<PAGE>
June 4, 1999 Prospectus
NUVEEN
Mutual Funds
High Yield Municipal Bond Fund
High tax-free income from a portfolio of carefully researched high-yield
municipal bonds.
Featuring Portfolio Management By Nuveen Investment Advisory Services
A Premier Adviser/SM/ for Income Investing
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The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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<PAGE>
Table of Contents
Section 1 The Fund
This section provides you with an overview of the fund
including investment objectives and portfolio holdings.
Introduction............................................................... 1
Nuveen High Yield Municipal Bond Fund...................................... 2
Section 2 How We Manage Your Money
This section gives you a detailed discussion of our
investment and risk management strategies.
Who Manages the Fund....................................................... 4
Management Fees............................................................ 5
What Securities We Invest In............................................... 5
How We Select Investments.................................................. 6
What the Risks Are......................................................... 7
How We Manage Risk......................................................... 9
Section 3 How You Can Buy and Sell Shares
This section provides the information you need to move
money into or out of your account.
How to Choose a Share Class................................................ 10
How to Reduce Your Sales Charge............................................ 12
How to Buy Shares.......................................................... 12
Systematic Investing....................................................... 13
Systematic Withdrawal...................................................... 14
Special Services........................................................... 14
How to Sell Shares......................................................... 17
Section 4 General Information
This section summarizes the fund's distribution policies
and other general fund information.
Distributions and Taxes.................................................... 19
Distribution and Service Plans............................................. 21
Net Asset Value............................................................ 21
Fund Service Providers..................................................... 22
We have used the icons below throughout this prospectus to make it easy for you
to find the type of information you need.
Investment
Strategy
Risks
Fees, Charges
and Expenses
Shareholder
Instructions
Performance and
Current Portfolio
Information
<PAGE>
June 4, 1999
Section 1 The Fund
Nuveen High Yield Municipal Bond Fund
Introduction
This prospectus is intended to provide important information to help you
evaluate whether the fund may be right for you. Please read it carefully before
investing and keep it for future reference.
During the past ten years, as interest rates have declined, high yield municipal
bonds have provided higher tax equivalent yields and more income than higher
rated corporate and U.S. Treasury bonds. High yield bonds (commonly called "high
risk" or "junk" bonds) are considered speculative and involve greater risks than
higher quality bonds. We believe the potential for higher yields can make high
yield municipal bonds a good choice to sustain or enhance your current income.
Investors comfortable bearing greater risk in pursuit of higher yields should
consider the Nuveen High Yield Municipal Bond Fund. The fund uses a value-
oriented strategy and intensive credit analysis to select high-yielding
municipal bonds that offer the best opportunities in the current market.
NOT FDIC OR GOVERNMENT INSURED MAY LOSE VALUE NO BANK GUARANTEE
Section 1 The Fund 1
<PAGE>
Nuveen High Yield Municipal Bond Fund
Fund Overview
Investment Objective
The investment objective of the fund is to provide high current income exempt
from regular federal income taxes. Capital appreciation is a secondary objective
when consistent with the fund's primary objective.
How the Fund Pursues Its Objective
The fund invests substantially all of its assets in municipal bonds. Under
normal circumstances, we invest at least 65% of the fund's net assets in medium-
to low-quality bonds (BBB/Baa or lower) as rated by Standard & Poor's, Moody's
Investors Service, Duff & Phelps, or Fitch IBCA, Inc, or if unrated, judged to
be of comparable quality. The fund may invest up to 10% of its net assets in
defaulted municipal bonds. The fund may buy securities that pay interest at
rates that float inversely with changes in prevailing interest rates. The fund
may also make forward commitments in which the fund agrees to buy a security in
the future at a price agreed upon today.
We use a research-intensive investment process to identify high-yielding
municipal bonds that offer attractive value in terms of their current yields,
prices, credit quality, liquidity and future prospects.
What are the Risks of Investing in the Fund?
An investment in the fund is subject to credit risk, interest rate risk and
diversification risk. Credit risk is the risk that a municipal bond issuer will
default or be unable to pay principal and interest. Because the fund invests in
lower rated municipal bonds, commonly referred to as "high yield," "high risk"
or "junk" bonds, which are considered to be speculative, the credit risk is
heightened for the fund. Interest rate risk is the risk that interest rates will
rise, causing municipal bond prices to fall. Interest rate risk may be increased
by the fund's investment in inverse floating rate securities and forward
commitments because of the leveraged nature of these investments. As a "non-
diversified" fund, the fund may invest more of its assets in a single issuer
than a "diversified" fund. Greater concentration may increase the variability of
the fund's net asset value. As with any mutual fund investment, loss of money is
a risk of investing.
Is This Fund Right for You?
The fund may be appropriate for you if you are seeking to:
. earn monthly tax-free dividends;
. reduce taxes on investment income;
. increase your income potential and are willing to accept a greater degree of
risk.
You should not invest in this fund if you are seeking to:
. avoid share price fluctuation;
. avoid the risks associated with low-quality municipal bonds;
. invest through an IRA or 401(k) plan.
What are the Costs of Investing?
Shareholder Transaction Expenses/1/
Paid Directly From Your Investment
Share Class A B C R/2/
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Maximum Sales Charge Imposed
on Purchases 4.20%/3/ None None None
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Maximum Sales Charge Imposed
on Reinvested Dividends None None None None
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Exchange Fees None None None None
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Deferred Sales Charge/4/ None/3/ 5%/5/ 1%/6/ None
- ------------------------------------------------------------------
Annual Fund Operating Expenses/7/
Paid From Fund Assets
Share Class A B C R
- ------------------------------------------------------------------
Management Fees 0.60% 0.60% 0.60% 0.60%
- ------------------------------------------------------------------
12b-1 Distribution and Service Fees 0.20% 0.95% 0.75% --%
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Other Expenses 0.58% 0.58% 0.58% 0.58%
- ------------------------------------------------------------------
Total Operating Expenses--Gross+ 1.38% 2.13% 1.93% 1.18%
+After Expense Reimbursements
- ------------------------------------------------------------------
Reimbursements/8/ 0.38% 0.38% 0.38% 0.38%
- ------------------------------------------------------------------
Total Operating Expenses--Net 1.00% 1.75% 1.55% 0.80%
==================================================================
The following example is intended to help you compare the cost of investing in
the fund with the costs of investing in other mutual funds. It assumes you
invest $10,000 in the fund for the time periods indicated and then either redeem
or do not redeem your shares at the end of a period. The example assumes that
your investment has a 5% return each year and that the fund's operating expenses
remain the same. Your actual returns and costs may be higher or lower.
Redemption No Redemption
Share Class A B C R A B C R
- -------------------------------------------------------------
1 Year $555 $610 $196 $120 $555 $216 $196 $120
- -------------------------------------------------------------
3 Years $839 $981 $606 $375 $839 $667 $606 $ 37
- -------------------------------------------------------------
2 Section 1 The Fund
<PAGE>
How the Fund Is Invested (as of __/__/99)
Portfolio Statistics
Weighted Average Maturity years
- ---------------------------------------
Weighted Average Duration years
- ---------------------------------------
Weighted Average Credit Quality
- ---------------------------------------
Number of Issues
- ---------------------------------------
Credit Quality
A %
- ---------------------------------------
BBB %
- ---------------------------------------
BB %
- ---------------------------------------
B %
- ---------------------------------------
NR/Other %
- ---------------------------------------
[GRAPH GOES HERE]
1. As a percent of offering price unless otherwise noted. Authorized Dealers
and other firms may charge additional fees for shareholder transactions or
for advisory services. Please see their materials for details.
2. Class R shares may be purchased only under limited circumstances, or by
specified classes of investors. See "How You Can Buy and Sell Shares."
3. Reduced Class A sales charges apply to purchases of $50,000 or more.
Certain Class A purchases at net asset value of $1 million or more may be
subject to a contingent deferred sales charge (CDSC) if redeemed within 18
months of purchase. See "How You Can Buy and Sell Shares."
4. As a percentage of lesser of purchase price or redemption proceeds.
5. Class B shares redeemed within six years of purchase bear a CDSC of 5%
during the first year, 4% during the second and third years, 3% during the
fourth, 2% during the fifth, and 1% during the sixth year.
6. Class C shares redeemed within one year of purchase bear a 1% CDSC.
7. Long-term Class B and C investors may pay more in 12b-1 distribution fees
and CDSCs than the economic equivalent of the maximum permitted front-end
sales charge.
8. Reflects a voluntary expense limitation by the fund's investment adviser
which may be modified or discontinued at any time.
The Benefits of High Yield Municipal Bond Funds
As interest rates have declined over the past several years, municipal high
yield bond funds have provided higher taxable-equivalent yields and more income
than funds investing in higher-rated corporate and U.S. Treasury bonds (see
chart below). The information in the chart below gives some indication of the
risks of investing in high yield municipal bond funds, like the fund, compared
to investing in A-rated corporate bond funds and U.S. treasury bond funds. High
yield municipal bond funds can be an important source of additional income in
your portfolio.
The High-Yield Municipal Bond Fund Advantage
May 1994-April 1999
art
May-94 6.40% 6.17% 9.20%
Nov-94 6.74% 6.42% 10.01%
May-95 6.31% 6.02% 8.81%
Nov-95 6.18% 6.08% 8.51%
May-96 6.32% 5.98% 8.61%
Nov-96 6.06% 5.10% 8.61%
May-97 6.29% 5.79% 8.38%
Nov-97 5.49% 4.82% 7.93%
May-98 5.65% 5.27% 7.62%
Nov-98 5.41% 4.72% 7.43%
High yield municipal bond funds, A-rated corporate bond funds and general U.S.
treasury bond funds are represented by the Lipper High-Yield Municipal Debt
Funds Index, Lipper A-Rated Corporate Bond Index and the Lipper General U.S.
Treasury Bond Index, respectively. The distribution yield of the High-Yield
Municipal Bond Index is computed on a taxable-equivalent basis assuming a 31%
tax rate. High-yield municipal bonds carry a greater risk of default than either
A-rated corporate bonds or U.S. treasury bonds. U.S. treasury bonds are backed
by the U.S. government and thus carry a minimal amount of credit risk. The chart
above does not present taxable-equivalent yields for U.S. treasury bonds, which
are exempt from state income taxes, since the tax benefit is marginal and varies
across states. High yield municipal bond fund yields do not represent the past
or predict the future yields of the fund.
Section 1 The Fund 3
<PAGE>
Section 2 How We Manage Your Money
To help you understand the fund better, this section includes a detailed
discussion of our investment and risk management strategies. For a more complete
discussion of these matters, please consult the Statement of Additional
Information.
Who Manages the Fund
Nuveen Advisory Corp. ("Nuveen Advisory"), the fund's investment adviser,
together with its advisory affiliate, Nuveen Institutional Advisory Corp., offer
premier advisory and investment management services to a broad range of mutual
fund clients. In the Nuveen family, these advisers are commonly referred to as
Nuveen Investment Advisory Services or NIAS. NIAS is responsible for the
selection and on-going monitoring of the municipal bonds in the fund's
investment portfolio, managing the fund's business affairs and providing certain
clerical, bookkeeping and other administrative services. The NIAS advisers are
located at 333 West Wacker Drive, Chicago, IL 60606.
The NIAS advisers are wholly owned subsidiaries of John Nuveen & Co.
Incorporated ("Nuveen"). Founded in 1898, Nuveen has been synonymous with
investments that withstand the test of time. Today we offer a broad range of
investments designed for individuals seeking to build and sustain wealth. Nuveen
is the sponsor and principal underwriter of the fund's shares and has sponsored
or underwritten more than $60 billion of investment company securities. Nuveen
and its affiliates have more than $50 billion in assets under management.
Overall investment management strategy and operating policies for the fund are
set by Nuveen's Investment Management Committee. The Investment Management
Committee is comprised of several principal executive officers and portfolio
managers of Nuveen and Nuveen Advisory. Day-to-day investment operations and
execution of specific investment strategies is the responsibility of Nuveen
Advisory. Nuveen Advisory manages the fund using a team of analysts and
portfolio managers that focus on a specific group of funds. Edward F. Neild and
Stephen S. Peterson, the fund's portfolio managers, provide daily oversight for
and execution of the fund's investment activities. Mr. Neild and Mr. Peterson,
each Chartered Financial Analysts, are Vice Presidents of Nuveen Advisory and
have been Vice Presidents of the fund since its inception. Mr. Neild has been a
Vice President of Nuveen Advisory since 1996 and was an Assistant Vice President
prior thereto. Mr. Peterson has been a Vice President of Nuveen Advisory since
1997. He was an Assistant Vice President (since 1966) and portfolio manager
prior thereto. Mr. Neild is Managing Director, NIAS, and has overall supervisory
responsibility for Nuveen's investment management activities. Mr. Peterson
currently manages investments for 4 Nuveen-sponsored investment companies with
an aggregate of $3.5 billion in assets and previously was an Assistant Vice
President and portfolio manager of Nuveen Advisory.
4 Section 2 How We Manage Your Money
<PAGE>
Management Fees
For providing these services, NIAS is paid an annual fund management fee
according to the following schedule:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Fund Fee
<S> <C>
For the first $125 million 0.6000%
.........................................................
For the next $125 million 0.5875%
.........................................................
For the next $250 million 0.5750%
.........................................................
For the next $500 million 0.5625%
.........................................................
For the next $1 billion 0.5500%
.........................................................
For assets over $2 billion 0.5250%
.........................................................
</TABLE>
The fund pays for its own operating expenses such as custodial, transfer agent,
accounting and legal fees; brokerage commissions; distribution and service fees;
and extraordinary expenses.
What Securities We Invest In
Municipal Bonds
The fund invests substantially all (at least 80%) of its net assets in municipal
bonds that pay interest that is exempt from regular federal income tax. Income
from these bonds may be subject to the federal alternative minimum tax.
States, local governments and municipalities issue municipal bonds to raise
money for various public purposes such as building public facilities,
refinancing outstanding obligations and financing general operating expenses. A
municipality may issue either general obligation bonds or bonds that are payable
from the revenues of a particular project or a special excise tax.
Under normal circumstances, at least 65% of the fund's net assets will be
invested in medium- to low-quality municipal bonds rated BBB/Baa or lower by
Standard & Poor's, Moody's Investors Service, Duff & Phelps, or Fitch IBCA,
Inc., or if unrated, judged by Nuveen Advisory to be of comparable quality. The
fund may invest up to 10% of its net assets in defaulted municipal bonds.
"Defaulted" means that the bond's issuer has not paid principal or interest on
time. Municipal bonds that are rated below investment grade (BB/Ba or lower) are
commonly known as "high yield," "high risk" or "junk" bonds. They typically
offer higher yields but involve greater risks, including the possibility of
default or bankruptcy, and increased market price volatility.
The fund may invest in higher quality municipal bonds (those rated AAA/Aaa to A
or, if unrated, judged by Nuveen Advisory to be of comparable quality) or in
short-term, high-quality investments, as a temporary defensive measure, in
response to unusual market conditions, when there is a lack of acceptable lower
rated bonds or at times when yield spreads do not justify the increased risks of
investing in lower rated bonds. If the fund invests in higher quality municipal
bonds, it may not be able to achieve its investment objective.
Section 2 How We Manage Your Money 5
<PAGE>
Inverse Floating Rate Securities
The fund may invest up to 15% of its total assets in municipal securities whose
coupons vary inversely with changes in short-term tax-exempt interest rates and
which thus are a leveraged investment in an underlying municipal bond (or
securities with similar economic characteristics). These securities present
special risks for two reasons: (1) if short-term interest rates rise (fall), the
income the fund earns on the inverse floating rate security will fall (rise);
and (2) if long-term interest rates rise (fall), the value of the inverse
floating rate security will fall (rise) more than the value of the underlying
bond because of the leveraged nature of the investment. These securities
generally are illiquid. The fund will seek to buy these securities at attractive
values and yields that more than compensate the fund for their higher income and
price volatility and reduced liquidity.
Forwards and Delayed Delivery Settlement
The fund may enter into contracts to purchase securities for a specified price
at a future date later than the normal settlement date. If the delayed
settlement takes place less than 61 days after purchase, it is referred to as a
"delayed delivery" transaction. Newly issued municipal bonds sold on a "when-
issued" basis represent a common form of delayed delivery transaction. If
settlement takes place more than 60 days after purchase, the transaction is
called a "forward."
Municipal "forwards" pay higher interest rates after settlement than standard
bonds, to compensate the buyer for bearing market risk but deferring income
during the settlement period, and can often be bought at attractive prices and
yields. If the fund knows that a portfolio bond will, or is likely to, be called
or mature on a specific future date, the fund may buy a forward settling on or
about that date to replace the called or maturing bond and "lock in" a currently
attractive interest rate. The fund may also invest up to 15% of its assets in
forwards that do not serve to replace a specific bond.
Short-term Investments
Under normal market conditions, the fund may invest up to 20% of its net assets
in short-term, high quality municipal investments. See also "How We Manage Risk
- -- Hedging and Other Defensive Investment Strategies." The fund may invest in
short-term, high-quality taxable securities if suitable short-term municipal
investments are not available at reasonable prices and yields. For more
information on eligible short-term investments, see the Statement of Additional
Information.
How We Select Investments
We follow a value-driven investment process to select municipal bonds based on
our assessment of their relative values in terms of their current yield, price,
bond structure, credit quality, liquidity and future prospects. We seek to
identify municipal bonds with favorable characteristics we believe are not yet
recognized by the market. An example would be a bond with improving credit
quality that we believe will favorably impact future performance and which
offers a high yield relative to its overall risk. Our portfolio managers are
supported by a team of research analysts who review bonds available for purchase
and, after purchase, monitor
6 Section 2 How We Manage Your Money
<PAGE>
their credit characteristics and identify potential changes in their outlook.
Our analysts and portfolio managers also evaluate the economics, political and
demographic trends affecting the bond markets as part of their overall analysis.
Our research analysts are an integrated part of our portfolio management group
rather than a separate department. This structure allows the portfolio
management team to more quickly identify and capitalize on the best value
opportunities in the market. Additionally, our analysts and portfolio managers
share a proprietary database that contains information on 8,500 municipal bonds,
providing them with a source of intelligence in evaluating bonds for purchase
and closely monitoring bonds currently held.
Nuveen has a century of municipal experience and currently manages $36 billion
in municipal bonds. Our size, market experience and trading relationships can
help give Nuveen a competitive advantage in finding the best value in the
municipal bond market.
Portfolio Maturity
The fund buys municipal bonds with different maturities in pursuit of its
investment objective, but maintains under normal market conditions an investment
portfolio with an overall weighted average maturity of 15 to 30 years.
Portfolio Turnover
The fund buys and sells portfolio bonds in the normal course of its investment
activities. The proportion of the fund's investment portfolio that is sold and
replaced with new bonds during a year is known as the fund's portfolio turnover
rate. The fund intends to keep portfolio turnover relatively low in order to
reduce trading costs and the realization of taxable capital gains. The fund,
however, may make limited short-term trades to take advantage of market
opportunities or reduce market risk. Frequent trades may increase costs to
shareholders.
The fund's investment objective may not be changed without shareholder approval.
The fund's investment policies may be changed by the Board of Trustees without
shareholder approval unless otherwise noted in this prospectus or the Statement
of Additional Information.
What the Risks Are
Risk is inherent in all investing. Investing in a mutual fund involves risk,
including the risk that you may receive little or no return on your investment
or even that you may lose part or all of your investment. Therefore, before
investing you should consider carefully the following risks that you assume when
you invest in the fund. Because of these and other risks, you should consider an
investment in the fund to be a long-term investment.
