<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1999
================================================================================
1933 Act File No. 333-69035
1940 Act File No. 811-09161
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[_] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[_] Post-Effective Amendment No. __________
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
Nuveen California Dividend Advantage Municipal Fund
(previously Nuveen California Municipal Advantage Fund)
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
Gifford R. Zimmerman
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Janet D. Olsen Thomas S. Harman Thomas A. DeCapo
Bell, Boyd & Lloyd Morgan, Lewis & Bockius LLP Skadden, Arps, Slate,
70 W. Madison St. 1800 M Street, N.W. Meagher & Flom LLP
Chicago, IL 60602 Washington, D.C. 20036 One Beacon Street
Boston, MA 02108
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
_________________
If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate
box)
[X] when declared effective pursuant to section 8(c)
_________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum
Title of Securities Amount Proposed Maximum Aggregate Offering Amount of
Being Registered Being Registered Offering Price Per Unit Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.01 par value 4,000,000 Shares $15.00 $60,000,000 16,680
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $417 of which has been previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
_______________
CROSS REFERENCE SHEET
Part A - Prospectus
<TABLE>
<CAPTION>
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
<S> <C> <C>
Item 1. Outside Front cover...................... Cover Page
Item 2. Cover Pages; Other Offering Information.. Cover Page
Item 3. Fee Table and Synopsis................... Prospectus Summary; Summary of Fund Expenses
Item 4. Financial Highlights..................... Not Applicable
Item 5. Plan of Distribution..................... Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders..................... Not Applicable
Item 7. Use of Proceeds.......................... Use of Proceeds; The Fund's Investments
Item 8. General Description of the Registrant.... The Fund; The Fund's Investments; MuniPreferred(R) Shares
and Leverage; Risks; How the Fund Manages Risk; Description
of Shares; Certain Provisions in the Declaration of Trust
Item 9. Management............................... Management of the Fund; Custodian and Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and Other
Securities............................. Description of Shares; MuniPreferred Shares and Leverage;
Distributions; Dividend Reinvestment Plan; Certain
Provisions in the Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings........................ Other Matters
Item 13. Table of Contents of the Statement of
Additional Information................. Table of Contents of the Statement of
Additional Information
</TABLE>
<PAGE>
Part B - Statement of Additional Information
<TABLE>
<CAPTION>
Location in Statement of
Items in Part A of Form N-2 Additional Information
---------------------------------------- -------------------------------------------------------------
<S> <C> <C>
Item 14. Cover Page.............................. Cover Page
Item 15. Table of Contents....................... Cover Page
Item 16. General Information and History......... Not Applicable
Item 17. Investment Objective and Policies....... The Fund's Investments; Certain Trading Strategies of the
Fund; Portfolio Transactions
Item 18. Management.............................. Management of the Fund; Portfolio Transactions
Item 19. Control Persons and Principal Holders of
Securities............................ Management of the Fund; Statement of Net Assets
Item 20. Investment Advisory and Other Services.. Management of the Fund; Custodian and Transfer Agent; Experts
Item 21. Brokerage Allocation and Other Practices Portfolio Transactions
Item 22. Tax Status.............................. Tax Matters; Distributions
Item 23. Financial Statements.................... Report of Independent Auditors; Statement of Net Assets
</TABLE>
Part C - Other Information
Items 24-33 have been answered in Part C of this Registration Statement.
2
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. No +
+person may sell these securities until the registration statement filed with +
+the Securities and Exchange Commission is effective. This Prospectus is not +
+an offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION--DATED APRIL 27, 1999
[LOGO OF NUVEEN APPEARS HERE]
4,000,000 Shares
Nuveen California Dividend Advantage Municipal Fund
Common Shares
$15.00 per share
---------
Investment Objectives. The Fund is a newly organized, closed-end, diversified
management investment company. The Fund's investment objectives are:
. to provide current income exempt from regular federal and California
income tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that the Fund's investment adviser
believes are underrated or undervalued or that represent municipal market
sectors that are undervalued.
Portfolio Contents. The Fund will invest its net assets in a diversified
portfolio of municipal bonds that are exempt from regular federal and
California income taxes. Under normal market conditions, the Fund expects to be
fully invested in such tax-exempt municipal bonds. The Fund will invest at
least 80% of its net assets in
(continued on following page)
---------
These securities involve certain risks. See "Risks" beginning on page 15.
Neither the Securities and Exchange Commission nor any state securities com-
mission has approved or disapproved these securities or determined if this pro-
spectus is truthful or complete. Any representation to the contrary is a crimi-
nal offense.
---------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Public Offering Price $15.00 $
Sales Load $ 0.675 $
Proceeds to the Fund $14.325 $
</TABLE>
---------
The Underwriters are offering the common shares subject to various
conditions. The Underwriters expect to deliver the common shares to purchasers
on or about May , 1999.
Salomon Smith Barney John Nuveen & Co.
Incorporated
BT Alex. Brown A.G. Edwards & Sons, Inc.
PaineWebber Incorporated Prudential Securities
Crowell, Weedon & Co. EVEREN Securities, Inc.
Gruntal & Co. Raymond James & Associates, Inc.
Sutro & Co. Incorporated Wedbush Morgan Securities
May , 1999
<PAGE>
(continued from previous page)
investment grade quality municipal bonds. Investment grade quality bonds are
those rated by national rating agencies within the four highest grades (Baa or
BBB or better), or bonds that are unrated but judged to be of comparable
quality by the Fund's investment adviser. The Fund may invest up to 20% of its
net assets in municipal bonds that are rated Ba/BB or B or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds of
below investment grade quality are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as junk bonds. See "The Fund's Investments." The
Fund cannot assure you that it will achieve its investment objectives. A
substantial portion of the Fund's income may be subject to the federal
alternative minimum tax. In addition, capital gains distributions will be
subject to capital gains taxes. The Fund is designed for individual investors
who are residents of California for tax purposes. See "Tax Matters."
