
made by Nuveen's Valuation Group. The members of the valuation committee are
Lawrence H. Brown, Thomas E. Leafstrand and Judith M. Stockdale.
Trustees Evans, Kissick, Leafstrand and Wellington are directors or
trustees, as the case may be, of 30 Nuveen open-end funds and 82 Nuveen
closed-end funds managed by Nuveen Advisory and 6 open-end funds and 13
closed-end funds managed by Nuveen Institutional Advisory Corp. Trustees
Bremner, Brown, Impellizzeri, Sawyers, Schneider and Stockdale are also
directors or trustees, as the case may be, of 30 open-end and 92 closed-end
funds managed by Nuveen Advisory and 6 open-end funds and 12 closed-end funds
managed by Nuveen Institutional Advisory Corp. Mr. Schwertfeger and Mr. Bennett
are directors or trustees, as the case may be, of 30 open-end funds and 92
closed-end advised by Nuveen Advisory and 6 open-end and 13 closed-end funds
advised by Nuveen Institutional Advisory Corp.
None of the independent trustees, nor any of their immediate family
members, has ever been a director, officer, or employee of, or a consultant to,
Nuveen Advisory, Nuveen or their affiliates. In addition, none of the
independent trustees owns beneficially or of record, any security of Nuveen
Advisory, Nuveen or any person (other than a registered investment company)
directly or indirectly controlling, controlled by or under common control with
Nuveen Advisory or Nuveen.
24
The Common Shareholders of the Fund will elect trustees at the next annual
meeting of Common Shareholders, unless any MuniPreferred Shares are outstanding
at that time, in which event holders of MuniPreferred Shares, voting as a
separate class, will elect two trustees and the remaining trustees shall be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. Holders of MuniPreferred Shares will be entitled to
elect a majority of the Fund's trustees under certain circumstances. See
"Description of Shares - MuniPreferred Shares - Voting Rights."
The following table sets forth the dollar range of equity securities
beneficially owned by each trustee as of December 31, 2002:
[Download Table]
Aggregate Dollar Range of
Equity Securities in All
Registered Investment
Dollar Range of Equity Companies Overseen by
Securities in the Trustee in Family of
Name of Trustee Fund Investment Companies
--------------- ---------------------- -------------------------
Timothy R. Schwertfeger.. $ 0 Over $100,000
-------------------------------------------------------------------------------
William E. Bennett....... $ 0 $50,001-$100,000
-------------------------------------------------------------------------------
Robert P. Bremner........ $ 0 $10,001-$50,000
-------------------------------------------------------------------------------
Lawrence H. Brown........ $ 0 Over-$100,000
-------------------------------------------------------------------------------
Jack B. Evans............ $ 0 Over $100,000
-------------------------------------------------------------------------------
Anne E. Impellizzeri..... $ 0 Over-$100,000
-------------------------------------------------------------------------------
William L. Kissick....... $ 0 Over-$100,000
-------------------------------------------------------------------------------
Thomas E. Leafstrand..... $ 0 Over $100,000
-------------------------------------------------------------------------------
Peter R. Sawers.......... $ 0 Over $100,000
-------------------------------------------------------------------------------
William S. Schneider..... $ 0 Over $100,000
-------------------------------------------------------------------------------
Judith M. Stockdale...... $ 0 $50,001-$100,000
-------------------------------------------------------------------------------
Sheila W. Wellington..... $ 0 Over $100,000
-------------------------------------------------------------------------------
No trustee who is not an interested person of the Fund owns beneficially or
of record, any security of Nuveen Advisory, Nuveen, A.G. Edwards & Sons, Inc.,
Wachovia Capital Markets, LLC or any person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with Nuveen Advisory, Nuveen, A.G. Edwards & Sons, Inc. or Wachovia
Capital Markets, LLC.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
[Download Table]
Amount of Total
Estimated Aggregate Total Compensation Compensation that
Compensation From from Fund and Has Been
Name of Trustee the Fund* Fund Complex** Deferred
--------------- ------------------ ------------------ -----------------
---------------------------------------------------------------------------------
Timothy R. Schwertfeger $0 $0 $0
---------------------------------------------------------------------------------
William E. Bennett $553 $53,050 $41,564
---------------------------------------------------------------------------------
Robert P. Bremner $553 $77,500 $8,780
---------------------------------------------------------------------------------
Lawrence H. Brown $579 $82,000 $ -
---------------------------------------------------------------------------------
Jack B. Evans $579 $49,100 $19,357
---------------------------------------------------------------------------------
Anne E. Impellizzeri $493 $77,500 $58,535
---------------------------------------------------------------------------------
William L. Kissick $493 $49,000 $18,000
---------------------------------------------------------------------------------
Thomas E. Leafstrand $579 $52,300 $20,542
---------------------------------------------------------------------------------
Peter R. Sawers $553 $79,250 $58,785
---------------------------------------------------------------------------------
William J. Schneider $568 $77,500 $58,535
---------------------------------------------------------------------------------
Judith M. Stockdale $493 $77,750 $14,690
---------------------------------------------------------------------------------
Sheila W. Wellington $493 $47,600 $37,403
---------------------------------------------------------------------------------
25
--------------------
* Based on the estimated compensation to be earned by the independent
trustees for the twelve-month period ending October 31, 2005, representing the
Fund's first full fiscal year, for services to the Fund.
**Based on the compensation paid to the trustees for the one year period
ending 12/31/02 for services to the Nuveen open-end and closed-end funds.
The Fund has no employees. Its officers are compensated by Nuveen
Investments, Inc. or its affiliates.
Nuveen Investments, Inc. maintains charitable contributions programs to
encourage the active support and involvement of individuals in the civic
activities of their community. These programs include a matching contributions
program and a direct contributions program. The Independent Board Members of the
funds managed by Nuveen Institutional Advisory Corp. are eligible to participate
in the charitable contributions program of Nuveen Investments, Inc. Under the
matching program, Nuveen Investments, Inc. will match the personal contributions
of a Board Member to Section 501(c)(3) organizations up to an aggregate maximum
amount of $10,000 during any calendar year. Under its direct (non-matching)
program, Nuveen Investments, Inc. makes contributions to qualifying Section
501(c)(3) organizations, as approved by the Corporate Contributions Committee of
Nuveen Investments, Inc. The Independent Board Members are also eligible to
submit proposals to the committee requesting that contributions be made under
this program to Section 501(c)(3) organizations identified by the Board member,
in an aggregate amount not to exceed $5,000 during any calendar year. Any
contribution made by Nuveen Investments, Inc. under the direct program is made
solely at the discretion of the Corporate Contributions Committee.
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 Investments, Inc.
Founded in 1898, Nuveen Investments brings over a century of expertise to the
municipal bond market. According to data from Thomson Wealth Management, Nuveen
Investments, Inc. is the leading sponsor of municipal closed-end exchange-traded
bond funds as measured by number of funds (97) and fund assets under management
($35 billion) as of September 30, 2003. Overall, Nuveen through its various
affiliates manages $90 billion in assets for clients in separate accounts,
registered investment companies, and other collective investment vehicles as of
September 30, 2003. Nuveen Investments, Inc. is a publicly-traded company that
is approximately 79% owned by The St. Paul Companies, Inc. ("St. Paul"). St.
Paul is a publicly-traded company
26
located in St. Paul, Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.
Nuveen Investments, Inc. provides high-quality investment services that are
essential to building balanced core investment portfolios. Nuveen Investments,
Inc. serves financial advisors, and their high-net-worth clients, as well as a
growing number of institutional clients. The Company today markets its
capabilities under four distinct brands: Nuveen, NWQ, Rittenhouse and Symphony.
In total, the Company now manages approximately $90 billion in assets. Nuveen
Investments, Inc. is listed on The New York Stock Exchange and trades under the
symbol "JNC."