Credit risk and lower rated investments: The fund's investments in municipal
bonds also exposes it to credit risk. This is the risk that an issuer of a bond
is unable to meet its obligation to make interest and principal payments due to
changing financial or market conditions. For additional risks, see "Year 2000"
below.
Section 2 How We Manage Your Money 7
<PAGE>
Generally, lower rated bonds (including below investment grade or "junk" bonds
owned by the fund) provide higher current income but have greater price
volatility and carry greater credit risk than higher rated bonds. The lower
ratings reflect a greater possibility that the issuer may be unable to make
timely payments of interest and principal and, thus, default. If this happens,
or is perceived likely to happen, the value of those investments will usually be
more volatile. Municipal bonds in the lowest rating categories may be in default
and are generally regarded as having poor prospects of attaining any real
investment standing. A default or expected default in a bond owned by the fund
could result in a significant decline in the value of that bond.
Liquidity risk: Lower rated bonds frequently are traded by only a limited number
of dealers, which may make it difficult for the fund to sell those bonds at
their fair value to meet redemption requests or for investment reasons. The fund
may not invest more than 15% of its net assets in "illiquid" bonds.
Interest rate risk: Because the fund invests in municipal bonds, the fund is
subject to interest rate risk. This is the risk that the value of the fund's
portfolio will decline because of rising market interest rates (municipal bond
prices move in the opposite direction of interest rates). The longer the average
maturity or duration of a fund's portfolio, the greater its interest rate risk.
See "How We Select Investments -- Portfolio Maturity." The fund's investments in
inverse floating rate securities increases this risk, because the value of such
a security would be likely to fall when interest rates rise even more than the
value of a security paying a fixed rate of interest. Forward commitments
acquired for investment purposes, each as described under "What Securities We
Invest In -- Forwards and Delayed Delivery Settlement", may increase interest
rate risk.
Income risk: Because the fund invests in municipal bonds, the fund is subject to
income risk. This is the risk that the income from the fund's portfolio will
decline because of changing market interest rates. This can result when the fund
invests the proceeds from new share sales, or from matured or called bonds, at
market interest rates that are below the portfolio's current earnings rate. The
fund's income may also decline if the fund invests in inverse floating rate
securities and short-term rates subsequently increase. This risk also is
magnified by the fund's use of forward commitments for investment purposes, as
described under "What Securities We Invest In -- Forwards and Delayed Delivery
Settlement."
Forwards and delayed delivery settlement risk: The fund typically does not earn
interest on these securities until settlement. A delayed delivery or forward
transaction presents special risks because, although the fund has not spent any
money for the bond prior to settlement, the fund gains or loses money as the
bond's value changes prior to settlement, making this a leveraged investment.
Diversification risk: As a "non-diversified fund," the fund is permitted to
concentrate its investments to a greater extent than a "diversified" fund. As a
result, the fund's share price may fluctuate more than that of a "diversified"
fund investing in similar securities.
Inflation risk: Like all mutual funds, the fund is subject to inflation risk.
This is the risk that the value of assets or income from investments will be
less in the future as inflation decreases the value of money. As inflation
increases, the value of the fund's assets can decline as can the value of the
fund's distributions.
8 Section 2 How We Manage Your Money
<PAGE>
How We Manage Risk
In pursuit of its investment objective, the fund assumes investment risk,
chiefly in the form of interest rate and credit risk. The fund seeks to limit
investment risk in several ways.
Intensive Research
We thoroughly research each security, both before purchase and then on an
ongoing basis. Our goal is to find securities of issuers whose prospects are
better than the general market perceives and to sell securities before a
significant price decline by anticipating a deterioration in credit quality
ahead of the market. In addition, we are obtaining information about the Year
2000 readiness of the issuers of the fund's bonds as part of our ongoing
surveillance of the creditworthiness of those issuers.
Diversification of Issuers
We purchase securities from a variety of issuers, seeking to moderate the impact
that a decline in credit of one issuer will have on the value of the overall
portfolio. Though the fund is considered "non-diversified" under the Investment
Company Act of 1940, for at least half of its portfolio, it cannot invest more
than 5% of total assets in securities of any one issuer. The fund expects that
the remainder of the portfolio will still be invested in a range of different
issuers, but any one issuer may represent more than 5% of the fund's total
assets.
Diversification Among Industries
We also diversify by industry, so a decline in the fortunes of one industry will
not unduly impact the value of the fund's portfolio. The fund will not invest
more than 25% of total assets in any one industry.
Temporary Defensive Measures
The fund may invest up to 100% in cash and cash equivalents and short-term
investments as a temporary defensive measure in response to adverse market
conditions, or to keep cash on hand fully invested. During those periods, the
weighted average maturity of the fund's investment portfolio may fall below the
defined range described under "How We Select Investments -- Portfolio Maturity."
If the fund invests in higher quality municipal bonds, it may not be able to
achieve its investment objective.
Hedging
Although it currently doesn't anticipate doing so, the fund may also use various
investment strategies designed to hedge against changes in the value of
securities the fund owns or expects to purchase or to hedge against interest
rate changes. These hedging strategies include using financial futures
contracts, options on financial futures, or options based on either an index of
long-term tax-free securities or on debt securities whose prices, in the opinion
of the fund's investment adviser, correlate with the prices of the fund's
investments. The ability of the fund to benefit from options and futures is
largely dependent on our ability to pursue such strategies successfully. The
fund could lose money on futures transactions or an option can expire worthless.
Any gains from these strategies that the fund recognizes and distributes will
generate taxable income for shareholders.
Section 2 How We Manage Your Money 9
<PAGE>
Section 3 How You Can Buy and Sell Shares
You can choose from four classes of fund shares, each with a different
combination of sales charges, fees, eligibility requirements and other features.
Your financial adviser can help you determine which class is best for you. We
offer a number of features for your convenience. Please see the Statement of
Additional Information for further details.
How to Choose a Share Class
In deciding whether to purchase Class A, Class B, Class C or Class R shares, you
should consider:
. the amount of your purchase;
. any current holdings of fund shares;
. how long you expect to hold the shares;
. the amount of any up-front sales charge;
. whether a contingent deferred sales charge (CDSC) would apply upon
redemption;
. the amount of any distribution or service fees that you may incur while you
own the shares;
. whether you will be reinvesting income or capital gain distributions in
additional shares;
. whether you qualify for a sales charge waiver or reduction.
For a summary of the charges and expenses for each class, please see the Summary
of Fund Expenses.
Class A Shares
You may purchase Class A shares at the offering price, which is the net asset
value per share plus an up-front sales charge. You may qualify for a reduced
sales charge, or the sales charge may be waived, as described in "How to Reduce
Your Sales Charge." Class A shares are also subject to an annual service fee of
.20% which compensates your financial adviser for providing ongoing service to
you. The up-front Class A sales charge for the fund is as follows:
<TABLE>
<CAPTION>
Authorized Dealer
Sales Charge as % of Sales Charge as % of Commission as % of
Amount of Purchase Public Offering Price Net Amount Invested Public Offering Price
<S> <C> <C> <C>
Less than $50,000 4.20% 4.38% 3.70%
.........................................................................................................
$50,000 but less than $100,000 4.00% 4.18% 3.50%
.........................................................................................................
$100,000 but less than $250,000 3.50% 3.63% 3.00%
.........................................................................................................
$250,000 but less than $500,000 2.50% 2.56% 2.00%
.........................................................................................................
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
.........................................................................................................
$1,000,000 and over --* -- 1.00%*
.........................................................................................................
</TABLE>
* You can buy $1 million or more of Class A shares at net asset value without an
up-front sales charge. Nuveen pays Authorized Dealers of record on these share
purchases a sales commission of 1.00% of the first $2.5 million, plus .50% of
the next $2.5 million, plus .25% of any amount over $5.0 million.
10 Section 3 How You Can Buy and Sell Shares
<PAGE>
If you redeem your shares within 18 months of purchase, you may have to pay a
CDSC of 1% of either your purchase price or your redemption proceeds, whichever
is lower. You do not have to pay this CDSC if your financial adviser has made
arrangements with Nuveen and agrees to waive the commission.
Class B Shares
You may purchase Class B shares at the net asset value per share without any up-
front sales charge so that the full amount of your purchase is invested in the
fund. However, you will pay annual distribution and service fees of 0.95% of the
average daily value of your account. These fees reimburse Nuveen for paying your
financial adviser a sales commission as well as an on-going service fee. Nuveen
pays your financial adviser a 4% sales commission at the time of your purchase,
which includes an advance of the first year's service fee.
If you sell your shares within six years of purchase, you will have to pay a
CDSC, as shown in the schedule below. The CDSC is based on your purchase or sale
price, whichever is lower. You do not pay a CDSC on any Class B shares you
purchase by reinvesting dividends.
<TABLE>
<CAPTION>
Years Since Purchase 0-1 1-2 2-3 3-4 4-5 5-6 Over 6
<S> <C> <C> <C> <C> <C> <C> <C>
CDSC 5% 4% 4% 3% 2% 1% None
........................................................................
</TABLE>
Class B shares automatically convert to Class A shares eight years after you
purchase them so that the distribution fees you pay over the life of your
investment are limited. You will continue to pay an annual service fee on any
converted Class B shares.
Class C Shares
You may purchase Class C shares at the net asset value per share without any up-
front sales charge so that the full amount of your purchase is invested in the
fund. However, you will pay annual distribution and service fees of .75% of the
average daily value of your account. These fees reimburse Nuveen for paying your
financial adviser a sales commission as well as an on-going service fee. Nuveen
pays your financial adviser a .75% sales commission at the time of your
purchase, which includes an advance of the first year's distribution and service
fees, and an additional 0.55% sales commission per year thereafter.
If you sell your shares within one year of purchase, you will have to pay a 1%
CDSC. The CDSC is based on either your purchase or sale price, whichever is
lower. You do not pay a CDSC on any Class C shares you purchase by reinvesting
dividends.
Class R Shares
Under limited circumstances, you may purchase Class R shares at the net asset
value on the day of purchase. In order to qualify, you must be eligible under
one of the programs described in "How to Reduce Your Sales Charge" or meet
certain other purchase size criteria. Class R shares are not subject to sales
charges or ongoing service or distribution fees. Class R shares have lower
ongoing expenses than the other classes.
Section 3 How You Can Buy and Sell Shares 11
<PAGE>
How to Reduce Your Sales Charge
We offer a number of ways to reduce or eliminate the up-front sales charge on
Class A shares or to qualify to purchase Class R shares.
Class A Sales Charge Reductions
. Rights of accumulation
. Letter of intent
. Group purchase
Class A Sales Charge Waivers
. Nuveen Defined Portfolio reinvestment
. Retirement plans
. Certain employees and directors of Nuveen or employees of authorized dealers
. Bank trust departments
Class R Eligibility
. Certain employees and directors of Nuveen or employees of authorized dealers
. Bank trust departments
In addition, Class A shares at net asset value and Class R shares may be
purchased through registered investment advisers, certified financial planners
and registered broker-dealers who charge asset-based or comprehensive "wrap"
fees for their services. Please refer to the Statement of Additional Information
for detailed program descriptions and eligibility requirements. Additional
information is available from your financial adviser or by calling (800) 257-
8787. Your financial adviser can also help you prepare any necessary application
forms. You or your financial adviser must notify Nuveen at the time of each
purchase if you are eligible for any of these programs. The fund may modify or
discontinue these programs at any time.
How to Buy Shares
You may open an account with $3,000 per fund share class ($1,000 for a
Traditional/Roth IRA account; $500 for an Education IRA account; $500 for
accounts opened through certain fee-based programs; and $50 through systematic
investment plan accounts) and make additional investments at any time with as
little as $50. There is no minimum if you are reinvesting Nuveen Defined
Portfolio distributions. The share price you pay will depend on when Nuveen
receives your order. Orders received before the close of trading on a business
day will receive that day's closing share price, otherwise you will receive the
next business day's price. A business day is any day the New York Stock Exchange
is open for business and normally ends at 4 P.M. New York time.
Through a Financial Adviser
You may buy shares through your financial adviser, who can handle all the
details for you, including opening a new account. Financial advisers can also
help you review your financial needs and formulate long-term investment goals
and objectives. In addition, financial advisers generally can help you develop a
customized financial plan, select investments and monitor and review your
portfolio on an ongoing basis to help assure your investments continue to meet
your needs as circumstances change. Financial advisers are paid either from fund
sales charges and fees or by charging you a separate fee in lieu of a sales
charge for ongoing investment advice and services. If you do not have a
financial adviser, call (800) 257-8787 and Nuveen can refer you to one in your
area.
12 Section 3 How You Can Buy and Sell Shares
<PAGE>
By Mail
You may open an account and buy shares by mail by completing the enclosed
application and mailing it along with your check to: Nuveen Investor Services,
P.O. Box 5186, Bowling Green Station, New York, NY 10274-5186.
Systematic Investing
Once you have established a fund account, systematic investing allows you to
make regular investments through automatic deductions from your bank account
(simply complete the appropriate section of the account application form) or
directly from your paycheck. To invest directly from your paycheck, contact your
financial adviser or call Nuveen at (800) 257-8787. Systematic investing may
also make you eligible for reduced sales charges.
The chart below illustrates the benefits of systematic investing based on a
$3,000 initial investment and subsequent monthly investments of $100 over 20
years. The example assumes you earn a return of 4%, 5% or 6% annually on your
investment and that you reinvest all dividends. These annual returns do not
reflect past or projected fund performance.
[PERFORMANCE CHART APPEARS HERE]
[PLOT POINTS TO COME]
One of the benefits of systematic investing is dollar cost averaging. Because
you regularly invest a fixed amount of money over a period of years regardless
of the share price, you buy more shares when the price is low and fewer shares
when the price is high. As a result, the average share price you pay should be
less than the average share price of fund shares over the same period. To be
effective, dollar cost averaging requires that you invest over a long period of
time, and does not assure that you will profit.
Section 3 How You Can Buy and Sell Shares 13
<PAGE>
Systematic Investment Plan
You can make regular investments of $50 or more per month by authorizing us to
draw preauthorized checks on your bank account. You can stop the withdrawals at
any time. There is no charge for this plan.
Payroll Direct Deposit Plan
You can, with your employer's consent, make regular investments of $25 or more
per pay period (meeting the monthly minimum of $50) by authorizing your employer
to deduct this amount automatically from your paycheck. You can stop the
deductions at any time. There is no charge for this plan.
Systematic Withdrawal
If the value of your fund account is at least $10,000, you may request to have
$50 or more withdrawn automatically from your account. You may elect to receive
payments monthly, quarterly, semi-annually or annually, and may choose to
receive a check, have the monies transferred directly into your bank account
(see "Special Services--Fund Direct" below), paid to a third party or sent
payable to you at an address other than your address of record. You must
complete the appropriate section of the account application or Account Update
Form to participate in the fund's systematic withdrawal plan.
You should not establish systematic withdrawals if you intend to make concurrent
purchases of Class A, B or C shares because you may unnecessarily pay a sales
charge or CDSC on these purchases.
Special Services
To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.
Exchanging Shares
You may exchange fund shares into an identically registered account at any time
for the same class of another Nuveen mutual fund available in your state. Your
exchange must meet the minimum purchase requirements of the fund into which you
are exchanging. Because an exchange is treated for tax purposes as a concurrent
sale and purchase, and any gain may be subject to tax, you should consult your
tax adviser about the tax consequences of any contemplated exchange.
The exchange privilege is not intended to allow you to use the fund for short-
term trading. Because excessive exchanges may interfere with portfolio
management, raise fund operating expenses or otherwise have an adverse effect on
other shareholders, the fund reserves the right to revise or suspend the
exchange privilege, limit the amount or number of exchanges, or reject any
exchange.
Reinstatement Privilege
If you redeem fund shares, you may reinvest all or part of your redemption
proceeds up to one year later without incurring any additional charges. You may
only reinvest into the same share class you redeemed. If you paid a CDSC, we
will refund your CDSC and reinstate your holding period. You may use this
reinstatement privilege only once for any redemption.
14 Section 3 How You Can Buy and Sell Shares
<PAGE>
Fund Direct/SM/
You may link your fund account to your bank account and transfer money
electronically between these accounts and perform a variety of account
transactions, including buying shares by telephone and systematic investing. You
may also have dividends, distributions, redemption payments or systematic
withdrawals sent directly to your bank account.
Your financial adviser can help you complete the forms for these services, or
you can call Nuveen at (800) 257-8787 for copies of the necessary forms.
How to Sell Shares
You may use one of the following ways to sell (redeem) your shares on any day
the New York Stock Exchange is open. You will receive the share price next
determined after Nuveen has received your properly completed redemption request.
Your redemption request must be received before the close of trading for you to
receive that day's price. While the fund does not charge a redemption fee, you
may be assessed a CDSC, if applicable. When you redeem Class A, Class B, or
Class C shares subject to a CDSC, the fund will first redeem any shares that are
not subject to a CDSC or that represent an increase in the value of your fund
account due to capital appreciation, and then redeem the shares you have owned
for the longest period of time, unless you ask the fund to redeem your shares in
a different order. No CDSC is imposed on shares you buy through the reinvestment
of dividends and capital gains. The holding period is calculated on a monthly
basis and begins on the first day of the month in which you buy shares. When you
redeem shares subject to a CDSC, the CDSC is calculated on the lower of your
purchase price or redemption proceeds, deducted from your redemption proceeds,
and paid to Nuveen. The CDSC may be waived under certain special circumstances
as described in the Statement of Additional Information.
Through Your Financial Adviser
You may sell your shares through your financial adviser who can prepare the
necessary documentation. Your financial adviser may charge for this.
By Telephone
If you have authorized telephone redemption privileges, you can redeem your
shares by telephone. You may not redeem by telephone shares held in certificate
form. Checks will be issued only to the shareholder of record and mailed to the
address of record. If you have established electronic funds transfer privileges,
you may have redemption proceeds transferred electronically to your bank
account. We will normally mail your check the next business day. Nuveen and
Chase Global Funds Services Company, the transfer agent, will be liable for
losses resulting from unauthorized telephone redemptions only if they do not
follow reasonable procedures designed to verify the identity of the caller. You
should immediately verify your trade confirmations when you receive them.
Section 3 How You Can Buy and Sell Shares 15
<PAGE>
An Important Note About Involuntary Redemption
From time to time, the fund may establish minimum account size requirements. The
fund reserves the right to liquidate your account upon 30 days' written notice
if the value of your account falls below an established minimum. The fund has
set a minimum balance of $100 unless you have an active Nuveen Defined Portfolio
reinvestment account. You will not be assessed a CDSC on an involuntary
redemption.
By Mail
You can sell your shares at any time by sending a written request to the fund,
Nuveen Investor Services, P.O. Box 5186, Bowling Green Station, New York, NY
10274-5186. Your request must include the following information:
. The fund's name;
. Your name and account number;
. The dollar or share amount you wish to redeem;
. The signature of each owner exactly as it appears on the account;
. The name of the person to whom you want your redemption proceeds paid (if
other than to the shareholder of record);
. The address where you want your redemption proceeds sent (if other than the
address of record);
. Any certificates you have for the shares; and
. Any required signature guarantees.
We will normally mail your check the next business day, but in no event more
than seven days after we receive your request. If you purchased your shares by
check, your redemption proceeds will not be mailed until your check has cleared.