No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies fre-
quently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short pe-
riod after completion of the public offering. The common shares have been ap-
proved for listing on the New York Stock Exchange, subject to notice of issu-
ance. The trading or "ticker" symbol of the common shares is expected to be
"NAC."
MuniPreferred(R) Shares. The Fund intends to offer preferred shares, called
"MuniPreferred Shares" in this Prospectus. The Fund expects that the
MuniPreferred Shares will represent about 35% of the Fund's capital. The issu-
ance of MuniPreferred Shares will leverage your common shares, meaning that the
issuance of the MuniPreferred Shares may cause you to receive a larger return
or loss on your common shares than you would have received without the issuance
of the MuniPreferred Shares. Leverage involves special risks, but also affords
an opportunity for greater return. There is no assurance that the Fund's
leveraging strategy will be successful. See "MuniPreferred Shares and Leverage"
and "Description of Shares."
The underwriters named in this prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
This Prospectus contains important information about the Fund. You should
read the Prospectus before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated , con-
taining additional information about the Fund, has been filed with the Securi-
ties and Exchange Commission and is hereby incorporated by reference in its en-
tirety into this Prospectus. You can review the table of contents of the State-
ment of Additional Information on page 32 of this Prospectus. You may request a
free copy of the Statement of Additional Information by calling (800) 257-8787.
You may also obtain the Statement of Additional Information on the Securities
and Exchange Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institu-
tion, and are not federally insured by the Federal Deposit Insurance Corpora-
tion, the Federal Reserve Board or any other government agency.
2
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in the Prospectus and in the Statement of Additional Information.
The Fund...............
Nuveen California Dividend Advantage Municipal Fund
(the "Fund") is a newly organized, closed-end,
diversified management investment company. The Fund
is designed for individual investors who are
residents of California for tax purposes. See "The
Fund."
The Offering...........
The Fund is offering common shares of beneficial
interest at $15.00 per share through a group of
underwriters (the "Underwriters") led by Salomon
Smith Barney Inc., John Nuveen & Co. Incorporated, BT
Alex. Brown Incorporated, A.G. Edwards & Sons, Inc.,
PaineWebber Incorporated, Prudential Securities,
Crowell, Weedon & Co., EVEREN Securities, Inc.,
Gruntal & Co., L.L.C., Raymond James & Associates,
Inc., Sutro & Co. Incorporated and Wedbush Morgan
Securities Inc. The common shares of beneficial
interest are called "Common Shares" in the rest of
this Prospectus. You must purchase at least 100
Common Shares. The Fund has given the Underwriters an
option to purchase up to additional Common
Shares to cover orders in excess of Common
Shares. See "Underwriting."
Investment Objectives..
The Fund's investment objectives are to provide
current income exempt from regular federal and
California income tax and enhance portfolio value
relative to the municipal bond market by investing in
tax-exempt municipal bonds that the Fund's investment
adviser believes are underrated or undervalued or
that represent municipal markets that are
undervalued. The Fund will invest its net assets in a
diversified portfolio of municipal bonds that are
exempt from regular federal and California income
tax. Under normal market conditions, the Fund expects
to be fully invested in such tax-exempt municipal
bonds. The Fund will invest at least 80% of its net
assets in municipal bonds that at the time of
investment are investment grade quality. Investment
grade quality bonds are bonds rated within the four
highest grades (Baa or BBB or better by Moody's
Investor Service, Inc. ("Moody's"), Standard & Poors
Corporation ("S&P") or Fitch IBCA, Inc. ("Fitch")),
or bonds that are unrated but judged to be of
comparable quality by the Fund's investment adviser.
The Fund may invest up to 20% of its net assets in
municipal bonds that, at the time of investment, are
rated Ba/BB or B by Moody's, S&P or Fitch or unrated
but judged to be of comparable quality by the Fund's
investment adviser. Bonds of below investment grade
quality are regarded as having predominately
speculative characteristics with respect to capacity
to pay interest and repay principal, and are commonly
referred to as junk bonds. The Fund cannot assure you
that it will attain its investment objectives. See
"The Fund's Investments."
3
<PAGE>
Special
Considerations........ The Fund expects that a substantial portion of its
investments will pay interest that is taxable under
the federal alternative minimum tax. If you are
subject to the federal alternative minimum tax, or
would become subject to such tax as a result of
investing in the Fund, the Fund may not be a suitable
investment for you. In addition, capital gains
distributions will be subject to capital gains taxes.
See "Tax Matters."
Proposed Offering of
MuniPreferred(R)
Shares................
Approximately one to three months after completion of
this offering (subject to market conditions), the
Fund intends to offer preferred shares of beneficial
interest ("MuniPreferred Shares") representing
approximately 35% of the Fund's capital after their
issuance. The issuance of MuniPreferred Shares will
leverage your shares. Leverage involves special
risks. There is no assurance that the Fund's
leveraging strategy will be successful. See "Risks".
The money the Fund obtains by selling the
MuniPreferred Shares will be invested in long-term
municipal bonds. Long-term municipal bond yields are
typically, although not always, higher than shorter-
term municipal bond yields. The MuniPreferred Shares
will pay dividends based on shorter-term rates. So
long as long-term bond rates of return, net of
applicable Fund expenses, exceed MuniPreferred Share
dividend rates, the investment of the proceeds of the
MuniPreferred Shares will generate more income than
will be needed to pay dividends on the MuniPreferred
Shares. If so, the excess will be used to pay higher
dividends to holders of Common Shares ("Common
Shareholders"). However, the Fund cannot assure you
that the issuance of MuniPreferred Shares will result
in a higher yield on your Common Shares. Once
MuniPreferred Shares are issued, the net asset value
and market price of the Common Shares and the yield
to Common Shareholders will be more volatile. See
"MuniPreferred Shares and Leverage" and "Description
of Shares-MuniPreferred Shares."
Investment Adviser.....