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided by
Nuveen Advisory an annual management fee, payable on a monthly basis, according
to the following schedule:
[Download Table]
Average Daily Managed Assets Management Fee
---------------------------- ------------------
Up to $125 million ...................................... 0.7500%
$125 million to $250 million ............................ 0.7375%
$250 million to $500 million ............................ 0.7250%
$500 million to $1 billion .............................. 0.7125%
$1 billion to $2 billion ................................ 0.7000%
$2 billion and over ..................................... 0.6750%
If the Fund utilizes leverage through the issuance of MuniPreferred Shares
in an amount equal to 32% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
[Download Table]
Net Assets Attributable to Common Shares Management Fee
---------------------------------------- ------------------
Up to $125 million....................................... 1.1029%
$125 million to $250 million............................. 1.0846%
$250 million to $500 million............................. 1.0662%
$500 million to $1 billion............................... 1.0478%
$1 billion to $2 billion................................. 1.0294%
$2 billion and over...................................... 0.9926%
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer agency and
dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, expenses of issuing MuniPreferred Shares,
expenses of preparing, printing and distributing shareholder reports, notices,
proxy statements and reports to governmental agencies and taxes, if any. All
fees and expenses are accrued daily and deducted before payment of dividends to
investors.
For the first eight full years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
[Download Table]
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of Year Ending (as a percentage of
November 30, Managed Assets) November 30, Managed Assets)
------------- ------------------- ------------- -------------------
2008 0.32%
2003(1) 0.32% 2009 0.24%
2004 0.32% 2010 0.16%
2005 0.32% 2011 0.08%
2006 0.32%
2007 0.32%
-----------------------
(1) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of
income available for the Common Shareholders. Nuveen Advisory has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond November 30,
2011.
Unless earlier terminated as described below, the Fund's investment
management agreement with Nuveen Advisory (the "management agreement") will
remain in effect until August 1, 2005. The management agreement continues in
effect from year to year so long as such continuation is approved at least
annually by (1) the Board of Trustees or the vote of a majority of the
outstanding voting securities of the Fund, and (2) a majority of the trustees
who are not interested persons of any party to the investment management
agreement, cast in person at a meeting called for the purpose of voting on such
approval. The investment management agreement may be terminated at any time,
without penalty, by either the Fund or Nuveen Advisory upon 60 days written
notice, and is automatically terminated in the event of its assignment as
defined in the 1940 Act.
The management agreement has been approved by a majority of the
independent trustees of the Fund and the sole shareholder of the Fund. The
independent trustees have determined that the terms of the Fund's management
agreement are fair and reasonable and that the agreement is in the Fund's
best interests. The independent trustees believe that the management agreement
will enable the Fund to obtain high quality investment management services at a
cost that they deem appropriate, reasonable, and in the best interests of the
Fund and its shareholders. In making such determination, the independent
trustees met independently from the interested trustee of the Fund and any
officers of Nuveen Advisory and its affiliates. The independent trustees also
relied upon the assistance of counsel to the independent trustees.
In evaluating the investment management agreement, the independent trustees
reviewed materials furnished by Nuveen Advisory at the annual contract renewal
meeting held in May 2003, including information regarding Nuveen Advisory, its
affiliates and its personnel, operations and financial condition. The
independent trustees discussed with representatives of Nuveen Advisory the
Fund's operations and Nuveen Advisory's ability to provide advisory and other
services to the Fund. The independent trustees also reviewed, among other
things, the nature and quality of services to be provided by Nuveen Advisory,
the proposed fees to be charged by Nuveen Advisory for investment management
services, the profitability to Nuveen Advisory of its relationship with the
Fund, fall-out benefits to Nuveen Advisory from that relationship, economies of
scale achieved by Nuveen Advisory, the experience of the investment advisory and
other personnel providing services to the Fund, the historical quality of the
services provided by Nuveen Advisory and comparative fees and expense ratios of
investment companies with similar objectives and strategies managed by other
investment advisers, and other factors that the independent trustees deemed
relevant.
The Fund, Nuveen Advisory, Nuveen and other related entities have adopted
codes of ethics which essentially prohibit certain of their personnel, including
the Nuveen fund portfolio manager, from engaging in personal investments which
compete or interfere with, or attempt to take advantage of a client's, including
the Fund's, anticipated or actual portfolio transactions, and are designed to
assure that the interests of clients, including Fund shareholders, are placed
before the interests of personnel in connection with personal investment
transactions. Text-only versions of the codes of ethics of the Fund, Nuveen
Advisory and Nuveen can be viewed online or downloaded from the EDGAR Database
on the SEC's internet web site at www.sec.gov. You may also review and copy
those documents by visiting the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may
be obtained, after mailing the appropriate duplicating fee, by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
Proxy Voting Policies
The Fund invests primarily in municipal securities. On rare occasions the
Fund may acquire, directly or through a special purpose vehicle, equity
securities of a municipal bond issuer whose bonds the Fund already owns when
such bonds have deteriorated or are expected shortly to deteriorate
significantly in credit quality. The purpose of acquiring equity securities
generally will be to acquire control of the municipal bond issuer and to seek to
prevent the credit deterioration or facilitate the liquidation or other workout
of the distressed issuer's credit problem. In the course of exercising control
of a distressed municipal issuer, Nuveen Advisory may pursue the Fund's
interests in a variety of ways, which may entail negotiating and executing
consents, agreements and other arrangements, and otherwise influencing the
management of the issuer. Nuveen Advisory does not consider such activities
proxy voting for purposes of Rule 206(4)-6 under the Investment Advisers Act of
1940, but nevertheless provides reports to the Fund's Board of Trustees on its
control activities on a quarterly basis.
In the rare event that a municipal issuer held by the Fund were to issue a
proxy, or that the Fund were to receive a proxy issued by a cash management
security, Nuveen Advisory would either engage an independent third party to
determine how the proxy should be voted or vote the proxy with the consent, or
based on the instructions, of the Fund's Board of Trustees or its
representative. In the case of a conflict of interest, the proxy would be
submitted to the Fund's Board to determine how the proxy should be voted. A
member of Nuveen Advisory's legal department would oversee the administration of
the voting, and ensure that records were maintained in accordance with Rule
206(4)-6, reports were filed with the Securities and Exchange Commission ("SEC")
on Form N-PX, and the results provided to the Fund's Board of Trustees and made
available to shareholders as required by applicable rules.
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
27
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.
DISTRIBUTIONS
As described in the Fund's Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 50 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. To permit the Fund to maintain a
28
more stable monthly distribution, the Fund will initially (prior to its first
distribution), and may from time to time thereafter, distribute less than the
entire amount of net investment income earned in a particular period. Such
undistributed net investment income would be available to supplement future
distributions, including distributions that might otherwise have been reduced by
a decrease in the Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on the Fund's
outstanding MuniPreferred Shares. As a result, the distributions paid by the
Fund for any particular period may be more or less than the amount of net
investment income actually earned by the Fund during such period. Undistributed
net investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between Common Shares and MuniPreferred
Shares in proportion to total dividends paid to each class for the year in
which such net capital gain or other taxable income is realized. For information
relating to the impact of the issuance of MuniPreferred Shares on the
distributions made by a Fund to Common Shareholders, see the Fund's Prospectus
under "MuniPreferred Shares and Leverage."
While any MuniPreferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the MuniPreferred Shares
have been paid and (2) the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of any outstanding MuniPreferred Shares. This
latter limitation on the Fund's ability to make distributions on its Common
Shares could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
"Tax Matters."
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration of Trust (the "Declaration") authorizes the issuance
of an unlimited number of Common Shares. The Common Shares being offered have a
par value of $0.01 per share and, subject to the rights of holders of
MuniPreferred Shares, if issued, have equal rights as to the payment of
dividends and the distribution of assets upon liquidation of the Fund. The
Common Shares being offered will, when issued, be fully paid and, subject to
matters discussed in "Certain Provisions in the Declaration of Trust,"
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. At any time when the Fund's MuniPreferred Shares are
outstanding, Common Shareholders will not be entitled to receive any cash
distributions from the Fund unless all accrued dividends on MuniPreferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to MuniPreferred Shares would be at least 200% after giving effect to
such distributions. See "MuniPreferred Shares" below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing. The Fund will not issue share certificates.
29
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund have during some periods traded at prices higher than net asset value and
during other periods have traded at prices lower than net asset value. There can
be no assurance that Common Shares or shares of other municipal funds will trade
at a price higher than net asset value in the future. Net asset value will be
reduced immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon a Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of the Fund's Common Shares will be determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Fund's Prospectus under "MuniPreferred Shares and
Leverage" and "The Fund's Investments--Municipal Securities."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares in one or more classes or series, with rights as determined
by the Board of Trustees of the Fund, by action of the Board of Trustees without
the approval of the Common Shareholders.