Guaranteed signatures are required if you are redeeming more than $50,000, you
want the check payable to someone other than the shareholder of record or you
want the check sent to another address (or the address of record has been
changed within the last 60 days.) Signature guarantees must be obtained from a
bank, brokerage firm or other financial intermediary that is a member of an
approved Medallion Guarantee Program or that is otherwise approved by the fund.
A notary public cannot provide a signature guarantee.
16 Section 4 General Information
<PAGE>
Section 4 General Information
To help you understand the tax implications of investing in the fund, this
section includes important details about how the fund makes distributions to
shareholders. We discuss some other fund policies, as well.
Distributions and Taxes
The fund pays tax-free dividends monthly and any taxable capital gains or other
taxable distributions once a year in December. The fund declares dividends
monthly to shareholders of record as of the ninth of each month, usually payable
the first business day of the following month.
Payment and Reinvestment Options
The fund automatically reinvests your dividends in additional fund shares unless
you request otherwise. You may request to have your dividends paid to you by
check, deposited directly into your bank account, paid to a third party, sent to
an address other than your address of record or reinvested in shares of another
Nuveen mutual fund. For further information, contact your financial adviser or
call Nuveen at (800) 257-8787.
Taxes and Tax Reporting
Because the fund invests in municipal bonds, the monthly dividends you receive
will be exempt from regular federal income tax. All or a portion of these
dividends, however, may be subject to state and local taxes or to the federal
alternative minimum tax.
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's
distributions of such amounts are taxed as ordinary income or capital gains
(which may be taxable at different rates depending on the length of time the
fund holds its assets). Dividends from the fund's long-term capital gains are
taxable as capital gains, while dividends from short-term capital gains and net
investment income are generally taxable as ordinary income. The tax you pay on a
given capital gains distribution depends generally on how long the fund has held
the portfolio securities it sold. It does not depend on how long you have owned
your fund shares. Taxable dividends do not qualify for a dividends received
deduction if you are a corporate shareholder.
Early in each year, you will receive a statement detailing the amount and nature
of all dividends and capital gains that you were paid during the prior year. You
will receive this statement from the firm where you purchased your fund shares
if you hold your investment in street name. Nuveen will send you this statement
if you hold your shares in registered form. The tax status of your dividends
from the fund is not affected by
Section 4 General Information 17
<PAGE>
whether you reinvest your dividends or receive them in cash. The sale of shares
in your account may produce a gain or loss, and is a taxable event. For tax
purposes, an exchange is the same as a sale.
Early in each year, you will receive a statement detailing the amount and nature
of all dividends and capital gains that you were paid during the prior year. You
will receive this statement from the firm where you purchased your fund shares
if you hold your investment in street name. Nuveen will send you this statement
if you hold your shares in registered form. The tax status of your dividends
from the fund is not affected by whether you reinvest your dividends or receive
them in cash. The sale of shares in your account may produce a gain or loss, and
is a taxable event. For tax purposes, an exchange is the same as a sale.
Tax laws are subject to change, so we urge you to consult your tax advisor about
your particular tax situation and how it might be affected by current tax law.
Please note that if you do not furnish us with your correct Social Security
number or employer identification number, federal law requires us to withhold
federal income tax from your distributions and redemption proceeds at a rate of
31%.
Buying or Selling Shares Close to a Record Date
Buying fund shares shortly before the record date for a taxable dividend is
commonly known as "buying the dividend." The entire dividend may be taxable to
you even though a portion of the dividend effectively represents a return of
your purchase price. Similarly, if you sell or exchange fund shares shortly
before the record date for a tax-exempt dividend, a portion of the price you
receive may be treated as a taxable capital gain even though it reflects tax-
free income earned but not yet distributed by the fund.
Taxable Equivalent Yields
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 and tax rates:
Taxable Equivalent of Tax-Free Yields
<TABLE>
<CAPTION>
Tax-Free Yield
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00%
<S> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33%
..............................................................
31.0% 5.80% 6.52% 7.25% 7.97% 8.70%
..............................................................
36.0% 6.25% 7.03% 7.81% 8.59% 9.37%
..............................................................
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
..............................................................
</TABLE>
The yields and tax rates shown above are hypothetical and do not predict your
actual returns or effective tax rate. For more detailed information, see the
Statement of Additional Information or consult your tax advisor.
18 Section 4 General Information
<PAGE>
Distribution and Service Plans
John Nuveen & Co. Incorporated serves as the selling agent and distributor of
the fund's shares. In this capacity, Nuveen manages the offering of the fund's
shares and is responsible for all sales and promotional activities. In order to
reimburse Nuveen for its costs in connection with these activities, including
compensation paid to authorized dealers, the fund has adopted a distribution and
service plan under Rule 12b-1 under the Investment Company Act of 1940. (See
"How to Choose a Share Class" for a description of the distribution and service
fees paid under this plan.)
Nuveen receives the distribution fee for Class B and Class C shares primarily
for providing compensation to Authorized Dealers, including Nuveen, in
connection with the distribution of shares. Nuveen uses the service fee for
Class A, Class B, and Class C shares to compensate Authorized Dealers, including
Nuveen, for providing account services to shareholders. These services may
include establishing and maintaining shareholder accounts, answering shareholder
inquiries, and providing other personal services to shareholders. These fees
also compensate Nuveen for other expenses, including printing and distributing
prospectuses to persons other than shareholders, the expenses of preparing,
printing, and distributing advertising and sales literature and reports to
shareholders used in connection with the sale of shares. Because these fees are
paid out of the fund's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
Net Asset Value
The price you pay for your shares is based on the fund's net asset value per
share which is determined as of the close of trading (normally 4:00 p.m. eastern
time) on each day the New York Stock Exchange is open for business. The New York
Stock Exchange is closed on weekends and certain national holidays. Net asset
value is calculated for each class by taking the fair value of the class' 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. All valuations
are subject to review by the fund's Board of Trustees or its delegate.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are valued
at market value. The prices of municipal bonds are provided by a pricing service
and based on the mean between the bid and asked price. When price quotes are not
readily available (which is usually the case for municipal securities), the
pricing service establishes fair market value based on prices of municipal
bonds.
Section 4 General Information 19
<PAGE>
Fund Service Providers
The custodian of the assets of the fund is The Chase Manhattan Bank, 4 New York
Plaza, New York, NY 10004-2413. Chase also provides certain accounting services
to the fund. The fund's transfer, shareholder services and dividend paying
agent, Chase Global Funds Services Company, P.O. Box 5186, Bowling Green
Station, New York, NY 10274-5186, performs bookkeeping, data processing and
administrative services for the maintenance of shareholder accounts.
Nuveen Advisory and Chase Global Funds Services Company each rely on computer
systems to manage the fund's investments, process shareholder transactions and
provide shareholder account maintenance. Because of the way computers
historically have stored dates, some of these systems currently may not be able
to correctly process activity occurring in the Year 2000. Nuveen Advisory is
working with the fund's service providers to adapt their systems to address this
"Year 2000" issue. Nuveen Advisory and the fund expect, but there can be no
absolute assurance, that the necessary work will be completed on a timely basis.
Year 2000
The fund's service providers rely on computer systems to manage the fund's
investments, process shareholder transactions and provide shareholder account
maintenance. Because of the way computers historically have stored dates, some
of these systems currently may not be able to correctly process activity
occurring in the year 2000. Nuveen is working with the fund's service providers
to adapt their systems to address this issue. Nuveen and the fund expect that
the necessary work will be completed on a timely basis, although there can be no
assurance of this.
In addition, Year 2000 issues may affect the ability of municipal issuers to
meet their interest and principal payment obligations to their bond holders, and
may adversely affect the bonds' credit ratings and values. Municipal issuers may
have greater Year 2000 risks than other issuers. Nuveen Advisory is requesting
information from municipal issuers so that Nuveen Advisory can take the issuers'
Year 2000 readiness, if made available, into account in making investment
decisions. There can be no assurance that issuers will provide this information
to Nuveen Advisory, or that issuers will begin or complete the work necessary to
address any Year 2000 issues on a timely basis.
20 Section 4 General Information
<PAGE>
Nuveen Mutual Funds
Nuveen offers a variety of mutual funds designed to help you reach your
financial goals. The funds below are grouped by investment objectives.
Growth
Nuveen Rittenhouse Growth Fund
Growth and Income
European Value Fund
Growth and Income Stock Fund
Balanced Stock and Bond Fund
Balanced Municipal and Stock Fund
Dividend and Growth Fund
Income
Income Fund
Tax-Free Income
National Municipal Bond Funds
Long-term
Insured Long-term
Intermediate-term
Limited-term
State Municipal Bond Funds
Arizona
California/1/
Colorado
Connecticut
Florida
Georgia
Kansas
Kentucky
Louisiana
Maryland
Massachusetts/1/
Michigan
Missouri
New Jersey
New Mexico
New York/1/
North Carolina
Ohio
Pennsylvania
Tennessee
Virginia
Wisconsin
Several additional sources of information are available to you. The Statement of
Additional Information (SAI), incorporated by reference into this prospectus,
contains detailed information on fund policies and operation. Shareholder
reports contain management's discussion of market conditions, investment
strategies and performance results as of the fund's latest semi-annual or annual
fiscal year end. Call Nuveen at (800) 257-8787 to request a free copy of any of
these materials or other fund information.
You may also obtain this and other fund information directly from the Securities
and Exchange Commission (SEC). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at (800) SEC-0330
for room hours and operation. You may also request fund information by writing
to the SEC's Public Reference Section, Washington, D.C. 20549. The fund's
Investment Company file number is 811-07873.
1. Long-term and insured long-term portfolios.
[NUVEEN LOGO]
John Nuveen & Co. Incorporated
333 West Wacker Drive
Chicago, IL 60606-1286
(800) 257-8787
www.nuveen.com MMPR-HY 5-99
<PAGE>
June 4, 1999
NUVEEN FLAGSHIP MUNICIPAL TRUST
Nuveen High Yield Municipal Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Prospectus of the Nuveen High Yield Municipal Bond Fund dated June 4, 1999. The
Prospectus may be obtained without charge from certain securities
representatives, banks, and other financial institutions that have entered into
sales agreements with John Nuveen & Co. Incorporated, or from the Fund, by
mailing a written request to the Fund c/o John Nuveen & Co. Incorporated, 333
West Wacker Drive, Chicago, Illinois 60606 or by calling 800-257-8787.
TABLE OF CONTENTS
Page
----
Investment Policies and Investment Portfolio............ S-2
Management.............................................. S-14
Investment Adviser and Investment Management Agreement.. S-18
Portfolio Transactions.................................. S-19
Net Asset Value......................................... S-20
Federal Income Tax Matters.............................. S-21
Performance Information................................. S-25
Additional Information on the Purchase and Redemption
of Fund Shares................................. S-28
Distribution and Service Plan........................... S-45
Independent Public Accountants and Custodian............ S-46
Appendix A--Ratings of Investments...................... A-1
Appendix B--Description of Hedging Techniques........... B-1
<PAGE>
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
Investment Policies
The investment objectives and certain fundamental investment policies of
the Fund are described in the Prospectus. The Fund, as a fundamental policy, may
not, without the approval of the holders of a majority of its shares:
(1) Invest in securities other than Municipal Obligations, short-term
securities and other securities, as described in the Prospectus. Municipal
Obligations are municipal bonds that pay interest that is exempt from
regular federal income taxes.
(2) Borrow money, except from banks for temporary or emergency
purposes and not for investment purposes and then only in an amount not
exceeding (a) 10% of the value of its total assets at the time of borrowing
or (b) one-third of the value of the Fund's total assets including the
amount borrowed, in order to meet redemption requests which might otherwise
require the untimely disposition of securities. While any such borrowings
exceed 5% of the Fund's total assets, no additional purchases of investment
securities will be made by the Fund. If due to market fluctuations or other
reasons, the value of the Fund's assets falls below 300% of its borrowings,
the Fund will reduce its borrowings within 3 business days. To do this, the
Fund may have to sell a portion of its investments at a time when it may be
disadvantageous to do so.
(3) Pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph (2) above, it may pledge
securities having a market value at the time of pledge not exceeding 10% of
the value of the Fund's total assets.
(4) Issue senior securities as defined in the Investment Company Act
of 1940, except to the extent such issuance might be involved with respect
to borrowings described under item (2) above or with respect to
transactions involving futures contracts or the writing of options within
the limits described in the Prospectus and this Statement of Additional
Information.
(5) Underwrite any issue of securities, except to the extent that the
purchase or sale of Municipal Obligations in accordance with its investment
objective, policies and limitations, may be deemed to be an underwriting.
(6) Purchase or sell real estate, but this shall not prevent the Fund
from investing in Municipal Obligations secured by real estate or interests
therein or foreclosing upon and selling such security.
(7) Purchase or sell commodities or commodities contracts or oil, gas
or other mineral exploration or development programs, except for
transactions involving futures contracts within the limits described in the
Prospectus and this Statement of Additional Information.
S-2
<PAGE>
(8) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations.
(9) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the
clearance of transactions.
(10) Write or purchase put or call options, except to the extent that
the purchase of a stand-by commitment may be considered the purchase of a
put, and except for transactions involving options within the limits
described in the Prospectus and this Statement of Additional Information.
(11) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitations shall not be
applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the
U.S. Government, it agencies or instrumentalities.
In addition, the Fund, as a non-fundamental policy, may not invest more
than 15% of its net assets in "illiquid" securities, including repurchase
agreements maturing in more than seven days.
The foregoing restrictions and limitations, as well as the Fund's policies
as to ratings of portfolio investments, will apply only at the time of purchase
of securities, and the percentage limitations will not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of an acquisition of securities, unless otherwise indicated.
The foregoing fundamental policies, together with the investment objective
of the Fund, cannot be changed without approval by holders of a "majority of the
Fund's outstanding voting shares." As defined in the Investment Company Act of
1940 (the "1940 Act"), this means the vote of (i) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the Fund's
shares are present or represented by proxy or (ii) more than 50% of the Fund's
shares, whichever is less.
General Information
The Fund is a non-diversified series of Nuveen Flagship Municipal Trust
(the "Trust"). The Trust is an open-end management investment company under the
1940 Act. The Trust was organized as a Massachusetts business trust on July 1,
1996. The Board of Trustees of the Trust is authorized to issue an unlimited
number of shares in one or more series or "Funds," which may be divided into
classes of shares. Currently, there are six series authorized and outstanding,
which is divided into four classes of shares designated Class A Shares, Class B
Shares, Class C Shares and Class R Shares. Each class of shares represents an
interest in the same portfolio of investments of the Fund. Each class of shares
has equal rights as to voting, redemption, dividends and liquidation, except
that each bears different class expenses, including different distribution and
service fees, and each has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. There are no conversion,
preemptive or other subscription rights, except that Class B Shares
automatically convert into Class A Shares, as described herein. The Board of
Trustees of Trust has the right to establish additional series and
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classes of shares in the future, to change those series or classes and to
determine the preferences, voting powers, rights and privileges thereof.
The Trust is not required and does not intend to hold annual meetings of
shareholders. Shareholders owning more than 10% of the outstanding shares of the
Fund have the right to call a special meeting to remove Trustees or for any
other purpose.
Under Massachusetts law applicable to Massachusetts business trusts,
shareholders of such a trust may, under certain circumstances, be held
personally liable as partners for its obligations. However, the Declaration of
Trust of the Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Trust's Declaration of Trust further provides for
indemnification out of the assets and property of the Trust for all losses and
expenses of any shareholder of the Trust held personally liable. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust or the Fund itself was unable to meet its obligations. The Trust believes
the likelihood of the occurrence of these circumstances is remote.
Year 2000 Issues
The "Year 2000" problem refers to the fact that many computer programs use
only the last two digits of a year, and do not recognize a year that begins with
"20" instead of "19". If this problem is not corrected, computers could function
improperly or not at all, which could affect the global economy. The SEC has
urged securities issuers to disclose the steps they are taking to correct any
Year 2000 problems.
The Fund invests primarily in municipal securities. If municipal issuers do
not correct any Year 2000 problems in a timely manner, they could experience
problems in conducting their operations or in making payments on their
securities, which could cause the value of these securities to decline.
Municipal issuers could experience three types of Year 2000 problems. First, if
an issuer's internal computer systems experience Year 2000 problems, this could
disrupt an issuer's operations (such as its ability to collect local taxes or
fees). Second, an issuer may rely on other parties for the payments that support
is debt service, such as servicers that collect mortgage or student loan
payments, and those third parties may have Year 2000 problems that interfere
with their ability to forward payments to the issuer. Third, an issuer may have
mechanical problems in sending payments to its shareholders.
Nuveen Advisory is obtaining information about the Year 2000 readiness of
the issuers of its bonds as part of its ongoing surveillance of the
creditworthiness of those issuers.
Diversification
Diversification is a means of reducing risk by investing in a broad range
of bonds or other securities. Because the Fund is non-diversified, it has the
ability to take larger positions in a smaller number of issuers. The
appreciation or depreciation of a single stock may have a greater impact on the
net asset value of a non-diversified fund, because the fund is likely to have a
greater percentage of its assets invested in that stock. As a result, the share
price of the Fund can be
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expected to fluctuate more than that of broadly diversified funds investing in
similar securities. Because it is non-diversified, the Fund is not subject to
the limitations under the 1940 Act on the percentage of its assets that it may
invest in any one issuer. The Fund, however, intends to comply with the
diversification standards for regulated investment companies under Subchapter M
of the Internal Revenue Code.
Municipal Obligations
As described in the Prospectus, the Fund invests substantially all of its
assets (at least 80%) in Municipal Obligations. Under normal circumstances, the
Fund will invest at least 65% of its assets in medium- to low-quality bonds
rated BBB/Baa or lower by Standard and Poor's Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc. ("Fitch"), or Duff &
Phelps Inc. ("D&P") or are unrated fixed-income securities which, in the opinion
of Nuveen Advisory, are of comparable quality. As a temporary defensive measure,
in response to unusual market conditions, lack of acceptable supply or times
when yield spreads do not justify the increased risks of investing in these
securities, the Fund may invest in higher quality Municipal Obligations (those
rated AAA/Aaa to A or, if unrated, judged by Nuveen Advisory to be of comparable
quality) or in short-term, high-quality investments. The Fund may invest up to
10% of its net assets in defaulted Municipal Obligations. "Defaulted" means that
the municipal bond's issuer has not paid principal or interest on time.
In general, Municipal Obligations include debt obligations issued by
states, cities and local authorities to obtain funds for various public
purposes, including construction of a wide range of public facilities such as
airports, bridges, highways, hospitals, housing, mass transportation, schools,
streets and water and sewer works. Industrial development bonds and pollution
control bonds that are issued by or on behalf of public authorities to finance
various privately-rated facilities are included within the term of Municipal
Obligations if the interest paid thereon is exempt from federal income tax.
Also included within the general category of Municipal Obligations
described in the Prospectus are participations in lease obligations or
installment purchase contract obligations (hereinafter collectively called
"Municipal Lease Obligations") of municipal authorities or entities. Although a
Municipal Lease Obligation does not constitute a general obligation of the
municipality for which the municipality's taxing power is pledged, a Municipal
Lease Obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payments due under the Municipal Lease Obligation.
However, certain Municipal Lease Obligations contain "non-appropriation" clauses
which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In the case of a "non-appropriation" lease, the
Fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition or
releasing of the property might prove difficult.