Nuveen Advisory Corp. ("Nuveen Advisory") will be the
Fund's investment adviser. Nuveen Advisory will
receive an annual fee, payable monthly, in a maximum
amount equal to .65% of the Fund's average daily
total net assets (including assets attributable to
any MuniPreferred Shares that may be outstanding),
with lower fee levels for assets that exceed $125
million. Nuveen Advisory has agreed to reimburse the
Fund for fees and expenses in the amount of .30% of
average daily total net assets of the Fund for the
first five years of the Fund's operations (through
July 31, 2004), and for a declining amount for an
additional five years (through July 31, 2009). Nuveen
Advisory is a wholly-owned subsidiary of John Nuveen
& Co. Incorporated ("Nuveen"). See "Management of the
Fund."
4
<PAGE>
Distributions..........
Commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions to
you at a level rate based on the projected
performance of the Fund. The Fund's ability to
maintain a level dividend rate will depend on a
number of factors, including dividends payable on the
MuniPreferred Shares. As portfolio and market
conditions change, the rate of dividends on the
Common Shares and the Fund's dividend policy could
change. Over time, the Fund will distribute all of
its net investment income (after it pays accrued
dividends on any outstanding MuniPreferred Shares).
In addition, at least annually, the Fund intends to
distribute net realized capital gains and taxable
ordinary income, if any, to you so long as the net
realized capital gains and taxable ordinary income
are not necessary to pay accrued dividends on, or
redeem or liquidate, any MuniPreferred Shares. Your
initial distribution is expected to be declared
approximately 45 days, and paid approximately 60 to
90 days, from the completion of this offering,
depending on market conditions. You may elect to
automatically reinvest some or all of your
distributions in additional Common Shares under the
Fund's Dividend Reinvestment Plan. See
"Distributions" and "Dividend Reinvestment Plan."
Listing................
The Common Shares have been approved for listing on
the New York Stock Exchange, subject to notice of
issuance. See "Description of Shares--Common Shares."
The trading or "ticker" symbol of the Common Shares
is expected to be "NAC."
Custodian.............. The Chase Manhattan Bank will serve as custodian of
the Fund's assets. See "Custodian and Transfer
Agent."
Market Price of
Shares................ Shares of closed-end investment companies frequently
trade at prices lower than net asset value. Shares of
closed-end investment companies like the Fund that
invest predominately in investment grade municipal
bonds have during some periods traded at prices
higher than net asset value and during other periods
have traded at prices lower than net asset value. The
Fund cannot assure you that Common Shares will trade
at a price higher than net asset value in the future.
Net asset value will be reduced immediately following
the offering by the sales load and the amount of the
organization and offering expenses paid by the Fund.
See "Use of Proceeds." In addition to net asset
value, market price may be affected by such factors
as dividend levels (which are in turn affected by
expenses), call protection, dividend stability,
portfolio credit quality and liquidity and market
supply and demand. See "MuniPreferred Shares and
Leverage," "Risks," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to Open-End
Fund" and the Statement of Additional Information
under "Repurchase of Fund Shares; Conversion to Open-
End Fund." The Common Shares are designed primarily
for long-term investors, and you should not view the
Fund as a vehicle for trading purposes.
5
<PAGE>
Special Risk
Considerations........
No Operating History. The Fund is a newly organized
closed-end investment company with no history of
operations.
Interest Rate Risk. When market rates fall, bond
prices rise, and vice versa. Interest rate risk is
the risk that the municipal bonds in the Fund's
portfolio will decline in value because of increases
in market interest rates. The prices of longer-term
bonds fluctuate more than prices of shorter-term
bonds as interest rates change. Because the Fund will
invest primarily in long-term bonds, the Common Share
net asset value and market price per share will
fluctuate more in response to changes in market
interest rates than if the Fund invested primarily in
shorter-term bonds. The Fund's use of leverage, as
described below, will tend to increase Common Share
interest rate risk.
Credit Risk. Credit risk is the risk that one or more
municipal bonds in the Fund's portfolio will decline
in price, or fail to pay interest or principal when
due, because the issuer of the bond experiences a
decline in its financial status. The Fund may invest
up to 20% (measured at the time of investment) of its
net assets in municipal bonds that are rated Ba/BB or
B or that are unrated but judged to be of comparable
quality by Nuveen Advisory. The prices of these lower
grade bonds are more sensitive to negative
developments, such as a decline in the issuer's
revenues or a general economic downturn, than are the
prices of higher grade securities.
Concentration in California Issuers. The Fund's policy
of investing primarily in municipal obligations of
issuers located in California makes the Fund more
susceptible to adverse economic, political or
regulatory occurrences affecting such issuers.
Leverage Risk. The use of leverage through the
issuance of MuniPreferred Shares creates an
opportunity for increased Common Share net income,
but also creates special risks for Common
Shareholders. There is no assurance that the Fund's
leveraging strategy will be successful. It is
anticipated that MuniPreferred dividends will be
based on shorter-term municipal bond rates of return
(which would be redetermined periodically, pursuant
to an auction process), and that the Fund will invest
the proceeds of the MuniPreferred Shares offering in
long-term municipal bonds. Long-term municipal bond
rates of return are typically, although not always,
higher than shorter-term municipal bond rates of
return. So long as the Fund's municipal bond
portfolio provides a higher rate of return (net of
Fund expenses) than the MuniPreferred dividend rate,
the leverage will cause Common Shareholders to
receive a higher
6
<PAGE>
current rate of return than if the Fund were not
leveraged. Leverage creates two major types of risks
for Common Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares,
because changes in the value of the Fund's bond
portfolio (including bonds bought with the
proceeds of the MuniPreferred Shares offering)
are borne entirely by the Common Shareholders;
and
. the possibility either that Common Share income
will fall if the MuniPreferred dividend rate
rises above the rate of return (net of Fund
expenses) on the Fund's bond portfolio, or that
Common Share income will fluctuate because the
MuniPreferred dividend rate varies.