The Fund's Board of Trustees has authorized an offering of MuniPreferred
Shares (representing approximately 32% of the Fund's capital immediately after
the time the MuniPreferred Shares are issued) that the Fund expects will likely
be issued within approximately one and one-half to two months after completion
of the offering of Common Shares. Any final decision to issue MuniPreferred
Shares is subject to market conditions and to the Board of Trustee's continuing
belief that leveraging the Fund's capital structure through the issuance of
MuniPreferred Shares is likely to achieve the benefits to the Common
Shareholders described in the Prospectus. The Board has determined that a
substantial portion of the MuniPreferred Shares, at least initially if market
conditions are deemed favorable, would pay cumulative dividends at rates
determined over intermediate-term periods (of between one and five years, which
will reset periodically), through an auction or remarketing procedure. Short-
and intermediate-term interest rates are currently near historically low levels.
In order to seek to reduce the impact on Common Share net income resulting from
increases in MuniPreferred Share dividend rates that are based on short-term
interest rates, the Fund intends that, if market conditions are deemed
favorable, a substantial portion of the MuniPreferred Shares will be initially
issued with fixed rate dividends based on intermediate-term interest rates of
between one and five years (which dividend rates would be redetermined at the
end of each such initial period). The initial fixed rate dividends are expected
to be higher than initial short-term floating rate dividends. See the Fund's
Prospectus under "MuniPreferred Shares and Leverage" and "Description of
Shares--MuniPreferred Shares." The Board of Trustees has indicated that the
liquidation preference, preference on distribution, voting rights and redemption
provisions of the MuniPreferred Shares will be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the MuniPreferred Shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
MuniPreferred Shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
MuniPreferred Shares discussed in this Prospectus, the liquidation value of the
MuniPreferred Shares is expected to be approximately 32% of the value of the
Fund's total net assets. The Fund intends to purchase or redeem MuniPreferred
Shares, if necessary, to keep that percentage below 50%.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
30
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of MuniPreferred Shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as otherwise required by applicable law,
holders of MuniPreferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of the Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of the Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of MuniPreferred Shares, voting together as a single
class. In addition, if at any time dividends on the Fund's outstanding
MuniPreferred Shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding MuniPreferred Shares, voting
as a separate class, will be entitled to elect a majority of the Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
The affirmative vote of the holders of a majority of the Fund's outstanding
MuniPreferred Shares of any class or series, as the case may be, voting as a
separate class, will be required to, among other things, (1) take certain
actions which would affect the preferences, rights, or powers of such class or
series or (2) authorize or issue any class or series ranking prior to the
MuniPreferred Shares. Except as may otherwise be required by law, (1) 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, will
be required to approve any conversion of the Fund from a closed-end to an
open-end investment company and (2) the affirmative vote of the holders of at
least two-thirds of the outstanding 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, 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 the By-laws. The affirmative vote of the holders of a majority of
the outstanding 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 under Section 13(a) of the 1940 Act including, among
other things, changes in a Fund's investment objectives or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives--Investment Restrictions." The class or series vote of holders of
MuniPreferred Shares described
31
above shall in each case be in addition to any separate vote of the
requisite percentage of Common Shares and MuniPreferred Shares necessary to
authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
MuniPreferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (1) redeemed or (2) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
Redemption, Purchase and Sale of MuniPreferred Shares by the Fund. The
terms of the MuniPreferred Shares provide that they are redeemable at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends, that the Fund may tender for or purchase MuniPreferred
Shares and that the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of MuniPreferred Shares by the Fund will
reduce the leverage applicable to Common Shares, while any resale of shares by
the Fund will increase such leverage.
The discussion above describes the Fund's Board of Trustees' present
intention with respect to an offering of MuniPreferred Shares. The terms of the
MuniPreferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
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 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
32
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), the required vote only by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby the Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the Fund's MuniPreferred Shares
outstanding at the time, voting as a separate class, or, if such action has been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, the affirmative vote
of the holders of at least a majority of the Fund's MuniPreferred Shares
outstanding at the time, voting as a separate class. None of the foregoing
provisions may be amended except by the vote of at least two-thirds of the
Common Shares and MuniPreferred Shares, voting together as a single class. The
votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of MuniPreferred Shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objectives and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
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 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 FUND 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
33
conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, the Fund's Board of
Trustees has currently determined that, at least annually, it will consider
action that might be taken to reduce or eliminate any material discount from net
asset value in respect of Common Shares, which may include the repurchase of
such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value, or the conversion of the Fund
to an open-end investment company. There can be no assurance, however, that the
Board of Trustees will decide to take any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares at the close of business on
the last day of the tender offer. Any service fees incurred in connection with
any tender offer made by the Fund will be borne by the Fund and will not reduce
the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Fund a taxable entity, causing the
Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the American Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or state banks in which the 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
34
foreign currency, (e) commencement of war, armed hostilities or other
international or national calamity directly or indirectly involving the United
States, or (f) other event or condition which would have a material adverse
effect (including any adverse tax effect) on the Fund or its shareholders if
shares were repurchased. The Board of Trustees of the Fund may in the future
modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the
time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all MuniPreferred Shares then outstanding, and the Fund's
Common Shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of the
Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value
would 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 would 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 would 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. See the Fund's Prospectus under
"Risks--Leverage Risk."
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.
35
TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The Fund intends to qualify under Subchapter M of the Code for tax
treatment as a regulated investment company and to satisfy certain conditions
which will enable interest from municipal obligations, which is exempt from
regular federal income taxes in the hands of the Fund, to qualify as "exempt-
interest dividends" when distributed to the Fund's shareholders. In order to
qualify for tax treatment as a regulated investment company, the Fund must
satisfy certain requirements relating to the source of its income,
diversification of its assets, and distributions of its income to shareholders.
First, the Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures and forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "90% gross
income test"). Second, the Fund must diversify its holdings so that, at the
close of each quarter of its taxable year, (i) at least 50% of the value of its
total assets is comprised of cash, cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value 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 value of its total assets is invested in the securities of any one issuer
(other than United States Government securities and 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.
As a regulated investment company, the Fund will not be subject to federal
income tax in any taxable year with respect to "net investment income" (i.e.,
its "investment company taxable income," as that term is defined in the Code,
determined without reference to the deduction for dividends paid) and "net
capital gain" (i.e., the excess of the Fund's net long-term capital gain over
its net short-term capital loss), provided that it distributes at least 90% of
the sum of (i) its investment company taxable income (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of net
long-term capital loss, and any other taxable income other than net capital gain
and is reduced by deductible expenses) and (ii) its net tax-exempt interest (the
excess of its gross tax-exempt interest income over certain disallowed
deductions). The Fund may retain for investment its net capital gain. However,
if the Fund retains any net capital gain or any investment company taxable
income, it will be subject to tax at regular corporate rates on the amount
retained. If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its shareholders
who, if subject to federal income tax on long-term capital gains, (i) will be
required to include in income for federal income tax purposes, as long-term
capital gain, their share of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Fund on
such undistributed amount against their federal income tax liabilities, if any,
and (iii) to claim refunds to the extent the credit exceeds such liabilities.
For federal income tax purposes, the tax basis of shares owned by a shareholder
of the Fund will be increased by an amount equal under current law to the
difference between the amount of undistributed capital gains included in the
shareholder's gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence. The
36
Fund intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect (unless it
has made a taxable year election for excise tax purposes) to treat all or part
of any net capital loss, any net long-term capital loss or any net foreign
currency loss incurred after October 31 as if it had been incurred in the
succeeding year.