The Fund buys Municipal Obligations with different maturities in pursuit of
its investment objective, but maintains under normal market conditions an
investment portfolio with an overall weighted average maturity of 15 to 30
years, but the weighted average maturity of obligations held by the Fund may be
shortened, depending on market conditions. As a result, the
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Fund's portfolio at any given time may include both long-term and intermediate-
term municipal bonds. Moreover, during temporary defensive periods (e.g., times
when, in Nuveen Advisory's opinion, temporary imbalances of supply and demand or
other temporary dislocations in the tax-exempt bond market adversely affect the
price at which long-term or intermediate-term municipal bonds are available),
and in order to keep cash on hand fully invested, including the period during
which the net proceeds of the offering are being invested, the Fund may invest
any percentage of its assets in short-term investments including high quality,
short-term securities which 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 temporary investments are not available at reasonable prices
and yields. See "Cash Equivalents and Short-Term Investments."
Obligations of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors. 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 and/or interest, 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 an issuer to pay, when
due, the principal of and interest on its Municipal Obligations may be
materially affected.
Non-Investment Grade Debt Securities ("Junk Bonds"). Under normal
circumstances, at least 65% of the Fund's net assets will be invested in medium-
to low-quality Municipal Obligations. Municipal Obligations rated below
investment grade (BB/Ba or lower) are commonly known as "high-yield," "high
risk" or "junk" bonds. Junk bonds, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to Appendix A of this
Statement of Additional Information for a discussion of securities ratings.
(1) Effect of Interest Rates and Economic Changes. The junk bond
market is relatively new and its growth has paralleled a long economic
expansion. As a result, it is not clear how this market may withstand a
prolonged recession or economic downturn. Such an economic downturn could
severely disrupt the market for and adversely affect the value of such
securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. In
addition, the market values of junk bond securities tend to reflect
individual corporate developments to a greater extent than do the market
values of higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Junk bond securities also tend to be
more sensitive to economic conditions than are higher rated securities. As
a result, they generally involve more credit risk than securities in the
higher rated categories. During an economic downturn or a sustained period
of rising interest rates, highly leveraged issuers of junk bond securities
may experience financial stress and may not have sufficient revenues to
meet their payment obligations. The risk of loss due to default by an
issuer of these securities is significantly greater than by an issuer of
higher rated securities
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because such securities are generally unsecured and are often subordinated
to other creditors. Further, if the issuer of a junk bond security
defaults, the Fund may incur additional expenses to seek recovery. Periods
of economic uncertainty and changes would also generally result in
increased volatility in the market prices of these and thus in the Fund's
net asset value.
As previously stated, the value of a junk bond security will generally
decrease in a rising interest rate market and, accordingly, so will the
Fund's net asset value. If the Fund experiences unexpected net redemptions
in such a market, it may be forced to liquidate a portion of its portfolio
securities without regard to their investment merits. Due to the limited
liquidity of junk bond securities, the Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation would
reduce the Fund's asset base over which expenses could be allocated and
could result in a reduced rate of return for the Fund.
(2) Payment Expectations. Junk bond securities typically contain
redemption, call, or prepayment provisions that permit the issuer of
securities containing such provisions to redeem the securities at its
discretion. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them
with debt securities with a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding securities, which
could result in a lower return for the Fund.
(3) Credit Ratings. Credit ratings are issued by credit rating
agencies and are indicative of the rated securities' safety of principal
and interest payments. They do not, however, evaluate the market value risk
of junk bond securities and, therefore, may not fully reflect the true
risks of such an investment. In addition, credit rating agencies may not
make timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in junk bonds will depend more upon credit
analysis by Nuveen Advisory than investments in investment grade debt
securities. Nuveen Advisory employs its own credit research and analysis,
which includes a study of the issuer's existing debt, capital structure,
ability to service debts and pay dividends, sensitivity to economic
conditions, operating history, and current earnings trend. Nuveen Advisory
continually monitors the Fund's investments and carefully evaluates whether
to dispose of or to retain junk bond securities whose credit ratings or
credit quality may have changed.
(4) Liquidity and Valuation. The Fund may have difficulty disposing
of certain junk bond securities because there may be a thin trading market
for such securities. Not all dealers maintain markets in all junk bond
securities. As a result, there is no established retail secondary market
for many of these securities. The Fund anticipates that such securities
could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is
generally not as liquid as the secondary market for higher rated
securities. The lack of a liquid secondary market may have an adverse
impact on the market price of the security. The
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lack of a liquid secondary market for certain securities may also make it
more difficult for the Fund to obtain accurate market quotations for
purposes of valuing its securities. Market quotations are generally
available on many junk bond issues only from a limited number of dealers
and may not necessarily represent firm bids of such dealers or prices for
actual sales. During periods of thin trading, the spread between bid and
asked prices is likely to increase significantly. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of junk bond securities,
especially in a thinly traded market.
The Fund may invest up to 10% of its net assets in defaulted Municipal
Obligations. Municipal Obligations in the lowest rating categories may be in
default and are generally regarded as having poor prospects of attaining any
real investment standing. A default or expected default in a Municipal
Obligation owned by the Fund could result in a significant decline in the value
of that Municipal Obligation.
Inverse Floating Rate Securities
The Fund may invest up to 15% of its total assets in municipal securities
whose coupons vary inversely with changes in short-term tax-exempt interest
rates and which thus are a leveraged investment in an underlying municipal
bond (or securities with similar economic characteristics). These securities
present special risks for two reasons: (1) if short-term interest rates rise
(fall), the income the Fund earns on the inverse floating rate security will
fall (rise); and (2) if long-term interest rates rise (fall), the value of the
inverse floating rate security will fall (rise) more than the value of the
underlying standard bond because of the leveraged nature of the instrument.
These securities generally are illiquid. The Fund will seek to buy these
securities at attractive values and yields that more than compensate the Fund
for their higher income and price volatility and reduced liquidity.
Forwards and Delayed Delivery Settlement
The Fund may enter into contracts to purchase securities for a specified
price at a future date later than the normal settlement date. If the delayed
settlement takes place less than 61 days after purchase, it is referred to as a
"delayed delivery" transaction. Newly issued municipal bonds sold on a "when-
issued" basis represent a common form of delayed delivery transaction. If
settlement takes place more than 60 days after purchase, the transaction is
called a "forward". The Fund typically does not earn interest on these
securities until settlement. A delayed delivery or forward transaction presents
special risks because, although the Fund has not spent any money for the bond
prior to settlement, the Fund gains or loses money as the bond's value changes
prior to settlement, making this a highly leveraged investment. The Fund may
enter into these types of transactions if the Fund sets aside liquid assets in
an amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns.
Municipal "forwards" pay higher interest rates after settlement than
standard bonds, to compensate the buyer for bearing market risk but deferring
income during the settlement period, and can often be bought at attractive
prices and yields. If the Fund knows that a portfolio bond will, or is likely
to, be called or mature on a specific future date, the Fund may buy a forward
settling on or about
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that date to replace the called or maturing bond and "lock in" a currently
attractive interest rate. The Fund may also invest up to 15% of its assets in
forwards that do not serve to replace a specific portfolio bond.
Cash Equivalents and Short-Term Instruments
Under normal market conditions, the Fund may invest up to 20% of its net
assets in short-term Municipal Obligations. Short-term Municipal Obligations
are securities that are exempt from regular federal income tax and mature within
three years or less from the date of issuance. Short-term Municipal Obligations
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) and municipal commercial
paper. The Fund may invest in short-term, high quality taxable securities
(those rated A-1 or higher by S&P, Prime-1 or higher by Moody's, Fitch 1 or
higher by Fitch or Duff 1 or higher by D&P) if suitable short-term Municipal
Obligations are not available at reasonable prices and yields. Taxable temporary
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. To the extent the Fund invests in taxable investments, the Fund
will not at such times be in a position to achieve its investment objective of
tax-exempt income. In addition, for temporary defensive purposes, in order to
keep cash on hand fully invested, the Fund may invest up to 100% of its total
assets in such instruments.
Short-term Municipal Obligations are defined to include, without
limitation, the following:
(1) 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.
(2) 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.
(3) 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,
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when received, be used to meet other obligations could affect the ability
of the issuer to pay the principal and interest on RANs.
(4) 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.
(5) Bank Notes are notes issued by local government bodies and agencies 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.
(6) Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-
term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. Maturities or municipal paper generally
will be shorter than the maturities of TANs, BANs or RANs. There is a
limited secondary market for issues of Municipal Paper.
Certain Municipal Obligations may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market indexes.
While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are
occasionally 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.
Short-term fixed-income securities 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
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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. If
such certificates of deposit are non-negotiable, they will be considered
illiquid securities and be subject to the Fund's applicable restriction on
investment in illiquid securities. The issuer of a certificate of deposit
agrees to pay the amount deposited plus interest to the bearer of the
certificate on the dated 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) Bankers' acceptances, which are short-term credit instruments used to
finance commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated amount of
funds to pay for specific merchandise. The draft is then "accepted" by a
bank that, in effect, unconditionally guarantees to pay the face value of
the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an asset or it may be sold in the secondary market at the
going rate of interest for a specific maturity.
(4) Repurchase agreements, which involve purchases of debt securities. At
the time the Fund purchases securities pursuant to a repurchase agreement,
it simultaneously agrees to resell and redeliver such securities to the
seller, who also simultaneously agrees to buy back the securities at a
fixed price and time. This assures a predetermined yield for the Fund
during its holding period, since the resale price is always greater than
the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Fund to invest temporarily available cash.
The Fund may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Fund may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Fund is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. Nuveen Advisory monitors the
value of the collateral at the time of the transaction 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.
(5) Bank time deposits, which are monies kept on deposit with banks or
savings and loan associations for a stated period of time at a fixed rate
of interest. There may be
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penalties for the early withdrawal of such time deposits, in which case the
yields of these investments will be reduced.
(6) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations
to finance their current operations. Master demand notes are direct lending
arrangements between the Fund and a corporation. There is no secondary
market for such notes. However, they are redeemable by the Fund at any
time. Nuveen Advisory will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the two highest categories by a major rating agency or unrated
commercial paper which is, in the opinion of Nuveen Advisory, of comparable
quality.
Hedging Strategies
The Fund may periodically engage in hedging transactions, although it does
not currently intend to do so. Hedging is a term used for various methods of
seeking to preserve portfolio capital value by offsetting price changes in one
investment through making another investment whose price should tend to move in
the opposite direction. It may be desirable and possible in various market
environments to partially hedge the portfolio against fluctuations in market
value due to interest rate fluctuations by investment in financial futures and
index futures as well as related put and call options on such instruments. Both
parties entering into an index or financial futures contract are required to
post an initial deposit of 1% to 5% of the total contract price. Typically,
option holders enter into offsetting closing transactions to enable settlement
in cash rather than take future delivery 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 the Fund may be greater than gains in the value of the securities in the
Fund's portfolio. In addition, futures and options markets may not be liquid in
all circumstances. As a result, in volatile markets, the Fund may not be able to
close out the transaction without incurring losses substantially greater than
the initial deposit. Finally, the potential deposit requirements in futures
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. For further information regarding
these investment strategies and risks presented thereby, see Appendix B to this
Statement of Additional Information.
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Other Investment Policies and Techniques
Illiquid Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction, illiquid securities
include, but are not limited to, restricted securities (securities the
disposition of which is restricted under the federal securities laws),
securities that may only be resold pursuant to Rule 144A under the Securities
Act of 1933, as amended (the "Securities Act"), but that are deemed to be
illiquid; and repurchase agreements with maturities in excess of seven days.
However, the Fund will not acquire illiquid securities if, as a result, such
securities would comprise more than 15% of the value of the Fund's net assets.
The Board of Trustees or its delegate has the ultimate authority to determine,
to the extent permissible under the federal securities laws, which securities
are liquid or illiquid for purposes of this 15% limitation. The Board of
Trustees has delegated to Nuveen Advisory the day-to-day determination of the
illiquidity of any fixed-income security, although it has retained oversight and
ultimate responsibility for such determinations. Although no definitive
liquidity criteria are used, the Board of Trustees has directed Nuveen Advisory
to look to such factors as (i) the nature of the market for a security
(including the institutional private resale market; the frequency of trades and
quotes for the security; the number of dealers willing to purchase or sell the
security; and the amount of time normally needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer), (ii) the terms of
certain securities or other instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase obligations and demand
instruments), and (iii) other permissible relevant facts.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Trustees or its delegate. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 15% of the value of its net assets are invested in
illiquid securities, including restricted securities which are not readily
marketable, the Fund will take such steps as is deemed advisable, if any, to
protect liquidity.
Structured Notes
The Fund may invest in structured notes, including "total rate of return
swaps" with rates of return determined by reference to the total rate of return
on one or more loans references in such notes. The rate of return on a
structured note may be determined by applying a multiplier to the rate of total
return on the referenced loan or loans. Application of a multiplier is
comparable to the use of leverage which magnifies the potential for gain and the
risk of loss because a relatively small decline in the value of a referenced
note could result in a relatively large loss in the value of the structured
note.
Mortgage-backed Securities
The Fund may invest in fixed-income obligations backed by a pool of
mortgages. Mortgage-backed securities are issued both by U.S. government
agencies, including the Government National Mortgage Association (GNMA) the
Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC) and by private entities. The payment of interest and
principal on securities issued by U.S. government agencies is guaranteed by the
full faith and credit of the U.S. government (in the case of GNMA securities) or
the issuer (in the case of FNMA and FHLMC securities). However, the guarantees
do not apply to the market prices and yields of these securities, which vary
with changes in interest rates. Mortgage-backed securities issued by private
entities are structured similarly to mortgage-backed securities issued by GNMA,
FNMA and FHLMC. These securities and the underlying mortgages are not guaranteed
by government agencies. However, these securities generally are structured with
one or more types of credit enhancement by a third party. Mortgage-backed
securities permit borrowers to prepay their underlying mortgages. Prepayments by
borrowers on underlying obligations can alter the effective maturity of these
instruments.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
Standby Commitments
The Fund may obtain standby commitments when it purchases Municipal
Obligations. A standby commitment gives the holder the right to sell the
underlying security to the seller at an agreed-upon price on certain dates or
within a specified period. The Fund will acquire standby commitments solely to
facilitate portfolio liquidity and not with a view to exercising them at a time
when the exercise price may exceed the current value of the underlying
securities. If the exercise price of a standby commitment held by the Fund
should exceed the current value of the underlying securities, the Fund may
refrain from exercising the standby commitment in order to avoid causing the
issuer of the standby commitment to sustain a loss and thereby jeopardizing the
Fund's business relationship with the issuer. The Fund will enter into standby
commitments only with banks and securities dealers that, in the opinion of
Nuveen Advisory, present minimal credit risks. However, if a securities dealer
or bank is unable to meet its obligation to repurchase the security when the
Fund exercises a standby commitment, the Fund might be unable to recover all or
a portion of any loss sustained from having to sell the security elsewhere.
Standby commitments will be valued at zero in determining the Fund's net asset
value.
Lending of Portfolio Securities
The Fund may lend its portfolio securities, up to 33 1/3% of its total
assets, including collateral received, to broker-dealers or institutional
investors. Such loans will be secured continuously by collateral at least equal
to the value of the securities lent by "marking to market" daily. The Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer of the securities lent and will retain the right to call, upon notice,
the lent securities. The Fund may also receive interest on the investment of the
collateral or a fee from the borrower as compensation for the loan. As with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail
S-13
<PAGE>
financially. However, loans will be made only to firms deemed by the investment
adviser to be of good standing.
Portfolio Turnover
The Fund will make changes in its investment portfolio from time to time in
order to take advantage of opportunities in the municipal market and to limit
exposure to market risk. The Fund may also engage to a limited extent in short-
term trading consistent with its investment objective. Securities may be sold in
anticipation of market decline or purchased in anticipation of market rise and
later sold. 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 disparity in the normal yield
relationship between the two securities. The Fund may make changes in its
investment portfolio in order to limit its exposure to changing market
conditions. Changes in a Fund's investments are known as "portfolio turnover."
The Fund's portfolio turnover rate may be altered if the Fund is required to
dispose of a holding because of the expiration of that holding's maturity date
or because the issuer calls the bond.
MANAGEMENT
The management of the Trust, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees. The number of trustees of the Fund is currently set at
seven, one of whom is an "interested person" (as the term "interested persons"
is defined in the Investment Company Act of 1940) and six of whom are not
"interested persons." None of the trustees who are "interested persons" of the
Fund has ever been director or employee of or consultant to Nuveen or its
affiliates. The names and business addresses of the trustees and officers of the
Fund and their principal occupations and other affiliations during the past five
years are set forth below, with those trustees who are "interested persons" of
the Fund indicated by an asterisk.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Timothy R. Schwertfeger* 50 Chairman Chairman since July 1, 1996 of The John Nuveen
333 W. Wacker Drive and Company, John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 Trustee Advisory Corp. and Nuveen Institutional Advisory
Corp.; prior thereto, Executive Vice President and
Director of The John Nuveen Company, John Nuveen &
Co. Incorporated, Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Chairman and Director
(since January 1997) of Nuveen Asset Management,
Inc.; Director (since 1996) of Institutional Capital
Corporation; Chairman and Director of Rittenhouse
Financial Services Inc. (since 1999).
- ---------------------------------------------------------------------------------------------------------------------
Robert P. Bremner 58 Trustee Private Investor and Management Consultant.
3725 Huntington Street, N.W.
Washington, D.C. 20015
- ---------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown 64 Trustee Retired (August 1989) as Senior Vice President of
201 Michigan Avenue The Northern Trust Company.
Highwood, IL 60040
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Anne E. Impellizzeri 65 Trustee Executive Director of Manitoga (Center for Russel
5 Peter Cooper Rd. Wright's Design with Nature); formerly President and
New York, NY 10010 Chief Executive Officer of Blanton-Peale Institute.
- ---------------------------------------------------------------------------------------------------------------------
Peter R. Sawers 66 Trustee Adjunct Professor of Business and Economics,
22 The Landmark University of Dubuque, Iowa; Adjunct Professor, Lake
Northfield, IL 60093 Forest Graduate School of Management, Lake Forest,
Illinois; Chartered Financial Analyst; Certified
Management Consultant.
- ---------------------------------------------------------------------------------------------------------------------
William J. Schneider 54 Trustee Senior Partner, Miller-Valentine Partners, Vice
4000 Miller-Valentine Ct. President, Miller-Valentine Group.
P.O. Box 744
Dayton, OH 45401
- ---------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale 51 Trustee Executive Director, Gaylord and Dorothy Donnelley
35 E. Wacker Drive Foundation (since 1994); prior thereto, Executive
Suite 2600 Director, Great Lakes Protection Fund (from 1990 to
Chicago, IL 60601 1994).
- ---------------------------------------------------------------------------------------------------------------------
Alan G. Berkshire 38 Vice President and Vice President and General Counsel (since September
333 W. Wacker Drive Assistant Secretary 1997) and Secretary (since May 1998) of The John
Chicago, IL 60606 Nuveen Company, John Nuveen & Co. Incorporated,
Nuveen Advisory Corp. and Nuveen Institutional
Advisory Corp., prior thereto, Partner in the law
firm of Kirkland & Ellis.
- ---------------------------------------------------------------------------------------------------------------------
Peter H. D'Arrigo 31 Vice President and Vice President of John Nuveen & Co. Incorporated
333 W. Wacker Drive Treasurer (January 1999), prior thereto, Assistant Vice
Chicago, IL 60606 President (January 1997); formerly, Associate of
John Nuveen & Co. Incorporated; Chartered Financial
Analyst.