Municipal Bond Market Risk. The amount of public
information available about the municipal bonds in
the Fund's portfolio is generally less than that for
corporate equities or bonds, and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of Nuveen
Advisory than would be a stock fund or taxable bond
fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in
which the Fund may invest, also tends to be less
well-developed or liquid than many other securities
markets, which may adversely affect the Fund's
ability to sell its bonds at attractive prices.
Anti-takeover Provisions. The Declaration of Trust
includes provisions that could limit the ability of
other entities or persons to acquire control of the
Fund or convert the Fund to open-end status. The
provisions of the Declaration described above could
have the effect of depriving the Common Shareholders
of opportunities to sell their Common Shares at a
premium over the then current market price of the
Common Shares.
7
<PAGE>
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of MuniPreferred Shares in an
amount equal to 35% of the Fund's capital (after their issuance), and shows
Fund expenses both as a percentage of net assets attributable to Common Shares
and as a percentage of total net assets.
<TABLE>
<CAPTION>
Percentage of
Total Net Assets
----------------
<S> <C> <C>
Shareholder Transaction Expenses
Sales Load Paid by You (as a
percentage of offering price)...... 4.50%
Dividend Reinvestment Plan Fees..... None*
<CAPTION>
Percentage of Net
Assets Attributable Percentage of
to Common Shares Total Net Assets
-------------------- ----------------
<S> <C> <C>
Annual Expenses
Management Fees..................... 1.00% .65%
Fee and Expense Reimbursement (Years
1-5)............................... (.46)%** (.30)%**
---- -----
Net Management Fees................... .54%** .35%**
Other Expenses........................ .31% .20%
---- -----
Total Net Annual Expenses............. .85%** .55%**
==== =====
</TABLE>
- --------
*You will be charged a $2.50 service charge and pay brokerage charges if you
direct the Plan Agent to sell your Common Shares held in a dividend
reinvestment account.
**Nuveen Advisory has agreed to reimburse the Fund for fees and expenses in
the amount of .30% of average daily total net assets for the first 5 years
of the Fund's operations, .25% of average daily total net assets in year 6,
.20% in year 7, .15% in year 8, .10% in year 9 and .05% in year 10. Without
the reimbursement, "Total Net Annual Expenses" would be estimated to be
.85% of average daily total net assets and 1.31% of average daily total net
assets attributable to Common Shares. Nuveen has agreed to pay all
organizational expenses and offering costs (other than sales load) that
exceed $0.02 per Common Share (.13% of offering price).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues 4,000,000 Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of .85% of net assets attributable to Common Shares
and .55% of total net assets in years 1 through 5, increasing to 1.23% and
.80%, respectively, in year 10 and (2) a 5% annual return:(/1/)
<TABLE>
<CAPTION>
Expenses Based on a
Percentage of 1 Year 3 Years 5 Years 10 Years(2)
------------------- ------ ------- ------- -----------
<S> <C> <C> <C> <C>
Net Assets Attributable
to Common Shares....... $53 $71 $90 $160
Total Net Assets........ $50 $62 $74 $121
</TABLE>
- --------
(1) The example should not be considered a representation of future expenses.
The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Fund's actual rate of return may be greater
or less than the hypothetical 5% return shown in the example.
(2) Assumes reimbursement of fees and expenses of .25% of average daily total
net assets in year 6, .20% in year 7, .15% in year 8, .10% in year 9 and
.05% in year 10. Nuveen Advisory has not agreed to reimburse the Fund for
any portion of its fees and expenses beyond July 31, 2009.
8
<PAGE>
THE FUND
The Fund is a recently organized, closed-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Massachusetts business
trust on December 1, 1998, pursuant to a Declaration of Trust governed by the
laws of the Commonwealth of Massachusetts (the "Declaration"). As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is (800) 257-8787. The Fund is designed for individual
investors who are residents of California for tax purposes.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the over-allotment option in
full) after payment of the estimated organization and offering costs. Nuveen
has agreed to pay all organizational expenses and offering costs (other than
sales load) that exceed $0.02 per Common Share. The Fund will invest the net
proceeds of the offering in accordance with the Fund's investment objectives
and policies as stated below. It is presently anticipated that the Fund will
be able to invest substantially all of the net proceeds in municipal bonds
that meet those investment objectives and policies within three months after
the completion of the offering. Pending such investment, it is anticipated
that the proceeds will be invested in short-term, tax-exempt securities.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's investment objectives are
. to provide current income exempt from regular federal and California
income tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes
are underrated or undervalued or that represent municipal market sectors
that are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered
9
<PAGE>
undervalued. The Fund's investment in underrated or undervalued municipal
bonds will be based on Nuveen Advisory's belief that their yield is higher
than that available on bonds bearing equivalent levels of interest rate risk,
credit risk and other forms of risk, and that their prices will ultimately
rise (relative to the market) to reflect their true value. The Fund attempts
to increase its portfolio value relative to the municipal bond market by
prudent selection of municipal bonds regardless of the direction the market
may move. Any capital appreciation realized by the Fund will generally result
in the distribution of taxable capital gains to Common Shareholders.
The Fund will invest its net assets in a diversified portfolio of municipal
bonds that are exempt from regular federal and California income tax. Under
normal market conditions, the Fund expects to be fully invested (at least 95%
of its assets) in such tax-exempt municipal bonds. The Fund will invest at
least 80% of its net assets in investment grade quality municipal bonds.
Investment grade quality means that such bonds are rated, at the time of
investment, within the four highest grades (Baa or BBB or better by Moody's,
S&P or Fitch) or are unrated but judged to be of comparable quality by Nuveen
Advisory. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch
or that are unrated but judged to be of comparable quality by Nuveen Advisory.