The Fund intends to qualify to pay "exempt-interest dividends" by
satisfying the requirement that at the close of each quarter of the Fund's
taxable year at least 50% of the value of its total assets consist of tax-exempt
municipal obligations. Distributions from the Fund will constitute exempt-
interest dividends to the extent of its tax-exempt interest income (net of
expenses and amortized bond premium). Exempt-interest dividends distributed to
Common Shareholders are excluded from gross income for federal income tax
purposes, although they are required to be reported on the Common Shareholders'
federal income tax returns. Gain from the sale or redemption of Common Shares,
however, will be taxable to the Common Shareholders as capital gain (provided
such Common Shares were held as capital assets) even though the increase in
value of such Common Shares is attributable to tax-exempt interest income. In
addition, gain realized by the Fund from the disposition of a tax-exempt
municipal obligation that was purchased at a price less than the principal
amount of the bond will be taxable to the Fund's shareholders as ordinary income
to the extent of accrued market discount. Under the Code, interest on
indebtedness incurred or continued to purchase or carry Common Shares, which
interest is deemed to relate to exempt-interest dividends, will not be
deductible by Common Shareholders for federal income tax purposes. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to alternative minimum tax and may have
other collateral tax consequences. Distributions derived from interest that is
exempt from regular federal income tax may subject corporate shareholders to or
increase their liability under the corporate alternative minimum tax. A portion
of such distributions may constitute a tax preference item for individual
shareholders and may subject them to or increase their liability under the
alternative minimum tax applicable to individuals. Taxpayers that may be subject
to the alternative minimum tax should consult their advisers before investing in
Common Shares.
Distributions by the Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gain realized by the Fund, if any, will be taxable to Common
Shareholders as ordinary income (and not eligible for favorable taxation as
"qualified dividend income") whether received in cash or additional shares. Any
net long-term capital gain realized by the Fund and distributed to Common
Shareholders in cash or additional shares will be taxable to Common Shareholders
as long-term capital gain regardless of the length of time investors have owned
shares of the Fund. Taxable distributions will not be eligible for the dividends
received deduction allowed to corporations. Distributions by the Fund to Common
Shareholders that do not constitute ordinary income dividends, capital gain
dividends or exempt-interest dividends will be treated as a return of capital to
the extent of (and in reduction of) the Common Shareholder's tax basis in his or
her shares. Any excess will be treated as gain from the sale of his or her
shares, as discussed below.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Fund is required to designate distributions paid with respect
to its Common Shares and its MuniPreferred Shares as consisting of a portion of
each type of income distributed by the Fund. The portion of each type of income
deemed received by the holders of each class of shares will be equal to the
portion of total Fund dividends received by such class. Thus, the Fund will
designate dividends paid as exempt-interest dividends in a manner that allocates
such dividends between the holders of the Common Shares and the holders of
MuniPreferred Shares, in proportion to the total dividends paid to each such
class during or with respect to the taxable year, or otherwise as required by
applicable law. Capital gain dividends and ordinary income dividends will
similarly be allocated between the two classes.
If the Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Fund, defer the Fund's losses, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends or distributions which are expected to be or
have been declared, but not paid. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution.
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.
The sale or exchange of Common Shares normally will result in capital gain
or loss to the Common Shareholders who hold their Common Shares as capital
assets. However, any loss on the sale or exchange of a Common Share that has
been held for six months or less will be disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such Common
Share. Generally, a Common Shareholder's gain or loss will be long-term gain or
loss if the shares have been held for more than one year. If a shareholder sells
or otherwise disposes of Common Shares before holding them for more than six
months, however, any loss on the sale or other disposition of such Common Shares
shall be treated as a long-term capital loss to the extent of any capital gain
dividends received by the Common Shareholder (or amounts credited to the Common
Shareholder as an undistributed capital gain) with respect to such Common
Shares. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities and "qualified
dividend income" is taxed at a maximum rate of 15%, while short-term capital
gain and other ordinary income is taxed at a maximum
37
rate of 35% through 2010, after which time the rate will increase to 39.6%
unless amended by Congress. Because of the limitations on itemized deductions
and the deduction for personal exemptions applicable to higher income taxpayers,
the effective tax rate may be higher in certain circumstances.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act")
reduced the maximum rate of tax on long-term capital gains of noncorporate
investors from 20% to 15%. The Act also reduced to 15% the maximum rate of tax
on "qualified dividend income" received by noncorporate shareholders who satisfy
certain holding period and other requirements. None of the Fund's distributions
are expected to be eligible for treatment as qualified dividend income. Without
further legislative change, the rate reductions enacted by the Act will lapse
and the previous rates will be reinstated, for taxable years beginning on or
after January 1, 2009.
All or a portion of a sales charge paid in purchasing Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another fund are subsequently acquired without payment of
a sales charge pursuant to a reinvestment right. Any disregarded portion of such
charge will result in an increase in the Common Shareholder's tax basis in the
shares subsequently acquired. In addition, no loss will be allowed on the
redemption or exchange of Common Shares if the Common Shareholder purchases
other shares of the Fund (whether through reinvestment of distributions or
otherwise) or the Common Shareholder acquires or enters into a contract or
option to acquire securities that are substantially identical to shares of the
Fund within a period of 61 days beginning 30 days before and ending 30 days
after such redemption or exchange. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
In order to avoid a nondeductible 4% federal excise tax, the Fund must
distribute or be deemed to have distributed by December 31 of each calendar year
at least an amount equal to the sum of (i) 98% of its taxable ordinary income
for such year, (ii) 98% of its capital gain net income (the excess of its
realized capital gains over its realized capital losses, generally computed on
the basis of the one-year period ending on October 31 of such year) and (iii)
100% of any taxable ordinary income and any excess of realized capital gains
over realized capital losses for the prior year that was not distributed during
such year and on which the Fund paid no federal income tax. For purposes of the
excise tax, a regulated investment company may reduce its capital gain net
income (but not below its net capital gain) by the amount of any net ordinary
loss for the calendar year. The Fund intends to make timely distributions in
compliance with these requirements and consequently it is anticipated that it
generally will not be required to pay the excise tax.
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
corporate federal income tax upon its income for that year, and distributions to
its Common Shareholders would be taxable to Common Shareholders as ordinary
dividend income for federal income tax purposes to the extent of the Fund's
earnings and profits.
The Fund is required in certain circumstances to withhold a percentage of
taxable dividends and certain other payments paid to non-corporate holders of
shares who have not furnished to the Fund their correct taxpayer identification
numbers (in the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding. The backup
withholding percentage is 28% for amounts paid through 2010, after which time
the rate will increase to 31% unless amended by Congress. Backup withholding is
not an additional tax and any amounts withheld may be credited against the
shareholder's federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax
38
advisors for more detailed information concerning the federal taxation of the
Fund and the income tax consequences to its Common Shareholders.
Under recently promulgated Treasury regulations, if a shareholder
recognizes a loss with respect to Common Shares of $2 million or more for an
individual shareholder of $10 million or more for a corporate shareholder in any
single taxable year (or a greater loss over a combination of years), the
shareholder must file with the Internal Revenue Service a disclosure statement
on Form 8886. Direct shareholders of portfolio securities are in many cases
excepted from this reporting requirement, but under current guidance,
shareholders of a regulated investment company are not excepted. Future guidance
may extend the current exception from this reporting requirement to shareholders
of most or all regulated investment companies. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Common Shareholders
should consult their tax advisors to determine the applicability of these
regulations in light of their individual circumstances.
39
EXPERTS
The Financial Statements of the Fund as of November 3, 2003, appearing in
this Statement of Additional Information have been audited by Ernst & Young,
LLP, 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. The principal business
address of Ernst & Young LLP is 233 South Wacker Drive, Chicago, Illinois 60606.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The custodian performs
custodial, fund accounting and portfolio accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Securities and Exchange Commission (the "Commission"), Washington, D.C.