- ---------------------------------------------------------------------------------------------------------------------
Michael S. Davern 41 Vice President Vice President of Nuveen Advisory Corp. (since
333 W. Wacker Drive January 1997); prior thereto, Vice President and
Chicago, IL 60606 Portfolio Manager of Flagship Financial.
- ---------------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson 53 Vice President Vice President of John Nuveen & Co. Incorporated;
333 W. Wacker Drive Vice President (since January 1998) of Nuveen
Chicago, IL 60606 Advisory Corp. and Nuveen Institutional Advisory
Corp.
- ---------------------------------------------------------------------------------------------------------------------
William M. Fitzgerald 35 Vice President Vice President of Nuveen Advisory Corp. (since
333 W. Wacker Drive December 1995); Assistant Vice President of Nuveen
Chicago, IL 60606 Advisory Corp. (from September 1992 to December
1995). Chartered Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Stephen D. Foy 44 Vice President and Vice President of John Nuveen & Co. Incorporated.
333 W. Wacker Drive Controller
Chicago, IL 60606
- ---------------------------------------------------------------------------------------------------------------------
J. Thomas Futrell 43 Vice President Vice President of Nuveen Advisory Corp.; Chartered
333 W. Wacker Drive Financial Analyst.
Chicago, IL 60606
- ---------------------------------------------------------------------------------------------------------------------
Richard A. Huber 36 Vice President Vice President of Nuveen Institutional Advisory
333 W. Wacker Drive Corp. (since March 1998) and Nuveen Advisory Corp.
Chicago, IL 60606 (since January 1997); prior thereto, Vice President
and Portfolio Manager of Flagship Financial.
- ---------------------------------------------------------------------------------------------------------------------
Steven J. Krupa 41 Vice President Vice President of Nuveen Advisory Corp.
333 W. Wacker Drive
Chicago, IL 60606
- ---------------------------------------------------------------------------------------------------------------------
Larry W. Martin 47 Vice President and Vice President, Assistant Secretary and Assistant
333 W. Wacker Drive Assistant Secretary General Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President and Assistant Secretary of Nuveen
Advisory Corp. and Nuveen Institutional Advisory
Corp.; Vice President and Assistant Secretary (since
January 1997) of Nuveen Asset Management, Inc.;
Assistant Secretary of The John Nuveen Company.
- ---------------------------------------------------------------------------------------------------------------------
Edward F. Neild, IV 33 Vice President Vice President (since September 1996), previously
333 W. Wacker Drive Assistant Vice President (since December 1993) of
Chicago, IL 60606 Nuveen Advisory Corp.; Vice President (since
September 1996), previously Assistant Vice President
(since May 1995), of Nuveen Institutional Advisory
Corp., Portfolio Manager prior thereto; Chartered
Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------
Stephen S. Peterson 41 Vice President Vice President (since September 1997), previously
333 W. Wacker Drive Assistant Vice President (since September 1996) of
Chicago, IL 60606 Nuveen Advisory Corp., Portfolio Manager prior
thereto; Chartered Financial Analyst.
- ---------------------------------------------------------------------------------------------------------------------
Stuart W. Rogers 43 Vice President Vice President of John Nuveen & Co. Incorporated.
333 W. Wacker Drive
Chicago, IL 60606
- ---------------------------------------------------------------------------------------------------------------------
Thomas C. Spalding, Jr. 47 Vice President Vice President of Nuveen Advisory Corp. and Nuveen
333 W. Wacker Drive Institutional Advisory Corp.; Chartered Financial
Chicago, IL 60606 Analyst.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
================================================================================================================
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William S. Swanson 33 Vice President Vice President of John Nuveen & Co. Incorporated
333 W. Wacker Drive (since October 1997), prior thereto, Assistant Vice
Chicago, IL 60606 President (since September 1996); formerly,
Associate of John Nuveen & Co. Incorporated;
Chartered Financial Analyst.
- ----------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman 42 Vice President and Vice President, Assistant Secretary and Associate
333 W. Wacker Drive Secretary General Counsel of John Nuveen & Co. Incorporated;
Chicago, IL 60606 Vice President and Assistant Secretary of Nuveen
Advisory Corp., Vice President and Assistant
Secretary of Nuveen Institutional Advisory Corp.;
Chartered Financial Analyst.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees. The Executive Committee, which
meets between regular meetings of the Board of Trustees, is authorized to
exercise all of the powers of the Board of Trustees.
The trustees of the Trust are directors or trustees, as the case of may be,
of 36 Nuveen open-end funds and 55 closed-end funds advised by Nuveen Advisory.
Mr. Schwertfeger is also trustee of 11 Nuveen open-end and closed-end funds
advised by Nuveen Institutional Advisory Corp.
The following table sets forth the compensation paid by the Trust to each
of the trustees during the Trust's fiscal year ended April 30, 1999. The Trust
has no retirement or pension plans. The officers and trustees affiliated with
Nuveen serve without any compensation from the Trust.
<TABLE>
<CAPTION>
Total
Aggregate Compensation
Compensation from Trust and
from the Fund Complex
Name of Trustee/Director Trust Paid to Trustees
- ------------------------ ----------- ----------------
<S> <C> <C>
Robert P. Bremner......... $179 $71,011(1)
Lawrence H. Brown......... $195 $80,000
Anne E. Impellizzeri...... $179 $59,739(2)
Peter R. Sawers........... $179 $60,294(3)
William J. Schneider...... $179 $59,739(2)
Judith M. Stockdale....... $179 $70,184(4)
</TABLE>
(1) Includes $1,989 in deferred compensation
(2) Includes $13,261 in deferred compensation
(3) Includes $13,456 in deferred compensation
(4) Includes $3,316 in deferred compensation
Other than its officers, each of whom are compensated by Nuveen or Nuveen
Advisory, the Trust does not have any employees.
S-17
<PAGE>
As of June 4, 1999, Nuveen Advisory owns all of the outstanding shares of
the Fund.
INVESTMENT ADVISER AND INVESTMENT MANAGEMENT AGREEMENT
Nuveen Advisory Corp. acts as investment adviser for and manages the
investment and reinvestment of the assets of the Fund. Nuveen Advisory also
administers the Trust's business affairs, provides office facilities and
equipment and certain clerical, bookkeeping and administrative services, and
permits any of its officers or employees to serve without compensation as
trustees or officers of the Trust if elected to such positions. See "Fund
Service Providers" in the Prospectus.
Pursuant to an investment management agreement between Nuveen Advisory and
the Trust, the Fund has agreed to pay an annual management fee at the rates set
forth below:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Fee Management Fee
--------------------------------- --------------
<S> <C>
For the first $125 million......................... .6000%
For the next $125 million.......................... .5875%
For the next $250 million.......................... .5750%
For the next $500 million.......................... .5625%
For the next $1 billion............................ .5500%
For assets over $2 billion......................... .5250%
</TABLE>
Nuveen Advisory has agreed to waive some or all of its fees or reimburse
expenses to prevent total operating expenses (not counting distribution and
service fees, taxes, interest, fees incurred in acquiring and disposing of
portfolio securities and, to the extent permitted, extraordinary expenses) from
exceeding 0.80% of the Fund's average daily net assets through July 31, 1999.
All fees and expenses are accrued daily and deducted before payment of dividends
to investors. In addition to the management fee, the Fund pays all other costs
and expenses of its operations and a portion of the Fund's general
administrative expenses.
Nuveen Advisory is a wholly owned subsidiary of John Nuveen & Co.
Incorporated ("Nuveen"), the Fund's principal underwriter. Nuveen and its
affiliates have sponsored or underwritten more than $60 billion of investment
company securities. Over 1,300,000 individuals have invested to date in Nuveen
investment products. Founded in 1898, Nuveen is a subsidiary of The John Nuveen
Company which, in turn, is approximately 78% owned by The St. Paul Companies,
Inc. ("St. Paul"). St. Paul is located in St. Paul, Minnesota and is principally
engaged in providing property-liability insurance through subsidiaries.
Nuveen Advisory's portfolio managers call upon the resources of Nuveen's
Research Department.
The Fund, the other Nuveen funds, Nuveen Advisory and other related
entities have adopted a code of ethics which essentially prohibits all Nuveen
fund management personnel, including Nuveen fund portfolio managers, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of, the Fund's anticipated or actual
S-18
<PAGE>
portfolio transactions, and is designed to assure that the interests of Fund
shareholders are placed before the interests of Nuveen personnel in connection
with personal investment transactions.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any significant amounts of 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. 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 significantly reduce 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.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to the
Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
Under the 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The Rule sets forth requirements relating
to, among other things, the terms of an issue of Municipal Obligations purchased
by the Fund, the amount of Municipal
S-19
<PAGE>
Obligations that may be purchased in any one issue and the assets of the Fund
that may be invested in a particular issue. In addition, purchases of securities
made pursuant to the terms of the Rule must be approved at least quarterly by
the Board of Trustees, including a majority of the trustees who are not
interested persons of the Trust.
NET ASSET VALUE
As stated in the Prospectus, the net asset value of the shares of the Fund
will be determined separately for each class of the Fund's shares by The Chase
Manhattan Bank, the Fund's custodian, as of the close of trading (normally 4:00
p.m. Eastern Time) on each day on which the New York Stock Exchange (the
"Exchange") is normally open for trading. The Exchange is not open for trading
on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of a class of shares of the Fund will be computed by dividing
the value of the Fund's assets attributable to the class, less the liabilities
attributable to the class, by the number of shares of the class outstanding.
In determining net asset value for the Fund, the Fund's custodian utilizes
the valuations of portfolio securities furnished by a pricing service approved
by the trustees. Securities for which quotations are not readily available
(which constitute a majority of the securities held by the Fund) are valued at
fair value as determined by the pricing service using methods which include
consideration of the following: yields or prices of fixed-income securities of
comparable quality, type of issue, coupon, maturity and rating; indications as
to value from dealers; and general market conditions. The pricing service may
employ electronic data processing techniques and/or a matrix system to determine
valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the Board
of Trustees.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon the
advise of Bell, Boyd & Lloyd, special counsel to the Trust.
The Fund intends to qualify under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") for tax treatment as a regulated investment
company. In order to qualify 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, foreign currencies or other income (including but not limited to
gains from options and futures) derived with respect to its business of
investing in such stock or securities (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
S-20
<PAGE>
value of the 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 for which 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 long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) 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
(which consists of the excess of its net long-term capital gain over its short-
term capital loss). 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 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 shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by such Fund against their federal income tax liabilities, if any, and 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 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, i.e., the excess of
net long-term capital gain over net short-term capital loss for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) 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 also intends to satisfy conditions (including requirements as to
the proportion of its assets invested in Municipal Obligations) that will enable
it to designate distributions from the interest income generated by investments
in Municipal Obligations, which is exempt from regular federal income tax when
received by the Fund, as exempt-interest dividends. Shareholders receiving
exempt-interest dividends will not be subject to regular federal income tax on
the amount of such dividends. Insurance proceeds received by the Fund under any
insurance policies in respect of scheduled interest payments on defaulted
Municipal Obligations generally should be excludable from federal gross income
under Section 103(a) of the Code. In the case of non-appropriation by a
political subdivision, however, there can be no assurance that payments made by
the insurer representing interest on "non-appropriation" lease obligations will
be excludable from gross income for federal income tax purposes.
S-21
<PAGE>
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 gains realized by the Fund, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional shares.
Any net long-term capital gains realized by the Fund and distributed to
shareholders in cash or additional shares, will be taxable to shareholders as
long-term capital gains regardless of the length of time investors have owned
shares of the Fund. Distributions by the Fund that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the 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.
If the Fund has both tax-exempt and taxable income, it will use the
"average annual" method for determining the designated percentage that is
taxable income and designate the use of such method within 60 days after the end
of the Fund's taxable year. Under this method, one designated percentage is
applied uniformly to all distributions made during the Fund's taxable year. The
percentage of income designated as tax-exempt for any particular distribution
may be substantially different from the percentage of the Fund's income that was
tax-exempt during the period covered by the distribution.
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 a 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 shareholders.
Because the taxable portion of the Fund's investment income consists
primarily of interest, none of its dividends, whether or not treated as exempt-
interest dividends, is expected to quality under the Code for the dividends
received deductions for corporations.
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 redemption or exchange of the shares of the Fund normally will result
in capital gain or loss to the shareholders. Generally, a shareholder's gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. 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 gains (i.e., the excess of net long-term capital
gain over net short-
S-22
<PAGE>
term capital loss) with respect to securities are taxed at a maximum rate of
20%, while short-term capital gains and other ordinary income are taxed at a
maximum rate of 39.6%. 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.
All or a portion of a sales charge paid in purchasing shares of the Fund
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 the reinvestment or exchange privilege.
Any disregarded portion of such charge will result in an increase in the
shareholder's tax basis in the shares subsequently acquired. In addition, no
loss will be allowed on the redemption or exchange of shares of the Fund if the
shareholder purchases other shares of the Fund (whether through reinvestment of
distributions or otherwise) or the 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 may not be advantageous from a tax perspective for shareholders to
redeem or exchange shares after tax-exempt income has accrued but before the
record date for the exempt-interest dividend representing the distribution of
such income. Because such accrued tax-exempt income is included in the net asset
value per share (which equals the redemption or exchange value), such a
redemption could result in treatment of the portion of the sales or redemption
proceeds equal to the accrued tax-exempt interest as taxable gain (to the extent
the redemption of exchange price exceeds the shareholder's tax basis in the
shares disposed of) rather than tax-exempt interest.
In order to avoid a 4% federal excise tax, the Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of 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 100% of
any taxable ordinary income and the 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 shareholders would be taxable to shareholders as ordinary dividend income
for federal income tax purposes to the extent of the Fund's earnings and
profits.
Because the Fund may invest in private activity bonds, the interest on
which is not federally tax-exempt to persons who are "substantial users" of the
facilities financed by such
S-23
<PAGE>
bonds or "related persons" of such "substantial users," the Fund may not be an
appropriate investment for shareholders who are considered either a "substantial
user" or a "related person" within the meaning of the Code. For additional
information, investors should consult their tax advisers before investing in the
Fund.
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain Municipal Obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
for certain tax-exempt organizations such as universities and non-profit
hospitals), is included as an item of tax preference in determining the amount
of a taxpayer's alternative minimum taxable income. To the extent that the Fund
receives income from Municipal Obligations subject to the alternative minimum
tax, a portion of the dividends paid by it, although otherwise exempt from
federal income tax, will be taxable to shareholders to the extent that their tax
liability is determined under the alternative minimum tax regime. The Fund will
annually supply shareholders with a report indicating the percentage of Fund
income attributable to Municipal Obligations subject to the federal alternative
minimum tax.
In addition, the alternative minimum taxable income for corporations is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on all Municipal Obligations, and
therefore all distributions by the Fund that would otherwise be tax-exempt, is
included in calculating a corporation's adjusted current earnings.
Tax-exempt income, including exempt-interest dividends paid by the Fund,
will be added to the taxable of individuals receiving social security or
railroad retirement benefits in determining whether a portion of that benefit
will be subject to federal income tax.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry shares of the Fund is not deductible. Under rules used by the
IRS for determining when borrowed funds are considered used for the purpose of
purchasing or carrying particular assets, the purchase of shares of the Fund may
be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of shares.
The Fund is required in certain circumstances to withhold 31% 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 number (in
the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding.
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 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. Shareholders are advised to consult their own tax advisers for
more detailed information concerning the federal taxation of the Funds and the
income tax consequences to their shareholders.
S-24
<PAGE>
PERFORMANCE INFORMATION
The Fund may quote its yield, distribution rate, average annual total
return or cumulative total return in reports to shareholders, sales literature
and advertisements each of which will be calculated separately for each class of
shares.
In accordance with a standardized method prescribed by rules of the SEC,
yield is computed by dividing the net investment income per share earned during
the specified one month or 30-day period by the maximum offering price per share
on the last day of the period, according to the following formula:
Yield = 2[(a - b)/cd + 1)/6/ -1]
In the above formula, a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements); c = the average
daily number of shares outstanding during the period that were entitled to
receive dividends; and d = the maximum offering price per share on the last day
of the period. In the case of Class A shares, the maximum offering price
includes the current maximum front-end sales charge of 4.20%.
In computing yield, the Fund follows certain standardized accounting
practices specified by SEC rules. These practices are not necessarily consistent
with those that the Fund uses to prepare its annual and interim financial
statements in conformity with generally accepted accounting principles. Thus,
yield may not equal the income paid to shareholders or the income reported in
the Fund's financial statements.
Taxable equivalent yield is computed by dividing that portion of the yield
which is tax-exempt by the remainder of (1 minus the stated federal income tax
rate, taking into account the deductibility of state taxes for federal income
tax purposes) and adding the product to that portion, if any, of the yield that
is not tax exempt. For additional information concerning taxable equivalent
yields, see the Taxable Equivalent of Tax-Free Yield table in the Prospectus.
The Fund may from time to time in its advertising and sales materials
report a quotation of its current distribution rate. The distribution rate
represents a measure of dividends distributed for a specified period.
Distribution rate is computed by taking the most recent monthly dividend per
share, multiplying it by 12 to annualize it, and dividing by the appropriate
price per share (e.g., net asset value for purchases to be made without a load
such as reinvestments from Nuveen Defined Portfolios, or the maximum public
offering price). The distribution rate differs from yield and total return and
therefore is not intended to be a complete measure of performance. Distribution
rate may sometimes differ from yield because the Fund may be paying out more
than its earning and because it may not include the effect of amortization of
bond premiums to the extent such premiums arise after the bonds were purchased.
All total return figures assume the reinvestment of all dividends and
measure the net investment income generated by, and the effect of any realized
and unrealized appreciation or depreciation of, the underlying investments in
the Fund over a specified period of time. Average annual total return figures
are annualized and therefore represent the average annual percentage change over
the specified period. Cumulative total return figures are not annualized and
S-25
<PAGE>
represent the aggregate percentage or dollar value change over a stated period
of time. Average annual total return and cumulative total return are based upon
the historical results of the Fund and are not necessarily representative of the
future performance of the Fund.
The average annual total return quotation is computed in accordance with a
standardized method prescribed by SEC rules. The average annual total return for
a specific period is found by taking a hypothetical, $1,000 investment ("initial
investment") in Fund shares on the first day of the period, reducing the amount
to reflect the maximum sales charge, and computing the "redeemable value" of
that investment at the end of the period. The redeemable value is then divided
by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains distributions have been reinvested in Fund shares
at net asset value on the reinvestment dates during the period. Average annual
and cumulative total returns may also be presented in advertising and sales
literature without the inclusion of sales charges.
Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial investment
from the redeemable value and dividing the remainder by the initial investment
and expressing the result as a percentage. The calculation assumes that all
income and capital gains distributions by the Fund have been reinvested at net
asset value on the reinvestment dates during the period. Cumulative total return
may also be shown as the increased dollar value of the hypothetical investment
over the period. Cumulative total return calculations that do not include the
effect of the sales charge would be reduced if such charge were included.