Bonds of below investment grade quality (Ba/BB or below) are commonly referred
to as junk bonds. Bonds of below investment grade quality are regarded as
having predominately speculative characteristics with respect to capacity to
pay interest and repay principal. The foregoing credit quality policies apply
only at the time a security is purchased, and the Fund is not required to
dispose of a security in the event that a rating agency downgrades its
assessment of the credit characteristics of a particular issue. In determining
whether to retain or sell such a security, Nuveen Advisory may consider such
factors as Nuveen Advisory's assessment of the credit quality of the issuer of
such security, the price at which such security could be sold and the rating,
if any, assigned to such security by other rating agencies. A general
description of Moody's, S&P's and Fitch's ratings of municipal bonds is set
forth in Appendix A to the Statement of Additional Information. See "Municipal
Bonds--Special Considerations Relating to California Municipal Bonds" below
for a general description of the economic and credit characteristics of
municipal issuers in California. The Fund may also invest in securities of
other open- or closed-end investment companies that invest primarily in
municipal bonds of the types in which the Fund may invest directly. See "--
Other Investment Companies" and "--Initial Portfolio Composition."
The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of
those securities. Although the insurance feature reduces certain financial
risks, the premiums for insurance and the higher market price paid for insured
obligations may reduce the Fund's income. Insurance generally will be obtained
from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P
or Fitch. The insurance feature does not guarantee the market value of the
insured obligations or the net asset value of the Common Shares.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep the Fund's cash fully invested, including the period
during which the net proceeds of the offering are being invested, the Fund may
invest up to 100% of its net assets in short-term investments including high
quality, short-term securities that may be either tax-exempt or taxable. The
Fund intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Investment in taxable short-term investments
would result in a portion of your dividends being subject to regular federal
and California income taxes. For more information, see the Statement of
Additional Information.
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<PAGE>
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
Shares voting together as a single class, and of the holders of a "majority of
the outstanding" MuniPreferred Shares voting as a separate class. A "majority
of the outstanding," means (i) 67% or more of the shares present at a meeting,
if the holders of more than 50% of the shares are present or represented by
proxy, or (ii) more than 50% of the shares, whichever is less. See
"Description of Shares--MuniPreferred Shares--Voting Rights" and the Statement
of Additional Information under "Description of Shares--MuniPreferred Shares--
Voting Rights" for additional information with respect to the voting rights of
holders of MuniPreferred Shares.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gains distributions will be subject to capital gains taxes. See "Tax Matters."
Municipal Bonds
General. Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects (such as roads or public
buildings), to pay general operating expenses, or to refinance outstanding
debt. Municipal bonds may also be issued for private activities, such as
housing, medical and educational facility construction, or for privately owned
industrial development and pollution control projects. General obligation
bonds are backed by the full faith and credit, or taxing authority, of the
issuer and may be repaid from any revenue source; revenue bonds may be repaid
only from the revenues of a specific facility or source. The Fund also may
purchase municipal bonds that represent lease obligations. These carry special
risks because the issuer of the bonds may not be obligated to appropriate
money annually to make payments under the lease. In order to reduce this risk,
the Fund will only purchase municipal bonds representing lease obligations
where Nuveen Advisory believes the issuer has a strong incentive to continue
making appropriations until maturity.
The municipal bonds in which the Fund will invest are generally issued by
the State of California, a city in California, or a political subdivision of
such State or city, and pay interest that, in the opinion of bond counsel to
the issuer (or on the basis of other authority believed by Nuveen Advisory to
be reliable), is exempt from regular federal and California income tax,
although the interest may be subject to the federal alternative minimum tax.
The Fund may also invest in municipal bonds issued by United States
territories (such as Puerto Rico or Guam) that are exempt from regular federal
and California income tax.
The yields on municipal bonds are dependent on a variety of factors,
including prevailing interest rates and the condition of the general money
market and the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The market value of
municipal bonds will vary with changes in interest rate levels and as a result
of changing evaluations of the ability of their issuers to meet interest and
principal payments.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
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<PAGE>
Special Considerations Relating to California Municipal Bonds. Because the
Fund primarily purchases municipal bonds from California, shareholders may be
exposed to additional risks. In particular, the performance of the Fund is
susceptible to various statutory, political and economic factors unique to
California. Some of these factors, including the State budget process, the
State's economy, and voter initiatives, may weaken or jeopardize the ability
of California municipal bond issuers to pay principal or interest on their
bonds. As a result, the Fund's shares may fluctuate more widely in value than
those of a fund investing in municipal bonds from a number of different
states. For more information, see the Statement of Additional Information.
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15 to 45 days of the trade date. This type of transaction may involve
an element of risk because no interest accrues on the bonds prior to
settlement and, since bonds are subject to market fluctuations, the value of
the bonds at time of delivery may be less (or more) than cost. A separate
account of the Fund will be established with its custodian consisting of cash,
cash equivalents, or liquid securities having a market value at all times at
least equal to the amount of the commitment.
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other
open- or closed-end investment companies that invest primarily in municipal
bonds of the types in which the Fund may invest directly. The Fund generally
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the
Fund receives the proceeds of the offering of its Common Shares or
MuniPreferred Shares, or during periods when there is a shortage of
attractive, high-yielding municipal bonds available in the market. As a
stockholder in an investment company, the Fund will bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Common Shareholders would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. Nuveen
Advisory will take expenses into account when evaluating the investment merits
of an investment in the investment company relative to available municipal
bond investments. In addition, the securities of other investment companies
may also be leveraged and will therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks", the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
85% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades of
the investment grade category or are unrated but judged to be of comparable
quality by Nuveen Advisory (approximately 50% in Aaa/AAA; 15% in A; 20% in
Baa/BBB). The Fund will generally select obligations which may not be redeemed
at the option of the issuer for approximately seven to nine years from the
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<PAGE>
date of purchase by the Fund. See the Statement of Additional Information
under "Certain Trading Strategies of the Fund--Portfolio Trading and Turnover
Rate." Subject to market availability, the Fund would likely seek to invest
approximately 15% of its initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade (Ba/BB or B) or that
are unrated but judged to be of comparable quality by Nuveen Advisory. See
"The Fund's Investments--Investment Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Approximately one to three months after the completion of the offering of
the Common Shares (subject to market conditions), the Fund intends to offer
MuniPreferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares. The MuniPreferred
Shares have complete priority upon distribution of assets over the Common
Shares. The issuance of MuniPreferred Shares will leverage the Common Shares.