The Fund's Prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Fund's Registration Statement. Statements contained in the Fund's Prospectus and
this Statement of Additional Information as to the contents of any contract or
other document referred to are not
40
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
41
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of
Nuveen Municipal High Income Opportunity Fund
We have audited the accompanying statement of assets and liabilities of Nuveen
Municipal High Income Opportunity Fund (the "Fund") as of November 3, 2003 and
the related statement of operations for the period from October 8, 2003 (date of
organization) through November 3, 2003. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of the Fund at November 3, 2003,
and the results of its operations for the period from October 8, 2003 (date of
organization) through November 3, 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
November 4, 2003
NUVEEN MUNICIPAL HIGH INCOME OPPORTUNITY FUND
FINANCIAL STATEMENTS
Nuveen Municipal High Income Opportunity Fund
Statement of Assets and Liabilities
November 3, 2003
[Download Table]
Assets:
Cash................................................................. $100,275
Offering costs....................................................... 600,000
Receivable from Adviser.............................................. 11,500
--------
Total assets...................................................... 711,775
--------
Liabilities:
Accrued offering costs............................................... 600,000
Payable for organization costs....................................... 11,500
--------
Total liabilities................................................. 611,500
--------
MuniPreferred Shares, $25,000 liquidation value; unlimited
number of shares authorized, no shares outstanding................ -
--------
Net assets applicable to Common Shares................................... $100,275
========
Net asset value per Common Share outstanding ($100,275 divided
by 7,000 Common Shares outstanding).................................. $ 14.325
========
Net Assets Applicable to Common Shares Represent:
Common Shares, $.01 par value; unlimited number of shares
authorized, 7,000 shares outstanding.............................. $ 70
Paid-in surplus...................................................... 100,205
--------
$100,275
========
43
Nuveen Municipal High Income Opportunity Fund
Statement of Operations
Period from October 8, 2003 (date of organization) through November 3, 2003
[Download Table]
Investment income.................................................... $ -
--------
Expenses:
Organization costs................................................ 11,500
Expense reimbursement............................................. (11,500)
--------
Total expenses................................................. -
--------
Net investment income................................................ $ -
========
Note 1: Organization
The Fund was organized as a Massachusetts business trust on October 3, 2003, and
has been inactive since that date except for matters relating to its
organization and registration as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended, and the sale of 7,000 Common Shares to Nuveen Advisory
Corp., the Fund's investment adviser (the "Adviser"), a wholly owned subsidiary
of Nuveen Investments, Inc.
Nuveen Investments, LLC, also a wholly owned subsidiary of Nuveen Investments,
Inc., has agreed to reimburse all organization expenses (approximately $11,500)
and pay all Common Share offering costs (other than the sales load) that exceed
$.03 per Common Share.
The Fund seeks to provide high current income exempt from regular federal income
tax. The Fund's secondary investment objective is to seek attractive total
return consistent with its primary objective.
The Fund is authorized by its Declaration of Trust to issue Preferred Shares
("MuniPreferred Shares") having a liquidation value of $25,000 per share in one
or more classes or series, with dividend, liquidation preference and other
rights as determined by the Fund's Board of Trustees without approval of the
Common Shareholders.
Note 2: Significant Accounting Policies
The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in the United States which require the use of
management estimates. Actual results may differ from those estimates.
The Fund's share of Common Share offering costs will be recorded as a reduction
of the proceeds from the sale of Common Shares upon the commencement of Fund
operations.
If the Fund offers MuniPreferred Shares, the offering costs will be borne by
Common Shareholders as a direct reduction to paid-in surplus.
Note 3: Investment Management Agreement
Pursuant to an investment management agreement between the Adviser and the Fund,
the Fund, upon commencement of Fund operations, has agreed to pay a management
fee, payable on a monthly basis, at an annual rate ranging from .7500% of the
first $125 million of the average daily net assets (including net assets
attributable to MuniPreferred Shares ("Managed Assets")) to .6750% of the
average daily Managed Assets in excess of $2 billion.
In addition to the reimbursement and waiver of organization and Common Share
offering costs discussed in Note 1, the Adviser has contractually agreed to
reimburse the Fund for fees and expenses in the amount of .32% of average daily
Managed Assets for the first five full years of the Fund's operations, .24% in
year 6, .16% in year 7 and .08% in year 8. The Adviser has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond November 30,
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 net
investment income, in addition to any significant amounts of net realized
capital gains and/or market discount realized from investment transactions, if
any.
44
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation, a division of The McGraw-Hill Companies ("Standard & Poor's"
or "S&P") rating symbols and their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
A-1
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.
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.
A-2
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.
c The `c' subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r The `r' highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (`AAA', `AA', `A', `BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
. Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
. Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
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-3
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' for the highest
quality obligations to `D' for the lowest. These categories are as follows:
A-1 The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 Issues with the A-3 designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments of principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes such payments will be made during such grace period.
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.
A-4
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 that 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.
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.
A-5
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.
Short-Term Debt Ratings
Issuers rated Prime-1 (or 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.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-6
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or 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 supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch Ratings--A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
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
A-7
financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of
some kind appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization
or liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve
as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have
the highest prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated `DD' and
`D' are generally undergoing a formal reorganization or liquidation
process; those rated `DD' are likely to satisfy a higher portion of their
outstanding obligations, while entities rated `D' have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
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.
A-8
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
'NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a one
to two year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
ratings for which outlooks are `stable' could be upgraded or 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 and
in these cases, the Rating Outlook may be described as 'evolving'.
A-9
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
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 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 yields for a range of hypothetical tax-free yields assuming the
stated marginal Federal tax rates for 2003 listed below:
Taxable Equivalent of Tax-Free Yields
Tax Free Yields
[Enlarge/Download Table]
Tax
rate 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25% 7.50%
---------------------------------------------------------------------------------------------------------------------------------
10.0% 4.44% 4.72% 5.00% 5.28% 5.56% 5.83% 6.11% 6.39% 6.67% 6.94% 7.22% 7.50% 7.78% 8.06% 8.33%
15.0% 4.71% 5.00% 5.29% 5.59% 5.88% 6.18% 6.47% 6.76% 7.06% 7.35% 7.65% 7.94% 8.24% 8.53% 8.82%
25.0% 5.33% 5.67% 6.00% 6.33% 6.67% 7.00% 7.33% 7.67% 8.00% 8.33% 8.67% 9.00% 9.33% 9.67% 10.00%
28.0% 5.56% 5.90% 6.25% 6.60% 6.94% 7.29% 7.64% 7.99% 8.33% 8.68% 9.03% 9.38% 9.72% 10.07% 10.42%
33.0% 5.97% 6.34% 6.72% 7.09% 7.46% 7.84% 8.21% 8.58% 8.96% 9.33% 9.70% 10.07% 10.45% 10.82% 11.19%
35.0% 6.15% 6.54% 6.92% 7.31% 7.69% 8.08% 8.46% 8.85% 9.23% 9.62% 10.00% 10.38% 10.77% 11.15% 11.54%
B-1
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various defensive
hedging techniques.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. When the Fund
purchases a financial future, it deposits in cash or securities an "initial
margin" of between 1% and 5% of the contract amount. Thereafter, the Fund's
account is either credited or debited on a daily basis in correlation with the
fluctuation in price of the underlying future or other requirements imposed by
the exchange in order to maintain an orderly market. The Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, the Fund may close out its position at any
time prior to expiration of the financial future by taking an opposite position.
At closing a final determination of debits and credits is made, additional cash
is paid by or to the Fund to settle the final determination and the Fund
realizes a loss or gain depending on whether on a net basis it made or received
such payments.
The sale of financial futures is for the purpose of hedging the Fund's
existing or anticipated holdings of long-term debt securities. For example, if
the Fund owns long-term bonds and interest rates were expected to increase, it
might sell financial futures. If interest rates did increase, the value of
long-term bonds in the Fund's portfolio would decline, but the value of the
Fund's financial futures would be expected to increase at approximately the same
rate thereby keeping the net asset value of the Fund from declining as much as
it otherwise would have.
Among the risks associated with the use of financial futures by the Fund as
a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
C-1
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.
Options on Financial Futures
The Fund may also purchase put or call options on financial futures which
are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by the Fund on its
portfolio securities to hedge against the risk of rising interest rates. As with
options on debt securities, the holder of an option may terminate his position
by selling an option of the Fund. There is no guarantee that such closing
transactions can be effected.
Index Contracts
Index Futures
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to a specified dollar amount times the difference
between the index value at the close of the last trading day of the contract and
the price at which the index future was originally written. Thus, an index
future is similar to traditional financial futures except that settlement is
made in cash.
Index Options
The Fund may also purchase put or call options on U.S. Government or tax-
exempt bond index futures and enter into closing transactions with respect to
such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance of the writer's futures margin account which represents the amount by
which the market price of the index futures contract, at exercise, is less than
the exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
C-2
APPENDIX D
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may be a suitable investment for a shareholder that is thinking of
adding municipal securities to his or her portfolio to balance the appreciated
stocks that the shareholder is holding. Because the Fund expects that a portion
of its investments will pay interest that is taxable under the federal
alternative minimum tax, the Fund may not be a suitable investment for
shareholders that are subject to the federal alternative minimum tax.