Calculation of taxable equivalent total return is also not subject to a
prescribed formula. Taxable equivalent total return for a specific period is
calculated by first taking a hypothetical initial invest in Fund shares on the
first day of the period, computing the total return for each calendar year in
the period in the manner described above, and increasing the total return for
each such calendar year by the amount of additional income that a taxable fund
would need to have generated to equal the income on an after-tax basis, at a
specified income tax rate (usually the highest marginal federal tax rate),
calculated as described above under the discussion of "taxable equivalent
yield." The resulting amount for the calendar year is then divided by the
initial investment amount to arrive at a "taxable equivalent total return
factor" for the calendar year. The taxable equivalent total return factors for
all the calendar years are then multiplied together and the result is then
annualized by taking its Nth root (N representing the number of years in the
period) and subtracting 1, which provides a taxable equivalent total return
expressed as a percentage.
Class A Shares of the Fund are sold at net asset value plus a current
maximum sales charge of 4.20% of the offering price. This current maximum sales
charge will typically be used for purposes of calculating performance figures.
Yield, returns and net asset value of each class of shares of the Fund will
fluctuate. Factors affecting the performance of the Fund include general market
conditions, operating expenses and investment management. Any additional fees
S-26
<PAGE>
charged by a securities representative or other financial services firm would
reduce returns described in this section. Shares of the Fund are redeemable at
net asset value, which may be more or less than original cost.
In reports or other communications to shareholders or in advertising and
sales literature, the Fund may also compare their performance with that of: (1)
the Consumer Price Index ; (2) other fixed-income mutual funds or equity mutual
fund indexes as reported by Lipper Analytical Services, Inc. ("Lipper"),
Morningstar, Inc. ("Morningstar"), Wiesenberger Investment Companies Service
("Wiesenberger") and CDA Investment Technologies, Inc. ("CDA") or similar
independent services which monitor the performance of mutual funds, or other
industry or financial publications such as Barron's, Changing Times, Forbes and
Money Magazine. Performance comparisons by these indexes, services or
publications may rank mutual funds over different periods of time by means of
aggregate, average, year-by-year, or other types of total return and performance
figures. Any given performance quotation or performance comparison should not be
considered as representative of the performance of the Fund for any future
period.
The Fund from time to time in its advertising and sales materials compare
its current yield or total return with the yield or total return on taxable
investments such as corporate or U.S. Government bonds, bank certificates of
deposit (CDs) or money market funds. These taxable investments have investment
characteristics that differ from those of the Fund. U.S. Government bonds, for
example, are long-term investments backed by the full faith and credit of the
U.S. Government, and bank CDs are generally short-term, FDIC-insured
investments, which pay fixed principal and interest but are subject to
fluctuating rollover rates. Money market funds are short-term investments with
stable net asset values, fluctuating yields and special features enhancing
liquidity.
There are differences and similarities between the investments which the
Fund may purchase and the investments measured by the indexes and reporting
services which are described herein. The Consumer Price Index is generally
considered to be a measure of inflation. The CDA Mutual Fund-Municipal Bond
Index is a weighted performance average of other mutual funds with a federally
tax-exempt income objective. The Lehman Brothers Municipal Bond Index is an
unmanaged index that generally represents the performance of high grade
intermediate and long-term municipal bonds during various market conditions. The
Lehman Brother High Yield Municipal Bond Index is an unmanaged index generally
representative of municipal bonds rated below Baa. The Lipper High Yield
Municipal Debt Funds Index is an equally-weighted performance index of the
largest qualifying funds in this Lipper category. The First Boston High Yield
Index is an unmanaged list of publicly issued fixed income nonconvertible
securities frequently used as a general measure of the performance of the
corporate bond market. Lipper calculates municipal bond fund averages based on
average maturity and credit quality. Morningstar rates mutual funds by overall
risk-adjusted performance, investment objectives, and assets. Lipper,
Morningstar, Wiesenberger and CDA are widely recognized mutual fund reporting
services whose performance calculations are based upon changes in net asset
value with all dividends reinvested and which do not include the effect of any
sales charges. The market prices and yields of taxable and tax-exempt bonds will
fluctuate. The Fund invests substantially all (at least 80%) of its net assets
in Municipal Obligations in pursuing its objective of as high a level of current
interest income which is exempt
S-27
<PAGE>
from federal income tax as is consistent, in the view of the Fund's management,
with capital appreciation.
The Fund may also compare its taxable equivalent total return performance
to the total return performance of taxable income funds such as treasury
securities funds, corporate bond funds (either investment grade or high yield),
or Ginnie Mae funds. These types of funds, because of the character of their
underlying securities, differ from municipal bond funds in several respects. The
susceptibility of the price of treasury bonds to credit risk is far less than
that of municipal bonds, but the price of treasury bonds tend to be slightly
more susceptible to change resulting from changes in market interest rates. The
susceptibility of the price of investment grade corporate bonds and municipal
bonds to market interest rate changes and general credit changes in similar.
High yield bonds are subject to a greater degree of price volatility than
municipal bonds resulting from changes in market interest rates and are
particularly susceptible to volatility from credit changes. Ginnie Mae bonds are
generally subject to less price volatility than municipal bonds from credit
concerns, due primarily to the fact that the timely payment of monthly
installments of principal and interest are backed by the full faith and credit
of the U.S. Government, but Ginnie Mae bonds of equivalent coupon and maturity
are generally more susceptible to price volatility resulting from market
interest rate changes. In addition, the volatility of Ginnie Mae bonds due to
changes in market interest rates may differ from municipal bonds of comparable
coupon and maturity because bonds of the sensitivity of Ginnie Mae prepayment
experience to change in interest rates.
ADDITIONAL INFORMATION ON THE PURCHASE AND REDEMPTION OF FUND SHARES
As described in the Prospectus, the Fund provides you with alternative ways
of purchasing Fund shares based upon your individual investment needs and
preferences.
Each class of shares of the Fund represents an interest in the same
portfolio of investments. Each class of shares is identical in all respects
except that each class bears its own class expenses, including distribution and
administration expenses, and each class has exclusive voting rights with respect
to any distribution or service plan applicable to its shares. As a result of the
differences in the expenses borne by each class of shares, net income per share,
dividends per share and net asset value per share will vary among the Fund's
classes of shares. There are no conversion, preemptive or other subscription
rights, except that Class B shares automatically convert into Class A shares as
described below.
Shareholders of each class will share expenses proportionately for services
that are received equally by all shareholders. A particular class of shares will
bear only those expenses that are directly attributable to that class, where the
type or amount of services received by a class varies from one class to another.
For example, class-specific expenses generally will include distribution and
service fees.
The expenses to be borne by specific classes of shares may include (i)
transfer agency fees attributed to a specific class of shares, (ii) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxy statements to current shareholders
of a specific class of shares, (iii) SEC and state securities registration fees
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<PAGE>
incurred by a specific class, (iv) the expense of administrative personnel and
services required to support the shareholders of a specific class of shares, (v)
litigation or other legal expenses relating to a specific class of shares, (vi)
trustees' fees or expenses incurred as a result of issues relating to a specific
class of shares, (vii) accounting expenses relating to a specific class of
shares and (viii) additional incremental expenses subsequently identified and
determined to be property allocated to one or more classes of shares.
Initial and Subsequent Purchases of Shares
You may buy Fund shares through Authorized Dealers or by calling or
directing your financial adviser to call Nuveen toll-free at 800-257-8787. You
may pay for your purchases by Federal Reserve draft or by check made payable to
"High Yield Municipal Bond Fund, Class [A], [B], [C], [R]'" delivered to the
financial adviser through whom the investment is to be made for forwarding to
Nuveen Investor Services. When making your initial investment, you must also
furnish the information necessary to establish your Fund account by completing
and enclosing with your payment the application form attached to the Prospectus
(the "Application Form"). After your initial investment, you may make subsequent
purchases at any time by forwarding to your financial adviser or Nuveen Investor
Services a check, in the amount of your purchase, made payable to "High Yield
Municipal Bond Fund, Class [A], [B], [C], [R]," and indicating on the check your
account number. All payments need to be in U.S. dollars and should be sent
directly to Nuveen Investor Services at P.O. Box 5186, Bowling Green Station,
New York, NY 10004-5186. A check drawn on a foreign bank or payable other than
to the order of your Fund generally will not be acceptable. You may also wire
Federal Funds directly to Nuveen Investor Services, but you may be charged a fee
for this. For instructions on how to make Fund purchases by wire transfer, call
Nuveen toll-free at 800-257-8787.
Purchase Price
The price at which you purchase a class of Fund shares is based on the next
calculation of the net asset value for that share class after the order is
placed. The net asset value per share of each share class is determined as of
the close of trading (normally 4:00 p.m. Eastern Time) on each day the New York
Stock Exchange is open for business. See "Net Asset Value," for a description of
how net asset value is calculated.
Minimum Investment Requirements
The minimum initial investment is $3,000 per Fund share class ($1,000 for a
Traditional/Roth IRA Account; $500 for an Education IRA Account), $50 through
systematic investment plan accounts and $500 for accounts opened through fee-
based programs for which the program sponsor has established a single master
account with the Fund's transfer agent and performs all sub-accounting services
related to that account. Additional purchases may be in amounts of $50 or more.
These minimums may be changed at any time by the Fund. There are exceptions to
these minimums for shareholders who qualify under reinvestment programs.
Systematic Investment Programs
The Fund offers you several opportunities to capture the benefits of
"dollar cost averaging" through systematic investment programs. In a regularly
followed dollar cost
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<PAGE>
averaging program, you would purchase more shares when Fund share prices are
lower and fewer shares when Fund share prices are higher, so that the average
price paid for Fund shares is less than the average price of the Fund shares
over the same time period. Dollar cost averaging does not assure profits or
protect against losses in a steadily declining market. Since dollar cost
averaging involves continuous investment regardless of fluctuating price levels,
you should consider your financial ability to continue investing in declining as
well as rising markets before deciding to invest in this way. The Fund offers
two different types of systematic investment programs:
Systematic Investment Plan. The initial minimum investment for a systematic
investment plan is $50. Once you have established a Fund account, you may make
regular investments in an amount of $50 or more each month by authorizing Nuveen
Investor Services to draw preauthorized checks on your bank account. There is no
obligation to continue payments and you may terminate your participation at any
time at your discretion. No charge in additional to the applicable sales charge
is made in connection with this Plan, and there is no cost to your Fund. To
obtain an application form for the Systematic Investment Plan, check the
applicable box on the Application Form or call Nuveen toll-free at 800-257-8787.
Payroll Direct Deposit Plan. Once you have established a Fund account, you
may, with your employer's consent, make regular investments in Fund shares of
$25 or more per pay period (meeting the monthly minimum of $50) by authorizing
your employer to deduct this amount automatically from your paycheck. There is
no obligation to continue payments and you may terminate your participation at
any time at your discretion. No charge in addition to the applicable sales
charge is made for this Plan, and there is no cost to your Fund. To obtain an
application form for the Payroll Direct Deposit Plan, check the applicable box
on the Application Form or call Nuveen toll-free at 800-257-8787.
Class A Shares
Class A Shares may be purchased at a public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the Prospectus. Shareholders may qualify
for a reduced sales charge, or the sales charge may be waived in its entirety,
as described below. Class A Shares are also subject to an annual service fee of
.20%. See "Distribution and Service Plan." Set forth below is an example of the
method of computing the offering price of the Class A Shares. The example
assumes a purchase on June 30, 1998 of Class A Shares from the Fund aggregating
less than $50,000 subject to the schedule of sales charges set forth in the
Prospectus at a price based upon the net asset value of the Class A Shares.
<TABLE>
<S> <C>
Net Asset Value per share............................... $9.46
Per Share Sales Charge--4.20% of public
offering price (4.38% of net asset value per share).. .41
-----
Per Share Offering Price to the Public.................. $9.87
</TABLE>
The Fund receives the entire net asset value of all Class A Shares that are
sold. Nuveen retains the full applicable sales charge from which it pays the
uniform reallowances shown in the Prospectus to Authorized Dealers.
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<PAGE>
The following Class A sales charges and commissions apply to the Fund:
<TABLE>
<CAPTION>
Class A Sales Charges and Commissions
- -------------------------------------------------------------------------------
Authorized
Dealer
Sales Charge Commission
--------------------- ----------
As % of As % of
Public As % of Public
Offering Your Net Offering
Purchase Amount Price Investment Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 4.20% 4.38% 3.70%
$50,000-100,000 4.00 4.18 3.50
$100,000-250,000 3.50 3.63 3.00
$250,000-500,000 2.50 2.56 2.00
$500,000-1,000,000 2.00 2.04 1.50
$1,000,000 and over -- -- 1.00/(1)/
</TABLE>
/(1)/Nuveen pays Authorized Dealers a commission equal to the sum of 1.00% of
the first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of
any amount over $5 million. Unless the Authorized Dealer waives the
commission, you may be assessed a contingent deferred sales charge (CDSC)
of 1.00% if you redeem any of your Class A Shares within 18 months of
purchase. The CDSC is calculated on the lower of your purchase price or
redemption proceeds.
Reduction or Elimination of Up-Front Sales Charge on Class A Shares
Rights of Accumulation. You may qualify for a reduced sales charge on a
purchase of Class A Shares of the Fund if the amount of your purchase, when
added to the value that day of all of your prior purchases of shares of the Fund
or of another Nuveen Mutual Fund, or Nuveen exchange-traded fund, or units of a
Nuveen Defined Portfolio, on which an up-front sales charge or ongoing
distribution fee is imposed, or is normally imposed, falls within the amounts
stated in the Class A Sales Charges and Commissions table in "How to Select a
Purchase Option" in the Prospectus. You or your financial adviser must notify
Nuveen or the Fund's transfer agent, Chase Global Funds Services Company ("Chase
Global"), of any cumulative discount whenever you plan to purchase Class A
Shares of the Fund that you wish to qualify for a reduced sales charge.
Letter of Intent. You may qualify for a reduced sales charge on a purchase
of Class A Shares of the Fund if you plan to purchase Class A Shares of Nuveen
Mutual Funds over the next 13 months and the total amount of your purchases
would, if purchased at one time, qualify you for one of the reduced sales
charges shown in the Class A Sales Charges and Commissions table in "How to
Select a Purchase Option" in the Prospectus. In order to take advantage of this
option, you must complete the applicable section of the Application Form or
sign and deliver either to an Authorized Dealer or to the Fund's transfer agent
a written Letter of Intent in a form acceptable to Nuveen. A Letter of Intent
states that you intend, but are not obligated, to purchase over the next 13
months a stated total amount of Class A shares that would qualify you for a
reduced sales charge shown above. You may count shares of a Nuveen Mutual Fund
that you
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<PAGE>
already own on which you paid an up-front sales charge or an ongoing
distribution fee and any Class B or Class C Shares of a Nuveen Mutual Fund that
you purchase over the next 13 months towards completion of your investment
program, but you will receive a reduced sales charge only on new Class A Shares
you purchase with a sales charge over the 13 months. You cannot count towards
completion of your investment program Class A Shares that you purchase without a
sales charge through investment of distributions from a Nuveen Mutual Fund or a
Nuveen defined portfolio, or otherwise.
By establishing a Letter of Intent, you agree that your first purchase of
Class A Shares of the Fund following execution of the Letter of Intent will be
at least 5% of the total amount of your intended purchases. You further agree
that shares representing 5% of the total amount of your intended purchases will
be held in escrow pending completion of these purchases. All dividends and
capital gains distributions on Class A Shares held in escrow will be credited to
your account. If total purchases, less redemptions, prior to the expiration of
the 13 month period equal or exceed the amount specified in your Letter of
Intent, the Class A Shares held in escrow will be transferred to your account.
If the total purchases, less redemptions, exceed the amount specified in your
Letter of Intent and thereby qualify for a lower sales charge than the sales
charge specified in your Letter of Intent, you will receive this lower sales
charge retroactively, and the difference between it and the higher sales charge
paid will be used to purchase additional Class A Shares on your behalf. If the
total purchases, less redemptions, are less than the amount specified, you must
pay Nuveen an amount equal to the difference between the amounts paid for these
purchases and the amounts which would have been paid if the higher sales charge
had been applied. If you do not pay the additional amount within 20 days after
written request by Nuveen or your financial adviser, Nuveen will redeem an
appropriate number of your escrowed Class A Shares to meet the required payment.
By establishing a Letter of Intent, you irrevocably appoint Nuveen as attorney
to given instructions to redeem any or all of your escrowed shares, with full
power of substitution in the premises.
You or your financial adviser must notify Nuveen or the Fund's transfer
agent whenever you make a purchase of Fund shares that you wish to be covered
under the Letter of Intent option.
Reinvestment of Nuveen Defined Portfolio Distributions. You may purchase
Class A Shares without an up-front sales charge by reinvestment of distributions
from any of the various Defined Portfolios sponsored by Nuveen. There is no
initial or subsequent minimum investment requirement for such reinvestment
purchases.
Group Purchase Programs. If you are a member of a qualified group, you may
purchase Class A Shares of the Fund or of another Nuveen Mutual Fund at the
reduced sales charge applicable to the group's purchases taken as a whole. A
"qualified group" is one which has previously been in existence, has a purpose
other than investment, has ten or more participating members, has agreed to
include Fund sales publications in mailings to members and has agreed to comply
with certain administrative requirements relating to its group purchases.
Under any group purchase program, the minimum initial investment in Class A
Shares of the Fund or portfolio for each participant is $50 provided that the
group invests at least $3,000 in the Fund, and the minimum monthly investment in
Class A Shares of the Fund or portfolio by
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each participant in the program is $50. No certificate will be issued for any
participant's account. All dividends and other distributions by the Fund will be
reinvested in additional Class A Shares of the Fund. No participant may utilize
a systematic withdrawal program.
To establish a group purchase program, both the group itself and each
participant must fill out special application materials, which the group
administrator may obtain from the group's financial adviser, by calling Nuveen
toll-free at 800-257-8787.
Class A shares of the Fund may be purchased at net asset value without a
sales charge, and may be purchased by the following categories of investors:
. investors purchasing $1,000,000 or more
. officers, trustees and former trustees of the Trust or any fund sponsored by
Nuveen, any parent company of Nuveen or subsidiaries thereof;
. bona fide, full-time and retired employees and directors of Nuveen, any
parent company of Nuveen, and subsidiaries thereof, or their immediate family
members;
. any person who, for at least 90 days, has been an officer, director or bona
fide employee of any Authorized Dealer, or their immediate family members;
. officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates or their
immediate family members;
. bank or broker-affiliated trust departments investing funds over which they
exercise exclusive discretionary investment authority and that are held in a
fiduciary, agency, advisory, custodial or similar capacity;
. investors purchasing on a periodic fee, asset-based fee or no transaction fee
basis through a broker-dealer sponsored mutual fund purchase program; and
. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their services.
. any eligible employer-sponsored qualified defined contribution retirement
plan. Eligible plans are those with at least 25 employees and which either
(a) make an initial purchase of one or more Nuveen Mutual Funds aggregating
$500,000 or more or (b) execute a Letter of Intent to purchase in the
aggregate $500,000 or more of fund shares. Nuveen will pay Authorized Dealers
a sales commission on such purchases equal to 1.00% of the first $2.5
million, plus .50% of the next $2.5 million, plus .25% of any amount
purchased over $5.0 million. For this category of investors a contingent
deferred sales charge of 1% will be assessed on redemptions within 18 months
of purchase, unless waived.
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Also, investors are eligible to buy Class A Shares at net asset value by
using the proceeds of sales of Nuveen Exchange-Traded fund shares or the
termination/maturity proceeds from Nuveen Defined Portfolios. You must provide
Nuveen appropriate documentation that the fund sale or Defined Portfolio
termination/maturity occurred not more than one year prior to the reinvestment.