Leverage involves special risks. There is no assurance that the Fund's
leveraging strategy will be successful. Although the timing and other terms of
the offering and the terms of the MuniPreferred Shares will be determined by
the Fund's Board of Trustees, the Fund expects to invest the proceeds of the
MuniPreferred Shares offering in long-term municipal bonds. Long-term
municipal bond rates of return are typically, although not always, higher than
shorter-term municipal bond rates of return. The MuniPreferred Shares will pay
dividends based on shorter-term rates (which would be redetermined
periodically by an auction process). So long as the Fund's portfolio is
invested in securities that provide a higher rate of return than the dividend
rate of the MuniPreferred Shares (after taking expenses into consideration),
the leverage will cause you to receive a higher current rate of return than if
the Fund were not leveraged.
Changes in the value of the Fund's bond portfolio (including bonds bought
with the proceeds of the MuniPreferred Shares offering) will be borne entirely
by the Common Shareholders. If there is a net decrease (or increase) in the
value of the Fund's investment portfolio, the leverage will decrease (or
increase) the net asset value per Common Share to a greater extent than if the
Fund were not leveraged. During periods in which the Fund is using leverage,
the fees paid to Nuveen Advisory for advisory services will be higher than if
the Fund did not use leverage because the fees paid will be calculated on the
basis of the Fund's total net assets, including the proceeds from the issuance
of MuniPreferred Shares.
For tax purposes, the Fund is currently required to allocate net capital
gains and other taxable income, if any, between the Common Shares and
MuniPreferred Shares in proportion to total distributions paid to each class
for the year in which the net capital gains or other taxable income is
realized. If net capital gains or other taxable income is allocated to
MuniPreferred Shares (instead of solely tax-exempt income), the Fund will
likely have to pay higher total dividends to MuniPreferred Shareholders or
make special payments to MuniPreferred Shareholders to compensate them for the
increased tax liability. This would reduce the total amount of dividends paid
to the Common Shareholders, but would increase the portion of the dividend
that is tax-exempt. On an after-tax basis, Common Shareholders may still be
better off than if they had been allocated all of the Fund's net capital gains
or other taxable income (resulting in a higher amount of total dividends), but
received a lower amount of tax-exempt income. If the increase in dividend
payments or the special payments to MuniPreferred Shareholders are not
entirely offset by a reduction in the tax liability of, and an increase in the
tax-exempt dividends received by, the Common Shareholders, the advantage of
the Fund's leveraged structure to Common Shareholders will be reduced.
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<PAGE>
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act" or the "1940 Act"), the Fund is not permitted to issue preferred
shares unless immediately after such issuance the value of the Fund's total
net assets is at least 200% of the liquidation value of the outstanding
preferred shares (i.e., such liquidation value may not exceed 50% of the
Fund's total net assets). In addition, the Fund is not permitted to declare
any cash dividend or other distribution on its Common Shares unless, at the
time of such declaration, the value of the Fund's total net assets is at least
200% of such liquidation value. If MuniPreferred Shares are issued, the Fund
intends, to the extent possible, to purchase or redeem MuniPreferred Shares
from time to time to the extent necessary in order to maintain coverage of any
MuniPreferred Shares of at least 200%. If the Fund has MuniPreferred Shares
outstanding, two of the Fund's Trustees will be elected by the holders of
MuniPreferred Shares, voting separately as a class. The remaining Trustees of
the Fund will be elected by holders of Common Shares and MuniPreferred Shares
voting together as a single class. In the event the Fund failed to pay
dividends on MuniPreferred Shares for two years, MuniPreferred Shares holders
would be entitled to elect a majority of the Trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of
one or more rating agencies which may issue ratings for MuniPreferred Shares
issued by the Fund. These guidelines may impose asset coverage or Fund
composition requirements that are more stringent than those imposed on the
Fund by the Investment Company Act. It is not anticipated that these covenants
or guidelines will impede Nuveen Advisory from managing the Fund's portfolio
in accordance with the Fund's investment objectives and policies.
The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
Assuming that the MuniPreferred Shares will represent approximately 35% of
the Fund's capital and pay dividends at an annual average rate of 2.65%, the
income generated by the Fund's portfolio (net of estimated expenses) must
exceed .93% in order to cover such dividend payments and other expenses
specifically related to the MuniPreferred Shares. Of course, these numbers are
merely estimates, used for illustration. Actual MuniPreferred Share dividend
rates will vary frequently and may be significantly higher or lower than the
rate estimated above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative
of the investment portfolio returns experienced or expected to be experienced
by the Fund. The table further reflects the issuance of MuniPreferred Shares
representing 35% of the Fund's total capital, a 4.69% yield on the Fund's
investment portfolio, net of expenses, and the Fund's currently projected
annual MuniPreferred Share dividend rate of 2.65%.
See "Risks" and "MuniPreferred Shares and Leverage."
<TABLE>
<S> <C> <C> <C> <C> <C>
Components of Portfolio Return
Net Income............................ 4.69% 4.69% 4.69% 4.69% 4.69%
Capital (Loss) or Gain................. (14.69)% (9.69)% (4.69)% 0.31% 5.31%
Assumed Portfolio Total Return........... (10.00)% (5.00)% (0.00)% 5.00% 10.00%
Common Share Dividends................. 5.79% 5.79% 5.79% 5.79% 5.79%
Common Share Capital Gain/(Loss)....... (22.60)% (14.91)% (7.22)% .48% 8.17%
Common Share Total Return................ (16.81)% (9.12)% (1.43)% 6.27% 13.96%
</TABLE>
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<PAGE>
Common Share total return is composed of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on MuniPreferred
Shares) and gains or losses on the value of the securities the Fund owns. As
required by the Securities and Exchange Commission rules, the table assumes
that the Fund is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0%, the Fund must
assume that the tax-exempt interest it receives on its municipal bond
investments is entirely offset by losses in the value of those bonds.