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of the Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
The Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that the Fund believes to be generally
accurate.
Nuveen
Municipal High Income
Opportunity Fund
A New Closed-End Exchange-Traded
Fund Designed to Provide:
.. High monthly tax-free income potential
.. Attractive total return opportunity
.. The municipal expertise and closed-end
ETF experience of Nuveen Investments
A New Fund Specifically
Designed to Provide High
Monthly Tax-Free Income
The Nuveen Municipal High Income Opportunity Fund will invest in a nationally
diversified portfolio of municipal bonds that the Fund's manager believes, based
on its research and analysis, are underrated or undervalued. The income
generated by these bonds provides monthly dividends free from regular federal
income taxes.
Income may be subject to state and local income taxes, and to the federal
Alternative Minimum Tax. Capital gains, if any, will be subject to capital gains
taxes.
Relatively Wide Credit Spread May Signal a Current Opportunity for
High-Yield Investing
Tax-Free Yield
AAA rated High Yield Municipals
10/31/1995 0.05122 0.07353
11/30/1995 0.04971 0.07242
12/31/1995 0.04949 0.07167
01/31/1996 0.04885 0.07181
02/29/1996 0.05024 0.07288
03/31/1996 0.05274 0.07574
04/30/1996 0.05371 0.07736
05/31/1996 0.05446 0.07797
06/30/1996 0.05377 0.07807
07/31/1996 0.05322 0.07831
08/31/1996 0.05388 0.07783
09/30/1996 0.05283 0.07685
10/31/1996 0.05188 0.07561
11/30/1996 0.04988 0.07445
12/31/1996 0.05118 0.07463
01/31/1997 0.05137 0.07454
02/28/1997 0.05074 0.0738
03/31/1997 0.05353 0.07502
04/30/1997 0.05318 0.07462
05/31/1997 0.05169 0.07372
06/30/1997 0.05088 0.07233
07/31/1997 0.04746 0.06922
08/31/1997 0.04963 0.06966
09/30/1997 0.04854 0.06833
10/31/1997 0.04824 0.06805
11/30/1997 0.04812 0.06769
12/31/1997 0.04654 0.0649
01/31/1998 0.04546 0.06314
02/28/1998 0.04605 0.06058
03/31/1998 0.04661 0.06261
04/30/1998 0.04805 0.06169
05/31/1998 0.04619 0.06204
06/30/1998 0.04624 0.0619
07/31/1998 0.04656 0.05996
08/31/1998 0.04453 0.05979
09/30/1998 0.04317 0.05972
10/31/1998 0.04351 0.06043
11/30/1998 0.04363 0.06079
12/31/1998 0.04392 0.06043
01/31/1999 0.04244 0.05971
02/28/1999 0.04371 0.06083
03/31/1999 0.04418 0.06087
04/30/1999 0.0444 0.05965
05/31/1999 0.04601 0.06097
06/30/1999 0.04912 0.06296
07/31/1999 0.04908 0.06312
08/31/1999 0.05064 0.06479
09/30/1999 0.05105 0.06545
10/31/1999 0.05291 0.0684
11/30/1999 0.05223 0.06842
12/31/1999 0.05428 0.07117
01/31/2000 0.05533 0.07287
02/29/2000 0.05483 0.07089
03/31/2000 0.05305 0.06957
04/30/2000 0.05457 0.07055
05/31/2000 0.05591 0.07221
06/30/2000 0.05298 0.07151
07/31/2000 0.05173 0.07143
08/31/2000 0.05019 0.07038
09/30/2000 0.05156 0.07165
10/31/2000 0.05069 0.0716
11/30/2000 0.05034 0.07252
12/31/2000 0.04711 0.0723
01/31/2001 0.04545 0.07146
02/28/2001 0.04559 0.07139
03/31/2001 0.04467 0.07078
04/30/2001 0.04701 0.07184
05/31/2001 0.04567 0.07117
06/30/2001 0.0454 0.07093
07/31/2001 0.04368 0.06967
08/31/2001 0.04124 0.06799
09/30/2001 0.04199 0.07179
10/31/2001 0.0406 0.07204
11/30/2001 0.04283 0.07377
12/31/2001 0.04501 0.07507
01/31/2002 0.04245 0.07385
02/28/2002 0.041 0.07363
03/31/2002 0.0455 0.07486
04/30/2002 0.04262 0.07312
05/31/2002 0.04221 0.07389
06/30/2002 0.04105 0.0735
07/31/2002 0.03952 0.07475
08/31/2002 0.03806 0.07594
09/30/2002 0.03469 0.07776
10/31/2002 0.03833 0.08232
11/30/2002 0.03956 0.08232
12/31/2002 0.03632 0.08041
01/31/2003 0.03698 0.0807
02/28/2003 0.03516 0.08175
03/31/2003 0.03547 0.0832
04/30/2003 0.03477 0.08157
05/31/2003 0.03127 0.07657
06/30/2003 0.03274 0.07564
07/31/2003 0.03956 0.07764
08/31/2003 0.03921 0.07785
09/30/2003 0.03471 0.07475
10/30/2003
Historically Wide Current Credit
Spreads May Make High-Yield
Municipal Securities Attractive
The current yield spread between high-yield municipal bonds and AAA-rated
municipal bonds is relatively wide by historical standards. By investing up to
50% of its portfolio in high-yield municipal securities, the Fund will position
those assets to earn high current tax-free income. In addition, a position in
high-yield municipal securities may enhance the Fund's total return over time if
the high-yield/AAA-yield spread narrows toward its historical average.
Past performance does not guarantee future results. Investing in high-yield
securities carries special risks, including the increased risk of losses due to
credit deterioration or default. Please see the Fund's prospectus for more
information on these risks. There can be no assurance that the yield spread
between the high-yield municipal securities in which the Fund will invest and
AAA rated municipal securities will narrow or that any associated return
advantage for high-yield securities will not be negated by losses due to credit
deterioration or defaults. High-yield municipal securities are represented by
the Lehman High Yield Municipal Index, an unmanaged, nationally diverse index
introduced in October 1995 and comprised of municipal bonds rated below BBB/Baa.
AAA-rated municipal securities are represented by the Lehman AAA Municipal
Index, an unmanaged, nationally diverse index of municipal bonds rated AAA by at
least one national statistical rating organization. It is not possible to invest
directly in an index.
Opportunity
for Attractive Total Return
The Fund's manager will use a rigorous, research-driven strategy in an attempt
to find municipal securities that, in the adviser's opinion, are underrated or
undervalued. In pursuing this approach, the Fund's adviser will draw upon the
proprietary systems and extensive resources that Nuveen Investments has
developed during the firm's 105 years as an active participant in the municipal
marketplace.
If successful, the purchase of underrated or undervalued municipal securities
may lead to enhanced Fund total returns over time relative to the returns of the
general municipal market.
Leverage May Enhance
Earnings and Dividends
To potentially enhance investment returns, the Fund likely will use financial
leverage by issuing its own MuniPreferred/R/ shares, currently expected to be in
an amount totaling approximately 33 1/3% of the Fund's assets after leveraging.
The Fund will invest the proceeds of that offering in additional longer-term,
generally fixed-rate municipal securities. In view of the current environment of
historically low short- and intermediate-term interest rates, the Fund expects
that, in addition to issuing MuniPreferred shares paying floating-rate dividends
that reset every seven days, if market conditions are deemed favorable, a
substantial portion of the MuniPreferred shares will be issued initially with
fixed-rate dividend terms of between one and five years. The initial fixed-rate
dividends are expected to be initially higher than short-term floating rate
dividends. In the event that floating short-term rates trend higher from their
current levels over the next several years, fixed-rate MuniPreferred dividends
set at relatively low current levels may result in lower total leveraging costs
over time.
There is no assurance that leverage will be used or, if used, that it will be
successful. The Fund's common shareholders will bear the cost of offering the
MuniPreferred shares, which will result in a reduction of the net asset value
per common share. Leveraging carries some risks; see the Fund's prospectus for
more information about these risks.
Exchange-Traded Liquidity
The Fund expects to list its common shares on the American Stock Exchange, which
should provide investors with liquidity, convenience and daily price visibility
through electronic services and in newspaper stock tables.