In addition, investors also may buy Class A Shares at net asset value without a
sales charge by directing their monthly dividends from Nuveen Exchange-Traded
funds.
For investors that purchased Class A Shares at net asset value because they
purchased such shares through an eligible employer-sponsored qualified defined
contribution plan or because the purchase amount equaled or exceeded $1 million
and the Authorized Dealer did not waive the sales commission, a contingent
deferred sales charge of 1.00% will be assessed on redemptions within 18 months
of purchase.
Any Class A Shares purchased pursuant to a special sales charge waiver must
be acquired for investment purposes and on the condition that they will not be
transferred or resold except through redemption by the Fund. You or your family
adviser must notify Nuveen or the Fund's transfer agent whenever you make a
purchase of Class A Shares of the Fund that you wish to be covered under these
special sales charge waivers.
Class A Shares of the Fund may be issued at net asset value without a sales
charge in connection with the acquisition by the Fund of another investment
company. All purchases under the special sales charge waivers will be subject to
minimum purchase requirements as established by the Fund.
In determining the amount of your purchase of Class A Shares of the Fund
that may qualify for a reduced sales charge, the following purchases may be
combined: (1) all purchases by a trustee or other fiduciary for a single trust,
estate or fiduciary account; (2) all purchases by individuals and their
immediate family members (i.e., their spouses, parents, children, grandparents,
grandchildren, parents-in-law, sons- and daughters-in-law, siblings, a sibling's
spouse, and a spouse's siblings); or (3) all purchases made through a group
purchase program as described above.
Class B Shares
You may purchase Class B Shares at a public offering price equal to the
applicable net asset value per share without any up-front sales charge. Since
Class B Shares are sold without an initial sales charge, the full amount of your
purchase payment will be invested in Class B Shares. Class B Shares are subject
to an annual distribution fee of .75% to compensate Nuveen for its costs in
connection with the sale of Class B Shares, and are also subject to an annual
service fee of .20% to compensate Authorized Dealers for providing you with
ongoing financial advice and other account services.
You may be subject to a CDSC if you redeem your Class B Shares prior to the
end of the sixth year after purchase. See "Reduction or Elimination of
Contingent Deferred Sales Charge" below. Nuveen compensates Authorized Dealers
for sales of Class B Shares at the time of sale at the rate of 4.00% of the
amount of Class B Shares purchased, which represents a sales commission plus an
advance on the first year's annual service fee of .20%.
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Class B Shares acquired through the reinvestment of dividends are not
subject to a CDSC. Any CDSC will be imposed on the lower of the redeemed shares'
cost or net asset value at the time of redemption.
Class B Shares will automatically convert to Class A Shares eight years
after purchase. The purpose of the conversion is to limit the distribution fees
you pay over the life of your investment. All conversions will be done at net
asset value without the imposition of any sales load, fee, or other charge, so
that the value of each shareholder's account immediately before conversion will
be the same as the value of the account immediately after conversion. Class B
Shares acquired through reinvestment of distributions will convert into Class A
Shares based on the date of the initial purchase to which such shares relate.
For this purpose, Class B Shares acquired through reinvestment of distributions
will be attributed to particular purchases of Class B Shares in accordance with
such procedures as the Board of Trustees may determine from time to time. Class
B Shares that are converted to Class A Shares will remain subject to an annual
service fee that is identical in amount for both Class B Shares and Class A
Shares. Since net asset value per share of the Class B Shares and the Class A
Shares may differ at the time of conversion, a shareholder may receive more or
fewer Class A Shares than the number of Class B Shares converted. Any conversion
of Class B Shares into Class A Shares will be subject to the continuing
availability of an opinion of counsel or a private letter ruling from the
Internal Revenue Service to the effect that the conversion of shares would not
constitute a taxable event under federal income tax law. Conversion of Class B
Shares into Class A Shares might be suspended if such an opinion or ruling were
no longer available.
Class C Shares
You may purchase Class C Shares without any up-front sales charge at a
price equal to their net asset value. Class C Shares are subject to an annual
distribution fee of .55% to compensate Nuveen for its costs in connection with
the sale of Class C Shares. Class C Shares are also subject to an annual service
fee of .20% to compensate Authorized Dealers for providing you with on-going
financial advice and other account services. Nuveen compensates Authorized
Dealers for sales of Class C Shares at the time of the sale at a rate of 1% of
the amount of Class C Shares purchased, which represents a sales commission plus
an advance on the first year's annual service fee of .20%. See "Distribution and
Service Plan."
Redemptions of Class C Shares within 12 months of purchase may be subject
to a CDSC of 1% of the lower of the purchase price or redemption proceeds.
Because Class C Shares do not convert to Class A Shares and continue to pay an
annual distribution fee indefinitely, Class C Shares should normally not be
purchased by an investor who expects to hold shares for significantly longer
than eight years.
Class R Share Purchase Eligibility
Class R Shares are available for purchases of $2.5 million or more and for
purchases using dividends and capital gains distributions on Class R Shares.
Class R Shares also are available for the following categories of investors:
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. officers, trustees and former trustees of the Trust and their
immediate family members or trustees/directors of any fund, sponsored
by Nuveen, any parent company of Nuveen and subsidiaries thereof and
their immediate family members;
. bona fide, full-time and retired employees and directors of Nuveen,
any parent company of Nuveen, and subsidiaries thereof, or their
immediate family members;
. any person who, for at least 90 days, has been an officer, director or
bona fide employee of any Authorized Dealer, or their immediate family
members;
. officers and directors of bank holding companies that make Fund shares
available directly or through subsidiaries or bank affiliates, or
their immediate family members;
. bank or broker-affiliated trust departments investing funds over which
they exercise exclusive discretionary investment authority and that
are held in a fiduciary, agency, advisory, custodial or similar
capacity;
. investors purchasing on a periodic fee, asset-based fee or no
transaction fee basis through a broker-dealer sponsored mutual fund
purchase program;
. clients of investment advisers, financial planners or other financial
intermediaries that charge periodic or asset-based fees for their
services.
. Any shares purchased by investors falling within any of the first four
categories listed above must be acquired for investment purposes and
on the condition that they will not be transferred or resold except
through redemption by the fund.
In addition, purchasers of Nuveen Defined Portfolios may reinvest their
distributions from such Defined Portfolios in Class R Shares, if, before
September 6, 1994, such purchasers had elected to reinvest distributions in
Nuveen Fund shares. Shareholders may exchange their Class R Shares of any Nuveen
Fund into Class R Shares of any other Nuveen Fund. Also you may exchange Class R
Shares of the Fund for Class A Shares without a sales charge if the current net
asset value of those Class R Shares is at least $3,000 or you already own Class
A Shares of the Fund.
The reduced sales charge programs may be modified or discontinued by the
Funds at any time. To encourage their participation, the Fund waives the sales
charge on Class A Shares and offers Class R Shares to trustees and officers of
the Trust and other affiliated persons of the Trust and Nuveen as noted above.
If you are eligible to purchase either Class R Shares or Class A Shares
without a sales charge at net asset value, you should be aware of the
differences between these two classes of shares. Class A Shares are subject to
an annual service fee to compensate Authorized Dealers for providing you with
ongoing account service. Class R Shares are not subject to a distribution
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or service fee and, consequently, holders of Class R Shares may not receive the
sale types or levels of services from Authorized Dealers. In choosing between
Class A Shares and Class R Shares, you should weigh the benefits of the services
to be provided by Authorized Dealers against the annual service fee imposed upon
the Class A Shares.
For more information about the purchase of Class A Shares or reduced sales
charge programs, or to obtain the required application forms, call Nuveen toll-
free at 800-257-8787.
Reduction or Elimination of Contingent Deferred Sales Charge
Class A Shares are normally redeemed at net asset value, without any
Contingent Deferred Sales Charge ("CDSC"). However, in the case of Class A
Shares purchased at net asset value because the purchase amount exceeded $1
million, where the Authorized Dealer did not waive the sales commission, a CDSC
of 1% is imposed on any redemption within 18 months of purchase. In the case of
Class B Shares redeemed within six years of purchase, a CDSC is imposed,
beginning at 5% for redemptions within the first year, declining to 4% for
redemptions within years two and three, and declining by 1% each year thereafter
until disappearing after the sixth year. Class C Shares are redeemed at net
asset value, without any CDSC, except that a CDSC of 1% is imposed upon
redemption of Class C Shares that are redeemed within 12 months of purchase.
In determining whether a CDSC is payable, the Fund will first redeem shares
not subject to any charge, or that represent an increase in the value of the
Fund account due to capital appreciation, and then will redeem shares held for
the longest period, unless the shareholder specifies another order. No CDSC is
charged on shares purchased as a result of automatic reinvestment of dividends
or capital gains paid. In addition, no CDSC will be charged on exchanges of
shares into another Nuveen Mutual Fund or Nuveen money market fund. You may not
exchange Class B Shares for shares of a Nuveen money market fund. The holding
period is calculated on a monthly basis and begins the first day of the month in
which the order for investment is received. The CDSC is calculated based on the
lower of the redeemed shares' cost or net asset value at the time of the
redemption and is deducted from the redemption proceeds. Nuveen receives the
amount of any CDSC shareholders pay. If Class A or Class C shares subject to a
CDSC are exchanged for shares of a Nuveen money market fund, the CDSC would be
imposed on the subsequent redemption of those money market fund shares, and the
period during which the shareholder holds the money market fund shares would be
counted in determining the remaining duration of the CDSC. The Fund may elect
not to so count the period during which the shareholder held the money market
fund shares, in which event the amount of any applicable CDSC would be reduced
in accordance with applicable SEC rules by the amount of any 12b-1 plan payments
to which those money market funds shares may be subject.
The CDSC may be waived or reduced under the following circumstances: (i) in
the event of total disability (as evidenced by a determination by the federal
Social Security Administration) or the shareholder (including a registered joint
owner) occurring after the purchase of the shares being redeemed; (ii) in the
event of the death of the shareholder (including a registered joint owner);
(iii) for redemptions made pursuant to a systematic withdrawal plan, up to 12%
annually of the current market value; (iv) involuntary redemptions caused by
operation of law; (v) redemptions in connection with a payment of account or
plan fees; (vi) redemptions in
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connection with the exercise of a reinstatement privilege whereby the proceeds
of a redemption of the Fund's shares subject to a sales charge are reinvested in
shares of certain funds within a specified number of days; and (vii) redemptions
in connection with the exercise of the Fund's right to redeem all shares in an
account that does not maintain a certain minimum balance or the Board of
Trustees has determined may have material adverse consequences to the
shareholders of the Fund.
In addition, the CDSC will be waived in connection with the following
redemptions of shares held by an employer-sponsored qualified defined
contribution retirement plan: (i) partial or complete redemptions in connection
with a distribution without penalty under Section 72(t) of the Internal Revenue
Code ("Code") from a retirement plan: (a) upon attaining age 59 1/2, (b) as part
of a series of substantially equal periodic payments, or (c) upon separation
from service and attaining age 55; (ii) partial or complete redemptions in
connection with a qualifying loan or hardship withdrawal; (iii) complete
redemptions in connection with termination of employment, plan termination or
transfer to another employer's plan or IRA; and (iv) redemptions resulting from
the return of an excess contribution. The CDSC will also be waived in connection
with the following redemptions of shares held in an IRA account: (i) for
redemptions made pursuant to an IRA systematic withdrawal based on the
shareholder's life expectancy including, but not limited to, substantially equal
periodic payments described in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2,
and (ii) for redemption to satisfy required minimum distributions after age
70 1/2 from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Nuveen IRA accounts).
Shareholder Programs
Exchange Privilege
You may exchange shares of a class of the Fund for shares of the same class
of any other Nuveen Mutual Fund with reciprocal exchange privileges, at net
asset value without a sales charge, by sending a written request to the Fund,
c/o Nuveen Investor Services, P.O. Box 5186, Bowling Green Station, New York
10274-5186. Similarly, Class A, Class B, Class C and Class R Shares of other
Nuveen Mutual Funds may be exchanged for the same class of shares of the Fund at
net asset value without a sales charge. Exchanges of shares from any Nuveen
money market fund will be made into Class A Shares, Class B Shares, Class C
Shares or Class R Shares (if eligible) of the Fund at the public offering price.
If, however, a sales charge has previously been paid on the investment
represented by the exchanged shares (i.e., the shares to be exchanged were
originally issued in exchange for shares on which a sales charge was paid), the
exchange of shares from a Nuveen money market fund will be made into shares of
the Fund at net asset value. All share classes may be exchanged for shares of
any Nuveen money market fund.
If you exchange shares subject to a CDSC, no CDSC will be charged at the
time of the exchange. However, if you subsequently redeem the shares acquired
through the exchange, the redemption may be subject to a CDSC, depending on when
you purchased your original shares and the CDSC schedule of the fund from which
you exchanged your shares.
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The shares to be purchased must be offered in your state of residence and
you must have held the shares you are exchanging for at least 15 days. The total
value of exchanged shares just at least equal the minimum investment requirement
of the Nuveen Mutual Fund being purchased. For federal income tax purposes, any
change constitutes a sale and purchase of shares and may result in capital gain
or loss. Before making any change, you should obtain the Prospectus for the
Nuveen Mutual fund you are purchasing and read it carefully. If the registration
of the account for the Fund is not exactly the same as that of the fund account
from which the exchange is made, written instructions from all holders of the
account from which the exchange is being made must be received, with signatures
guaranteed by a member of an approved Medallion Guarantee Program or in such
other manner as may be acceptable to the Fund. You may also exchange shares by
telephone if you authorize telephone exchanges by checking the applicable box on
the Application Form or by calling Nuveen toll-free at 800-257-8787 to obtain an
authorization form. The exchange privilege may be modified or discontinued by
the Fund at any time.
The exchange privilege is not intended to permit the Fund to be used as a
vehicle for short-term trading. Excessive exchange activity may interfere with
portfolio management, raise expenses, and otherwise have an adverse effect on
all shareholders. In order to limit excessive exchange activity and in other
circumstances where Fund management believes doing so would be in the best
interest of the Fund, the fund reserves the right to revise or terminate the
exchange privilege, or limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to the extent
required by law.
Reinstatement Privilege
If you redeemed Class A, Class B or Class C Shares of the Fund or any other
Nuveen Mutual Fund that were subject to a sales charge or a CDSC, you have up to
one year to reinvest all or part of the full amount of the redemption in the
same class of shares of the Fund at net asset value. This reinstatement
privilege can be exercised only once for any redemption, and reinvestment will
be made at the net asset value next calculated after reinstatement of the
appropriate class of Fund shares. If you reinstate shares that were subject to a
CDSC, your holding period as of the redemption date also will be reinstated for
purposes of calculating a CDSC. The federal income tax consequences of any
capital gain realized on a redemption will not be affected by reinstatement, but
a capital loss may be disallowed in whole or in part depending on the timing,
the amount of the reinvestment and the fund from which the redemption occurred.
Fund Direct/SM/
You can use Fund Direct to link your Fund account to your account at a bank
or other financial institution. Fund Direct enables you to transfer money
electronically between these accounts and perform a variety of account
transactions. These include purchasing shares by telephone, investing through a
Systematic Investment Plan, and sending dividends, distributions, redemption
payments or Systematic Withdrawal Plan payments directly to your bank account.
Please refer to the Application Form for details, or call Nuveen Investor
Services at 800-257-8787 for more information.
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Fund Direct privileges may be requested via an application you obtain by
calling 800-257-8787. Fund Direct privileges will apply to each shareholder
listed in the registration on your account as well as to you Authorized Dealer
representative of record unless and until Nuveen Investor Services receives
written instructions terminating or changing those privileges. After you
establish Fund Direct for your account, any change of bank account information
must be made by signature-guaranteed instructions to Nuveen Investor Services
signed by all shareholders who own the account.
Purchases may be made by telephone only after your account has been
established. To purchase shares in amounts up to $250,000 through a telephone
representative, call Nuveen Investor Services at 800-257-8787. The purchase
payment will be debited from your bank account.
Redemption
You may redeem shares by sending a written request for redemption directly
to the Fund, c/o Nuveen Investor Services, P.O. Box 5186, Bowling Green Station,
New York 10274-5186, accompanied by duly endorsed certificates, if issued.
Requests for redemption and share certificates, if issued, must be signed by
each shareholder and, if the redemption proceeds exceed $50,000 or are payable
other than to the shareholder of record at the address of record (which address
may not have changed in the preceding 60 days), the signature must be guaranteed
by a member of an approved Medallion Guarantee Program or in such other manner
as may be acceptable to the fund. You will receive payment based on the next
asset value per share next determined after receipt by the Fund of a properly
executed redemption request in proper form. A check for the redemption proceeds
will be mailed to you within seven days after receipt of your redemption
request. For accounts registered in the name of a broker-dealer, payment will be
forwarded within three business days. However, if any shares to be redeemed were
purchased by check within 10 days prior to the date the redemption request is
received, the Fund will not mail the redemption proceeds until the check
received for the purchase of shares has cleared, which may take up to 10 days.
Telephone and Electronic Redemption
If you have authorized telephone redemption and your account address has
not changed within the last 60 days, you can redeem shares that are held in non-
certificate form by calling Nuveen Investor Services at 800-257-8787. While you
or anyone authorized by you may make telephone redemption requests, redemption
checks will be issued only in the name of the shareholder of record and will be
mailed to the address of record. If your telephone request is received prior to
4:00 p.m. eastern time, the redemption check will normally be mailed the next
business day. For requests received after 4:00 p.m. eastern time, the redemption
will be effected at 4:00 p.m. eastern time the following business day and the
check will normally be mailed on the second business day after the request.
If you have authorized electronic fund redemption or established Fund
Direct privileges, you can take advantage of the following expedited redemption
procedures to redeem shares held in non-certificate form that are worth at least
$1,000. You may make electronic fund redemption
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requests through a phone representative or Fund Direct redemption requests by
calling Nuveen Investor Services at 800-257-8787. If a redemption request is
received by 4:00 p.m. eastern time, the redemption will be made as of 4:00 p.m.
that day. If the redemption request is received after 4:00 p.m. eastern time,
the redemption will be made as of 4:00 p.m. the following business day. Proceeds
of electronic fund redemption will normally be wired on the second business day
following the redemption, but may be delayed one additional business day if the
Federal Reserve Bank of Boston or the Federal Reserve Bank of New York is closed
on the day redemption proceeds would ordinarily be wired. The fund reserves the
right to charge a fee for electronic fund redemption. Proceeds of redemptions
through Fund Direct will normally be wired to your Fund Direct bank account on
the second or third business day after the redemption.
Before you may redeem shares electronically by phone or through Fund
Direct, you need to complete the telephone redemption authorization section of
the Application Form or the Fund Direct application form and return it to Nuveen
Investor Services. If you did not authorize telephone redemption when you opened
your account, you may obtain a telephone redemption authorization form by
writing the Fund or by calling Nuveen Investor Services toll-free at 800-257-
8787. Proceeds from electronic share redemptions will be transferred by Federal
Reserve wire only to the commercial bank account specified by the shareholder on
the Application Form. You need to send a written request to Nuveen Investor
Services in order to establish multiple accounts, or to change the account or
accounts designated to receive redemption proceeds. These requests must be
signed by each account owner with signature guaranteed by a member of an
approved Medallion Guarantee Program or in such other manner as may be
acceptable to the Fund. Further documentation may be required from corporation,
executors, trustees or personal representatives.