Unless and until MuniPreferred Shares are issued, the Common Shares will
not be leveraged and this section will not apply.
RISKS
The net asset value of the Common Shares will fluctuate with and be
affected by, among other things, interest rate risk, credit risk, reinvestment
risk and leverage risk, and an investment in Common Shares will be subject to
market discount risk, inflation risk, municipal bond market risk and "Year
2000" risk, each of which is more fully described below.
Newly Organized. The Fund is a newly organized, diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value.
Interest Rate Risk. Interest rate risk is the risk that bonds (and the
Fund's net assets) will decline in value because of changes in interest rates.
Generally, municipal bonds will decrease in value when interest rates rise and
increase in value when interest rates decline. This means that the net asset
value of the Common Shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Fund's municipal bond holdings. The
value of the longer-term bonds in which the Fund generally invests fluctuates
more in response to changes in interest rates than does the value of shorter-
term bonds. Because the Fund will invest primarily in long-term bonds, the
Common Share net asset value and market price per share will fluctuate more in
response to changes in market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund's use of leverage, as described
below, will tend to increase Common Share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond
will become unable to meet its obligation to make interest and principal
payments. In general, lower rated municipal bonds carry a greater degree of
risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact to the Fund's net asset value or
dividends. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds
rated Ba/BB or B are regarded as having predominately speculative
characteristics with respect to capacity to pay interest and repay principal,
and these bonds are commonly referred to as junk bonds. The prices of these
lower grade bonds are more sensitive to negative developments, such as a
decline in the issuer's revenues or a general economic downturn, than are the
prices of higher grade securities.
The Fund intends to invest substantially all its assets in municipal bonds
issued by the State of California or a municipality therein and by other
issuers located in California. As a result, the Fund bears the investment risk
that economic, political or regulatory changes could hurt many municipal
15
<PAGE>
bond issuers in California, which would likely reduce the value of the Fund's
bond portfolio and a Common Shareholder's investment in the Fund. For a
discussion of economic and other conditions in the State of California, see
"The Fund's Investments--Municipal Bonds."
Municipal Bond Market Risk. Investing in the municipal bond market involves
certain risks. The amount of public information available about the municipal
bonds in the Fund's portfolio is generally less than that for corporate
equities or bonds, and the investment performance of the Fund may therefore be
more dependent on the analytical abilities of Nuveen Advisory than would be a
stock fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in which the Fund may invest,
also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Fund's ability to sell its bonds at
attractive prices.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the proceeds
from matured, traded or called bonds at market interest rates that are below
the portfolio's current earnings rate. A decline in income could affect the
Common Shares' market price or their overall return.
Leverage Risk. Leverage risk is the risk associated with the issuance of
the MuniPreferred Shares to leverage the Common Shares. There is no assurance
that the Fund's leveraging strategy will be successful. Once the MuniPreferred
Shares are issued, the net asset value and market value of Common Shares will
be more volatile, and the yield to Common Shareholders will tend to fluctuate
with changes in the shorter-term dividend rates on the MuniPreferred Shares.
If the dividend rate on the MuniPreferred Shares approaches the net rate of
return on the Fund's investment portfolio, the benefit of leverage to Common
Shareholders would be reduced. If the dividend rate on the MuniPreferred
Shares exceeds the net rate of return on the Fund's portfolio, the leverage
will result in a lower rate of return to Common Shareholders than if the Fund
were not leveraged. In addition, the Fund will pay (and Common Shareholders
will bear) any costs and expenses relating to the issuance and ongoing
maintenance of the MuniPreferred Shares. Accordingly, the Fund cannot assure
you that the issuance of MuniPreferred Shares will result in a higher yield or
return to Common Shareholders.
Similarly, any decline in the net asset value of the Fund's investments
will be borne entirely by Common Shareholders. Therefore, if the market value
of the Fund's portfolio declines, the leverage will result in a greater
decrease in net asset value to Common Shareholders than if the Fund were not
leveraged. Such greater net asset value decrease will also tend to cause a
greater decline in the market price for the Common Shares. The Fund might be
in danger of failing to maintain the required 200% asset coverage or of losing
its expected AAA/aaa ratings on the MuniPreferred Shares or, in an extreme
case, the Fund's current investment income might not be sufficient to meet the
dividend requirements on the MuniPreferred Shares. In order to counteract such
an event, the Fund might need to liquidate investments in order to fund a
redemption of some or all of the MuniPreferred Shares. Liquidation at times of
low municipal bond prices will tend to reduce the net asset value of the
Common Shares and to reduce returns to Common Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate
the increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
Common Shareholders. Changes in the future direction of interest rates are
very difficult to predict accurately. If the Fund were to reduce leverage
based on a prediction about future changes to interest rates, and that
prediction turns out to be incorrect, the reduction in leverage would likely
operate to reduce the income
16
<PAGE>
and/or total returns to Common Shareholders relative to the circumstance where
the Fund had not reduced leverage. The Fund may decide that this risk
outweighs the likelihood of achieving the desired reduction to volatility in
income and share price if the predictions were to turn out to be correct, and
determine not to reduce leverage as described above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation decreases
the value of money. As inflation increases, the real value of the Common
Shares and distributions can decline. In addition, during any periods of
rising inflation, MuniPreferred Share dividend rates would likely increase,
which would tend to further reduce returns to Common Shareholders.
"Year 2000" Risk. "Year 2000" risk is the risk that the computer systems
used by Nuveen Advisory, its service providers and industry wide information
and transaction clearinghouses to manage the Fund's investments and process
shareholder transactions may not be able to correctly process activity
occurring in the year 2000 because of the way computers historically have
stored dates. 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 their credit ratings.