Like any stock, the Fund's common share price will fluctuate with market
conditions and other factors. At the time of sale, Fund shares may have a market
price that is above or below net asset value, and may be worth more or less than
the original investment.
Convenient Dividend Reinvestment
Investors can reinvest their monthly income to buy additional shares of the Fund
automatically, compounding their investment and providing the opportunity to
generate more tax-free income over time. Remember that systematic investing like
this does not ensure a profit, nor does it protect you against a loss in a
declining market.
Managed by the Leading
Sponsor of Municipal Closed-End
Exchange-Traded Funds
The Fund will be managed by Nuveen Advisory Corp., a unit of Nuveen Investments.
Founded in 1898, Nuveen Investments brings more than a century of expertise to
the municipal bond market. According to Thomson Wealth Management, Nuveen is the
leading sponsor of municipal closed-end exchange-traded bond funds measured by
the number of funds (97) and fund assets under management ($35 billion), as of
September 30, 2003.
Benefits of Purchasing at the IPO
Investors can take advantage of several special features when purchasing shares
during this initial public offering. First, all shares will be purchased at a
known, established price--$15 per share. Second, the $15 per share price
remains the same for all purchases, regardless of the size of the order.
Investors wishing to make a large purchase will not see their order filled in
increments at ever-increasing prices.
Management Fee Reimbursement
The Fund's adviser will reimburse to the Fund 32 basis points of the annual 75
basis point management fee in each of the first five full years, with
reimbursements reduced in each succeeding year through year eight. The expected
net annual expenses on total assets during the first five years will be
approximately 58-60 bps, and will increase to 90 bps in year nine and
thereafter.
Years 1-5 6 7 8 9+
------------------------------------------------------------
Fee 0.75% 0.75% 0.75% 0.75% 0.75%
Reimbursement (0.32) (0.24) (0.16) (0.08) (0.00)
Other Expenses 0.15 0.15 0.15 0.15 0.15
------------------------------------------------------------
Net Expenses 0.58% 0.66% 0.74% 0.82% 0.90%
Other expenses of the Fund are estimated to be 0.15% per year; actual other
expenses may be higher or lower. All numbers shown are a percentage of net
assets, including assets attributable to the MuniPreferred shares. These
estimates assume the Fund has issued MuniPreferred shares in an amount
representing approximately 33% of the Fund's net assets after leveraging. The
Fund's operating expenses will effectively be borne by the Fund's common
shareholders. As a percentage of net assets attributable to common shares,
management fees and other expenses before reimbursements are expected to be
1.34%. Reimbursements on assets attributable to common shares will be 0.48% in
years 1-5, 0.36% in year 6, 0.24% in year 7, and 0.12% in year 8.
D-1
[Download Table]
Nuveen Municipal High Income Opportunity Fund _________ Common Shares
------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
------------------------------------------
____________, 2003
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act are filed with this Pre-effective Amendment to the Registration
Statement.
2. Exhibits:
a. Declaration of Trust dated October 8, 2003, as amended on October 15, 2003.
Filed on October 17, 2003 as Exhibit a to Registrant's registration
statement on Form N-2 (File No. 333-109801) and incorporated herein by
reference.*
b. By-Laws of Registrant. Filed on October 17, 2003 as Exhibit b to
Registrant's registration statement on Form N-2 (File No. 333-109801) and
incorporated herein by reference.*
c. None.
d. Not Applicable.
e. Terms and Conditions of the Dividend Reinvestment Plan. Filed on November
6, 2003 as Exhibit e to Pre-effective Amendment No. 2 to Registrant's
registration statement on Form N-2 (File No. 333-109801) and incorporated
herein by reference.*
f. None.
g. Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated November 3, 2003.
h.1 Form of Underwriting Agreement.
h.2 Form of A.G. Edwards & Sons, Inc. Master Selected Dealer Agreement.
h.3 Form of Nuveen Master Selected Dealer Agreement.
h.4 Form of A.G. Edwards & Sons, Inc. Master Agreement Among Underwriters.
h.5 Form of Dealer Letter Agreement.
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees. Filed on November 6, 2003 as Exhibit i
to Pre-effective Amendment No. 2 to Registrant's registration statement on
Form N-2 (File No. 333-109801) and incorporated herein by reference.*
j. Master Custodian Agreement between Registrant and State Street Bank and
Trust Company dated August 19, 2002.
k.1 Transfer Agency and Service Agreement between Registrant and State Street
Bank and Trust Company dated October 7, 2002.
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp. dated November 3, 2003.
C-1
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC. Filed on November 6, 2003 as
Exhibit l.1 to Pre-effective Amendment No. 2 to Registrant's registration
statement on Form N-2 (File No. 333-109801) and incorporated herein by
reference.*
l.2 Opinion and consent of Bingham McCutchen LLP. Filed on November 6, 2003 as
Exhibit l.2 to Pre-effective Amendment No. 2 to Registrant's registration
statement on Form N-2 (File No. 333-109801) and incorporated herein by
reference.*
l.3 Consent of Bell, Boyd & Lloyd LLC.
l.4 Consent of Bingham McCutchen LLP.
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated November 3, 2003.
q. None.
r.1 Code of Ethics of Nuveen Advisory Corp. Filed on November 6, 2003 as
Exhibit r to Pre-effective Amendment No. 2 to Registrant's registration
statement on Form N-2 (File No. 333-109801) and incorporated herein by
reference.*
s. Powers of Attorney.
___________________
* Previously filed.
Item 25: Marketing Arrangements
See Sections 2, 3 and 5(n) of the Form of Underwriting Agreement to be filed as
Exhibit h.1 to this Registration Statement.
See the Introductory Paragraph and Sections 2 and 3(d) of the Form of A.G.
Edwards & Sons, Inc. Master Selected Dealer Agreement to be filed as Exhibit h.2
to this Registration Statement and the Introductory Paragraph and Sections 2 and
3(d) of the Form of Nuveen Master Selected Dealer Agreement to be filed as
Exhibit h.3 to this Registration Statement.
See Introductory Paragraph and Sections 1.2, 3.1, 3.2, 3.4-3.8, 4.1, 4.2,
5.1-5.4, 6.1, 10.9 and 10.10 of the Form of A.G. Edwards & Sons, Inc. Master
Agreement Among Underwriters to be filed as Exhibit h.4 to this Registration
Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen and the
Underwriters to be filed as Exhibit h.5 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
[Download Table]
Securities and Exchange Commission fees $ 28,517
National Association of Securities Dealers, Inc. fees 30,500
Printing and engraving expenses 475,000
Legal Fees 150,000
Exchange listing fees 5,000
Blue Sky filing fees and expenses 5,000
Underwriter's reimbursement 73,750
Miscellaneous expenses 12,233
--------
Total $780,000
========
C-2
------------
*Nuveen Advisory has contractually agreed to reimburse the Fund for fees
and expenses in the amount of 0.32% of average daily Managed Assets for the
first 5 full years of the Fund's operations, 0.24% of average daily Managed
Assets in year 6, 0.16% in year 7 and 0.08% in year 8. Without the
reimbursement, "Total Annual Expenses" would be estimated to be 1.32% of average
daily net assets attributable to Common Shares. Nuveen has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales load) that
exceed $0.03 per Common Share (0.20% of offering price).
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At November 18, 2003
[Download Table]
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $0.01 par value 1
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides
as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final
adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
C-3
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
C-4
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment Trust
Directors and Officers and Errors and Omission policies in the aggregate amount
of $50,000,000 against liability and expenses of claims of wrongful acts arising
out of their position with the Registrant, except for matters which involve
willful acts, bad faith, gross negligence and willful disregard of duty (i.e.,
where the insured did not act in good faith for a purpose he or she reasonably
believed to be in the best interest of Registrant or where he or she had
reasonable cause to believe this conduct was unlawful). The policy has a
$500,000 deductible, which does not apply to individual trustees or officers.