For the convenience of shareholders, the Fund has authorized Nuveen as its
agent to accept orders from financial advisers by wire or telephone for the
redemption of Fund shares. The redemption price is the first net asset value of
the appropriate share class determined following receipt of an order placed by
the financial adviser. The fund makes payment for the redeemed shares to the
securities representatives who placed the order promptly upon presentation of
required documents with signatures guaranteed as described above. However, your
financial adviser may charge you for serving as agent in the redemption of
shares.
The Fund reserves the right to refuse telephone redemptions and, at it
option, may limit the timing, amount or frequency of these redemptions.
Telephone redemption procedures may be modified or terminated at any time, on 30
days' notice, by the Fund. The Fund, Chase Global, the Funds' shareholder
services agent, and Nuveen will not be liable for following telephone
instructions reasonably believed to be genuine. The Fund employs procedures
reasonably designed to confirm that telephone instructions are genuine. These
procedures include recording all telephone instructions and requiring up to
three forms of identification prior to acting upon a caller's instructions. If
the Fund does not follow reasonable procedures for protecting shareholder
against loss on telephone transaction, it may be liable for any losses due to
unauthorized or fraudulent telephone instructions.
Systematic Withdrawal Plan
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If you own Fund shares currently worth at least $10,000, you may establish
a Systematic Withdrawal Plan by completing an application form for the Plan. You
may obtain an application form by checking the applicable box on the Application
Form or by calling Nuveen toll-free at 800-257-8787.
The Plan permits you to request periodic withdrawals on a monthly,
quarterly, semi-annual or annual basis in an amount of $50 or more. Depending
upon the size of the withdrawals requested under the Plan and fluctuations in
the net asset value of fund shares, these withdrawals may reduce or even exhaust
your account.
The purchase of Class A Shares, other than through reinvestment, while you
are participating in the Systematic Withdrawal Plan with respect to Class A
Shares will usually be disadvantageous because you will be paying a sales charge
on any Class A Shares you purchase at the same time you are redeeming shares.
Similarly, use of the Systematic Withdrawal Plan for Class B Shares held for
less than six years or Class C Shares held for less than 12 months may be
disadvantageous because the newly-purchased Class B or Class C shares will be
subject to the CDSC.
Suspension of Right of Redemption
The Fund may suspend the right of redemption of the Fund shares or delay
payment more than seven days (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closings), (b) when
trading in the markets the fund normally utilizes is restricted, or any
emergency exists as determined by the Securities and Exchange Commission so that
trading of the fund's investment or determination of its net asset value is not
reasonably practicable, or (c) for any other periods that the Securities and
Exchange commission by order may permit for protection of Fund shareholders.
Involuntary Redemption
The Fund may, from time to time, establish a minimum total investment for
Fund shareholders, and the Fund reserves the right to redeem your shares if your
investment is less than the minimum after giving you at least 30 days' notice.
If any minimum total investment is established, and if your account is below the
minimum, you will be allowed 30 days following the notice in which to purchase
sufficient shares to meet the minimum. So long as the Fund continues to offer
shares at net asset value to holders of Nuveen Defined Portfolios who are
investing their Nuveen Defined Portfolio distributions, no minimum total
investment will be established for those investors.
Redemption In Kind
The Fund has reserved the right to redeem in kind (that is, to pay
redemption requests in cash and portfolio securities, or wholly in portfolio
securities), although the fund has no present intention to redeem in kind. The
Fund voluntarily has committed to pay in cash all request for redemption by any
shareholder, limited as to each shareholder during any ninety-day period to
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the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of the ninety-day period.
General Matters
The Fund may encourage registered representatives and their firms to help
apportion their assets among bonds, stocks and cash, and may seek to participate
in programs that recommend a portion of their assets be invested in tax-free,
fixed income securities.
In addition to the types of compensation to dealers to promote sales of
fund shares that are described in the prospectus, Nuveen may from time to time
make additional reallowances only to certain authorized dealers who sell or are
expected to sell certain minimum amounts of shares of the Nuveen mutual funds
during specified time periods. Promotional support may include providing sales
literature to and holding informational or educational programs for the benefit
of such Authorized Dealers' representatives, seminars for the public, and
advertising and sales campaigns. Nuveen may reimburse a participating Authorized
Dealer for up to one-half of specified media costs incurred in the placement of
advertisements which jointly feature the Authorized Dealer and Nuveen Funds and
Nuveen Defined Portfolios.
Such reimbursement will be based on the number of its financial advisers
who have sold Nuveen Fund shares and Nuveen Defined Portfolio units during the
prior calendar year according to an established schedule. Any such support or
reimbursement would be provided by Nuveen out of its own assets, and not out of
the assets of the Fund, and will not change the price an investor pays for
shares or the amount that the Fund will receive from such a sale. The staff of
the Securities and Exchange Commission takes the position that dealers who
receive 90% or more of the applicable sales charge may be deemed underwriters
under the Securities Act of 1933, as amended.
To help advisers and investors better understand and most efficiently use
the Fund to reach their investment goals, the Fund may advertise and create
specific investment programs and systems. For example, this may include
information on how to use the Fund to accumulate assets for future education
needs or periodic payments such as insurance premiums. The Fund may produce
software or additional sales literature to promote the advantages of using the
Fund to meet these and other specific investor needs.
The Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee accepts the
order. Customer orders received by such broker (or their designee) will be
priced at the Fund's net asset value next computed after they are accepted by an
authorized broker (or their designee). Orders accepted by an authorized broker
(or their designee) before the close of regular trading on the New York Stock
Exchange will receive that day's share price; orders accepted after the close of
trading will receive the next business day's share price.
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Exchanges of shares of the Fund for shares of a Nuveen money market fund
may be made on days when both funds calculate a net asset value and make shares
available for public purchase. Shares of the Nuveen money market funds may be
purchased on days on which the Federal Reserve Bank of Boston is normally open
for business. In addition to the holidays observed by the Fund, the Nuveen money
market funds observe and will not make fund shares available for purchase on the
following holidays: Martin Luther King's Birthday, Columbus Day and Veterans
Day.
The Fund may suspend the right of redemption, or delay payment to redeeming
shareholders for more than seven days, when the New York Stock Exchange is
closed (not including customary weekend and holiday closings); when trading in
the markets the Fund's portfolio securities or determination of the Fund's net
assets value is not reasonably practical; or the SEC by order permits the
suspension of the right of redemption or the delay in payment to redeeming
shareholders for more than seven days.
Shares will be registered in the name of the investor or the investor's
financial adviser. A change in registration or transfer of shares held in the
name of a financial adviser may only be made by an order in good form from the
financial adviser acting on the investor's behalf. Share certificates will only
be issued upon written request to the Fund's transfer agent. No share
certificates will be issued for fractional shares.
For more information on the procedure for purchasing shares of the Fund and
on the special purchase programs available thereunder, see "How to Buy Fund
Shares" in the Prospectus.
If you choose to invest in the Fund, an account will be opened and
maintained for your by Chase Global. Share certificates will be issued to you
only upon written request to Nuveen Investor Services, and no certificates will
be issued for fractional shares. The Fund reserves the right to reject any
purchase order and to waive or increase minimum investment requirements. A
change in registration or transfer of shares held in the name of your financial
adviser's firm can only be made by an order in good form from the financial
adviser acting on your behalf.
Authorized Dealers are encouraged to open single master accounts. However,
some Authorized Dealers may wish to use Chase Global's sub-accounting system to
minimize their internal recordkeeping requirements. An Authorized Dealer or
other investor requesting shareholder servicing or accounting other than the
master account or sub-accounting services offered by Chase Global will be
required to enter into a separate agreement with another agent for these
services for a fee that will depend upon the level of services to be provided.
Fund shares are offered continuously. However, subject to the rules and
regulations of the Securities and Exchange Commission, the Fund reserves the
right to suspend the continuous offering of its shares at any time, but no
suspension shall affect your right of redemption.
Nuveen serves as the principal underwriter of the shares of the Fund
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust, dated February 1997 and last renewed on July 31, 1998
("Distribution Agreement"). Pursuant to the Distribution Agreement, the Trust
appointed Nuveen to be its agent for the distribution of the
S-44
<PAGE>
Funds' shares on a continuous offering basis. Nuveen sells shares to or through
brokers, dealers, banks or other qualified financial intermediaries
(collectively referred to as "Dealers"), or others, in a manner consistent with
the then effective registration statement of the Trust. Pursuant to the
Distribution Agreement, Nuveen, at its own expense, finances certain activities
incident to the sale and distribution of the Fund's shares, including printing
and distributing of prospectuses and statements of additional information to
other than existing shareholders, the printing and distributing of sales
literature, advertising and payment of compensation and giving of concessions to
Dealers. Nuveen receives for its services the excess, if any, of the sales price
of the Fund's shares less the net asset value of those shares, and reallows a
majority or all of such amounts to the Dealers who sold the shares; Nuveen may
act as such a Dealer. Nuveen also receives compensation pursuant to a
distribution plan adopted by the Trust pursuant to Rule 12b-1 and described
herein under "Distribution and Service Plan." Nuveen receives any CDSCs imposed
on redemptions of Shares.
DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a plan (the "Plan") pursuant to Rule 12b-1 under the
1940 Act, which provides that Class B Shares and Class C Shares will be subject
to an annual distribution fee, and that Class A Shares, Class B Shares and Class
C Shares will be subject to an annual service fee. Class R Shares will not be
subject to either distribution or service fees.
The distribution fee applicable to Class B and Class C Shares under the
Fund's Plan will be payable to reimburse Nuveen for services and expenses
incurred in connection with the distribution of Class B and Class C Shares,
respectively. These expenses include payments to Authorized Dealers, including
Nuveen, who are brokers of record with respect to the Class B and Class C
Shares, as well as, without limitation, expenses of printing and distributing
prospectuses to persons other than shareholders of the Fund, expenses of
preparing, printing and distributing advertising and sales literature and
reports to shareholders used in connection with the sale of Class B and Class C
Shares, certain other expenses associated with the distribution of Class B and
Class C Shares, and any distribution-related expenses that may be authorized
from time to time by the Board of Trustees.
The service fee applicable to Class A Shares, Class B Shares and Class C
Shares under the Fund's Plan will be payable to Authorized Dealers in connection
with the provision of ongoing account services to shareholders. These services
may include establishing and maintaining shareholder accounts, answering
shareholder inquiries and providing other personal services to shareholders.
The Fund may spend up to .20 of 1% per year of the average daily net assets
of Class A Shares as a service fee under the Plan applicable to Class A Shares.
The Fund may spend up to .75 of 1% per year of the average daily net assets of
Class B Shares as a distribution fee and up to .20 of 1% per year of the average
daily net assets of Class B Shares as a service fee under the Plan applicable to
Class B Shares. The Fund may spend up to .55 of 1% per year of the average daily
net assets of Class C Shares as a distribution fee and up to .20 of 1% per year
of the average daily net assets of Class C Shares as a service fee under the
Plan applicable to Class C Shares.
S-45
<PAGE>
Under the Fund's Plan, the Fund will report quarterly to the Board of
Trustees for its review all amounts expended per class of shares under the Plan.
The Plan may be terminated at any time with respect to any class of shares,
without the payment of any penalty, by a vote of a majority of the trustees who
are not "interested persons" and who have no direct or indirect financial
interest in the Plan or by vote of a majority of the outstanding voting
securities of such class. The Plan may be renewed from year to year if approved
by a vote of the Board of Trustees and a vote of the non-interested trustees who
have no direct or indirect financial interest in the Plan cast in person at a
meeting called for the purpose of voting on the Plan. The Plan may be continued
only if the trustees who vote to approve such continuance conclude, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under applicable law, that there is a reasonable likelihood that the Plan will
benefit the Fund and its shareholders. The Plan may not be amended to increase
materially the cost which a class of shares may bear under the Plan without the
approval of the shareholders of the affected class, and any other material
amendments of the Plan must be approved by the non-interested trustees by a vote
cast in person at a meeting called for the purpose of considering such
amendments. During the continuance of the Plan, the selection and nomination of
the non-interested trustees of the Trust will be committed to the discretion of
the non-interested trustees then in office.
INDEPENDENT PUBLIC ACCOUNTANTS AND CUSTODIAN
Arthur Andersen LLP, independent public accountants, 33 West Monroe Street,
Chicago, Illinois 60603, has been selected as auditors for the Trust. In
addition to audit services, the auditors will provide consultation and
assistance on accounting, internal control, tax and related matters. The
financial statements incorporated by reference elsewhere in this Statement of
Additional Information and the information for prior periods set forth under
"Financial Highlights" in the Prospectus have been audited by the respective
auditors as indicated in their report with respect thereto, and are included in
reliance upon the authority of that firm in giving that report.
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, New York 10004. The custodian performs custodial, fund
accounting and portfolio accounting services.
The Fund's transfer, shareholder services, and dividend paying agent is
Chase Global Funds Services Company, 73 Tremont Street, Boston, Massachusetts
02108.
S-46
<PAGE>
APPENDIX A -- RATINGS OF INVESTMENTS
Standard & Poor's Ratings Group--A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings (as
published by S&P) follows:
Long Term Debt
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Investment Grade
AAA Debt rated `AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated `AA' has a very strong capacity to pay interest and repay
principal, and differs from the highest-rated issues only in small degree.
A Debt rated `A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
A-1
<PAGE>
BBB Debt rated `BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
Speculative Grade Rating
Debt rated `BB,' `B,' `CCC,' `CC' and `C' is regarded as having
predominantly speculative characteristics, with respect to capacity to pay
interest and repay principal. `BB' indicates the least degree of speculation and
`C' the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
the `BB' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `BBB-' rating.
B Debt rated `B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The `B' rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied `BB' or `BB-' rating.
CCC Debt rated `CCC' has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied `B' or `B-' rating.
CC The rating `CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' debt rating.
C The rating `C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied `CCC-' debt rating. The `C' rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
A-2
<PAGE>
CI The rating `CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated `D' is in payment default. The `D' rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The `D' rating also
will be used upon the filling of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): the ratings from `AA' to `CCC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: the letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L The letter `L' indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured by the Federal Savings & Loan Insurance Corp. or the
Federal Deposit Insurance Corp.* and interest is adequately collateralized.
In the case of certificates of deposit, the letter `L' indicates that the
deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up
to the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This 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-3
<PAGE>
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat 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 or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. the ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc.--A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Long Term Debt
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are mostly 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-4
<PAGE>
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future can not 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.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of condition.
Note:Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols
Aa1, A1, Baa1, Ba1, and B1.
A-5
<PAGE>
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will often be evidenced by many of the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of senior short-term promissory 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of senior short-term promissory obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Duff & Phelps, Inc.--A brief description of the applicable Duff & Phelps,
Inc. ("D&P") ratings symbols and their meanings (as published by D&P) follows:
Long Term Debt
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
A-6
<PAGE>
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of `BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, use this same rating scale. Duff &
Phelps Credit Rating claims paying ability ratings of insurance companies use
the same scale with minor modification in the definitions. Thus, an investor
can compare the credit quality of investment alternatives across industries
and structural types. A "Cash Flow Rating" (as noted for specific ratings)
addresses the likelihood that aggregate principal and interest will equal or
exceed the rated amount under appropriate stress conditions.
<TABLE>
<CAPTION>
Rating
Scale Definition
- ------ ----------------------------------------------------------------------
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for
BBB prudent investment. Considerable variability in risk during economic
BBB- cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate
BB- according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
</TABLE>
A-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CCC Well below investment grade securities. Considerable uncertainty exists as to timely payment
of principal, interest or preferred dividends.
Protection factors are narrow, and risk can be substantial with unfavorable
economic/industry conditions and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent with the rating criteria
used by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured portion
of certificates of deposit, unsecured bank loans, master notes, bankers
acceptances, irrevocable letters of credit, and current maturities of long-term
debt. Asset-backed commercial paper is also rated according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
ratings is the refinement of the traditional `1' category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. As a consequence, Duff & Phelps Credit Rating has
incorporated gradations of `1+' (one plus) and `1-' (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-dealer requirements,
specifically capital computation guidelines. These ratings meet Department of
labor ERISA guidelines governing pension and profit-sharing investments. State
regulators also recognize the ratings of Duff & Phelps Credit Rating for
insurance company investment portfolios.
Rating
Scale: Definition
D-1+ High Grade
Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
A-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-2 Good Grade
Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
D-3 Satisfactory Grade
Satisfactory liquidity and other protection factors qualify issue as
to investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
D-4 Non-Investment Grade
Speculative investment characteristics. Liquidity is not sufficient
to insure against disruption in debt service. Operating factors and
market access may be subject to a high degree of variation.
D-5 Default
Issuer failed to meet scheduled principal and/or interest payments.
</TABLE>
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long Term Debt
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
A-9
<PAGE>
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA".
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of the issuers is generally rated "F-1+".
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds and, therefore, impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories can not fully reflect the
differences in the degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
A-10
<PAGE>
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD Bonds are in default on interest and/or principal payments. Such bonds
DD are extremely speculative and should be valued on the basis of their
and D ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery of these
bonds, and "D" represents the lowest potential for recovery.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificate of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ Exceptionally Strong Credit Quality Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1 Very Strong Credit Quality Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated "F-1+".
F-2 Good Credit Quality Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S Weak Credit Quality Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D Default Issues assigned this rating are in actual or imminent payment
default.
A-11
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LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
A-12
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APPENDIX B-- DESCRIPTION OF HEDGING TECHNIQUES
Set forth below is additional information regarding the various defensive
hedging techniques and use of repurchase agreements.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. When a 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 a Fund's
existing or anticipated holdings of long-term debt securities. For example, if a
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 Funds
as a hedging device, perhaps the most significant is the imperfect correlation
between movements in the price of the financial futures and movements in the
price of the debt securities which are the subject of the hedge.
Thus, if the price of the financial future moves less or more than the
price of the securities which are the subject of the hedge, the hedge will not
be fully effective. To compensate for this imperfect correlation, the Fund may
enter into financial futures in a greater dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the prices of
such securities has been greater than the historical volatility of the financial
futures. Conversely, the Fund may enter into fewer financial futures if the
historical volatility of the price of the securities being hedged is less than
the historical volatility of the financial futures.
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing
B-1
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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 a 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 same Fund. There is no guarantee that such closing
transactions can be effected.
Index Contracts
Index Futures
A tax-exempt bond index which assigns relative values to the tax-exempt
bonds included in the index is traded on the Chicago Board of Trade. The index
fluctuates with changes in the market values of all tax-exempt bonds included
rather than a single bond. An index future is a bilateral agreement pursuant to
which two parties agree to take or make delivery of an amount of cash-rather
than any security-equal to specified dollar amount times the difference between
the index value at the close of the last trading day of the contract and the
price at which the index future was originally written. Thus, an index future is
similar to traditional financial futures except that settlement is made in cash.
Index Options
The Fund may also purchase put or call options on U.S. Government or tax-
exempt bond index futures and enter into closing transactions with respect to
such options to terminate an existing position. Options on index futures are
similar to options on debt instruments except that an option on an index future
gives the purchaser the right, in return for the premium paid, to assume a
position in an index contract rather than an underlying security at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
of the writer's futures margin account which represents the amount by which the
market price of the index futures contract, at exercise, is less than the
exercise price of the option on the index future.
Bond index futures and options transactions would be subject to risks
similar to transactions in financial futures and options thereon as described
above. No series will enter into transactions in index or financial futures or
related options unless and until, in the Adviser's opinion, the market for such
instruments has developed sufficiently.
B-2