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 to this
Registration Statement provides for each of the parties thereto, including the
Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Adviser
Nuveen Advisory Corp. serves as investment adviser to the following open-
end management type investment companies: Nuveen Multistate Trust I, Nuveen
Multistate Trust II, Nuveen Multistate Trust III, Nuveen Multistate Trust IV
and Nuveen Municipal Trust. Nuveen Advisory Corp. also serves as investment
adviser to the following closed-end management type investment companies other
than the Registrant: Nuveen Municipal Value Fund, Inc., Nuveen California
Municipal Value Fund, Inc., Nuveen New York Municipal Value Fund, Inc., Nuveen
Municipal Income Fund, Inc., Nuveen Premium Income Municipal Fund, Inc., Nuveen
Performance Plus Municipal Fund, Inc., Nuveen California Performance Plus
Municipal Fund, Inc., Nuveen New York Performance Plus Municipal Fund, Inc.,
Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund,
Inc., Nuveen California Municipal Market Opportunity Fund, Inc., Nuveen New York
Municipal Market Opportunity Fund, Inc., Nuveen Investment Quality Municipal
Fund, Inc., Nuveen California Investment Quality Municipal Fund, Inc., Nuveen
New York Investment Quality Municipal Fund, Inc., Nuveen Insured Quality
Municipal Fund, Inc., Nuveen Florida Investment Quality Municipal Fund, Nuveen
New Jersey Investment Quality Municipal Fund, Inc., Nuveen Pennsylvania
Investment Quality Municipal Fund, Nuveen Select Quality Municipal Fund, Inc.,
Nuveen California Select Quality Municipal Fund, Inc., Nuveen New York Select
Quality Municipal Fund, Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen
Insured Municipal Opportunity Fund, Inc., Nuveen Florida Quality Income
Municipal Fund, Nuveen Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio
Quality Income Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund,
C-5
Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York Quality
Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc., Nuveen Insured California Premium
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc.,
Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen Michigan Premium Income Municipal Fund,
Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California
Premium Income Municipal Fund 2, Inc., Nuveen Insured New York Premium Income
Municipal Fund 2, Nuveen Michigan Premium Income Municipal Fund 2, Nuveen
Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland Premium Income
Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund, Nuveen
Virginia Premium Income Municipal Fund, Nuveen Connecticut Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri
Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium
Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal Fund,
Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend Advantage
Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen
Connecticut Dividend Advantage Municipal Fund, Nuveen Maryland Dividend
Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal
Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, Nuveen Virginia
Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2,
Nuveen California Dividend Advantage Municipal Fund 2, Nuveen New York Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund,
Nuveen Ohio Dividend Advantage Municipal Fund, Nuveen Pennsylvania Dividend
Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 3, Nuveen
California Dividend Advantage Municipal Fund 3, Nuveen Georgia Dividend
Advantage Municipal Fund, Nuveen Maryland Dividend Advantage Municipal Fund 2,
Nuveen Michigan Dividend Advantage Municipal Fund, Nuveen Ohio Dividend
Advantage Municipal Fund 2, Nuveen North Carolina Dividend Advantage Municipal
Fund 2, Nuveen Virginia Dividend Advantage Municipal Fund 2, Nuveen Insured
Dividend Advantage Municipal Fund, Nuveen Insured California Dividend Advantage
Municipal Fund, Nuveen Insured New York Dividend Advantage Municipal Fund,
Nuveen Arizona Dividend Advantage Municipal Fund 2, Nuveen Connecticut Dividend
Advantage Municipal Fund 2, Nuveen New Jersey Dividend Advantage Municipal Fund
2, Nuveen Pennsylvania Dividend Advantage Municipal Fund 2, Nuveen Ohio Dividend
Advantage Municipal Fund 3, Nuveen Arizona Dividend Advantage Municipal Fund 3,
Nuveen Connecticut Dividend Advantage Municipal Fund 3, Nuveen Georgia Dividend
Advantage Municipal Fund 2, Nuveen Maryland Dividend Advantage Municipal Fund 3,
Nuveen North Carolina Dividend Advantage Municipal Fund 3, Nuveen Insured
Tax-Free Advantage Municipal Fund, Nuveen Insured California Tax-Free Advantage
Municipal Fund, Nuveen Insured Florida Tax-Free Advantage Municipal Fund, Nuveen
Insured Massachusetts Tax-Free Advantage Municipal Fund and Nuveen Insured New
York Tax-Free Advantage Municipal Fund.
Nuveen Advisory Corp. has no other clients or business at the present time.
For a description of other business, profession, vocation or employment of a
substantial nature in which any director or officer of the investment adviser
has engaged during the last two years for his account or in the capacity of
director, officer, employee, partner or trustee, see the descriptions under
"Management of the Fund" in Part A of this Registration Statement. Such
information for the remaining senior officers of Nuveen Advisory Corp. appears
below:
[Enlarge/Download Table]
Other Business Profession, Vocation or
Name and Position with NAC Employment During Past Two Years
-------------------------- --------------------------------------
John P. Amboian, President.................... President and Director, formerly Executive Vice President
of Nuveen Investments, Inc., Nuveen Investments, LLC,
Nuveen Institutional Advisory Corp., Nuveen Asset
Management, Inc.and Executive Vice President and Director
of Rittenhouse Asset Management, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel................. Senior Vice President (since 1999), formerly Vice President
and General Counsel (since 1997) and Secretary (since 1998)
of Nuveen Investments, Inc., Nuveen Investments, LLC, and
Nuveen Asset Management, Inc.; Senior Vice President (since
1997) and Secretary (since 1998) of Nuveen Institutional
Advisory Corp., Senior Vice President, Secretary and
General Counsel of Rittenhouse Asset Management, Inc.
(since 2001); Secretary (since 2003) of Symphony Asset
Management, LLC.
Margaret E. Wilson, Senior Vice President,
Finance....................................... Senior Vice President, Finance of Nuveen Investments,
Inc., Nuveen Investments, LLC, and Nuveen Institutional
Advisory Corp.
Item 31: Location of Accounts and Records
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all advisory material
of the investment adviser.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 18th day of
November, 2003.
NUVEEN MUNICIPAL HIGH
INCOME OPPORTUNITY FUND
/s/ Jessica R. Droeger
______________________________________
Jessica R. Droeger, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
[Enlarge/Download Table]
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller November 18, 2003
-------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
/s/ Gifford R. Zimmerman Chief Administrative Officer November 18, 2003
------------------------ (Principal Executive Officer)
Gifford R. Zimmerman
Timothy R. Schwertfeger* Chairman of the Board and By: /s/ Jessica R. Droeger
Trustee ------------------------
Jessica R. Droeger
Attorney-In-Fact
November 18, 2003
William E. Bennett* Trustee
Robert P. Bremner* Trustee
Lawrence H. Brown* Trustee
Jack B. Evans* Trustee
Anne E. Impellizzeri* Trustee
William L. Kissick* Trustee
Thomas E. Leafstrand* Trustee
Peter R. Sawers* Trustee
William J. Schneider* Trustee
Judith M. Stockdale* Trustee
Shelia W. Wellington* Trustee
*Original powers of attorney authorizing Jessica R. Droeger and Gifford R.
Zimmerman, among others, to execute this Registration Statement, and Amendments
thereto, for each of the trustees of the Registrant on whose behalf this
Registration Statement is filed, have been executed and filed as exhibits.
INDEX TO EXHIBITS
a. Declaration of Trust dated October 8, 2003, as amended on October 15,
2003.*
b. By-Laws of Registrant.*
c. None.
d. Not Applicable.
e. Terms and Conditions of the Dividend Reinvestment Plan.*
f. None.
g. Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated November 3, 2003.
h.1 Form of Underwriting Agreement.
h.2 Form of A.G. Edwards & Sons, Inc. Master Selected Dealer Agreement.
h.3 Form of Nuveen Master Selected Dealer Agreement.
h.4 Form of A.G. Edwards & Sons, Inc. Master Agreement Among Underwriters.
h.5 Form of Dealer Letter Agreement.
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.*
j. Master Custodian Agreement between Registrant and State Street
Bank and Trust Company dated August 19, 2002.
k.1 Shareholder Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company dated October 7, 2002.
k.2 Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp. dated November 3, 2003.
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.*
l.2 Opinion and consent of Bingham McCutchen LLP.*
l.3 Consent of Bell, Boyd & Lloyd LLC.
1.4 Consent of Bingham McCutchen LLP.
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated November 3, 2003.
q. None.
r.1 Code of Ethics of Nuveen Advisory Corp.*
s. Powers of Attorney.
___________________
* Previously filed.
Dates Referenced Herein and Documents Incorporated by Reference
5 Subsequent Filings that Reference this Filing
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