In addition, it is possible that the markets for municipal securities in
which the Fund invests may be detrimentally affected by computer failures
throughout the financial services industry beginning on or before January 1,
2000. Improperly functioning trading systems may result in settlement problems
and liquidity issues. In addition, corporate and governmental data processing
errors may result in production problems for individual issuers and overall
economic uncertainties. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in financial statements. Accordingly, the Fund's investments may be adversely
affected. The statements above are subject to the Year 2000 Information and
Readiness Disclosure Act, which may limit the legal rights regarding the use
of such statements in the case of a dispute.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and MuniPreferred Shares voting
together as a single class, and the approval of the holders of a majority of
the MuniPreferred Shares voting as a separate class. The Fund may not:
. Invest more than 25% of total fund assets in securities of issuers in any
one industry; except that this limitation does not apply to municipal bonds
backed by the assets and revenues of governments or political subdivisions
of governments; and
. Invest more than 5% of total fund assets in securities of any one issuer,
except that this limitation does not apply to bonds issued by the United
States Government, its agencies and instrumentalities or to the investment
of 25% of its total assets.
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<PAGE>
The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above in order to obtain and maintain
ratings from Moody's or S&P on the MuniPreferred Shares that it intends to
issue. The Fund does not anticipate that such guidelines would have a material
adverse effect on the Fund's Common Shareholders or the Fund's ability to
achieve its investment objectives. See "Investment Objectives and Policies--
Investment Restrictions" in the Statement of Additional Information for
information about these guidelines and additional fundamental and non-
fundamental investment policies of the Fund.
Quality Investments
The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated by national rating agencies within the four highest
grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but
judged to be of comparable quality by Nuveen Advisory.
Limited Issuance of MuniPreferred Shares
Under the 1940 Act, the Fund could issue MuniPreferred Shares having a
total liquidation value (original purchase price of the shares being
liquidated plus any accrued and unpaid dividends ) of up to one-half of the
value of the total net assets of the Fund. If the total liquidation value of
the MuniPreferred Shares was ever more than one-half the value of the Fund's
total net assets, the Fund would not be able to declare dividends on the
Common Shares until the liquidation value, as a percentage of the Fund's
assets, was reduced. The Fund intends to issue MuniPreferred Shares
representing about 35% of the Fund's total capital at the time of issuance, if
the Fund sells all the Common Shares and MuniPreferred Shares discussed in
this Prospectus. This higher than required margin of net asset value provides
a cushion against later fluctuations in the value of the Fund's portfolio and
will subject Common Shareholders to less income and net asset value volatility
than if the Fund were more leveraged. The Fund intends to purchase or redeem
MuniPreferred Shares, if necessary, to keep the liquidation value of the
MuniPreferred Shares below one-half of the value of the Fund's total net
assets.
Management of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short-term rates increase or market
conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity of
its investment portfolio (by investing in short-term, high quality securities)
or may extend the maturity of outstanding MuniPreferred Shares. The Fund may
also attempt to reduce the leverage by redeeming or otherwise purchasing
MuniPreferred Shares. As explained above under "Risks--Leverage Risk", the
success of any such attempt to limit leverage risk depends on Nuveen
Advisory's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund may
never attempt to manage its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued MuniPreferred Shares or MuniPreferred
Shares that the Fund previously issued but later repurchased.
Currently, the Fund may not invest in inverse floating rate securities,
which are securities that pay interest at rates that vary inversely with
changes in prevailing short-term tax-exempt interest rates and which represent
a leveraged investment in an underlying municipal bond. This restriction is a
non-fundamental policy of the Fund that may be changed by vote of the Fund's
Board of Trustees.
18
<PAGE>
Hedging Strategies
The Fund may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of Nuveen Advisory,
correlate with the prices of the Fund's investments. Successful implementation
of most hedging strategies would generate taxable income, and the Fund has no
present intention to use these strategies.
Year 2000 Issues
Nuveen Advisory is working with the Fund's service providers and
clearinghouses to adapt their systems to address the Year 2000 issue. Nuveen
Advisory and the Fund expect, but there can be no assurance, that the
necessary work will be completed on a timely basis. Nuveen Advisory is also
requesting information from municipal issuers so that issuers' Year 2000
readiness, if made available, can be taken into account in making investment
decisions. However, there can be no assurance that the requested information
will be provided to Nuveen Advisory, or that issuers of municipal bonds in the
Fund's portfolio will begin or complete the work necessary to address any Year
2000 issues on a timely basis.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined
in the 1940 Act) and six of whom are not "interested persons." The names and
business addresses of the trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are
set forth under "Management of the Fund" in the Statement of Additional
Information.
Investment Adviser
Nuveen Advisory, 333 West Wacker Drive, Chicago, Illinois 60606, serves as
the investment adviser to the Fund. In this capacity, Nuveen Advisory is
responsible for the selection and on-going monitoring of the municipal bonds
in the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and administrative services. Nuveen
Advisory serves as investment adviser to investment portfolios with more than
$35 billion in assets under management. See the Statement of Additional
Information under "Management of the Fund--Investment Adviser."
Overall investment management strategy and operating policies for the Fund
are set by the Investment Management Committee of John Nuveen & Co.
Incorporated ("Nuveen"), subject to the ultimate oversight and supervision of
the Board of Trustees. The Investment Management Committee is comprised of
several principal executive officers and portfolio managers of Nuveen and
Nuveen Advisory. Day to day 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. William M. Fitzgerald is the portfolio manager of the
Fund and will provide daily oversight for, and execution of, the Fund's
investment activities. Mr. Fitzgerald currently manages eleven closed-end
municipal bond funds for Nuveen Advisory with assets aggregating more than $5
billion. He is a Chartered Financial Analyst and a Vice President of Nuveen
Advisory.
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<PAGE>
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates
have over $60 billion of net assets under management or surveillance. Nuveen
is a subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
Investment Management Agreement
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided
by Nuveen Advisory an annual management fee, payable on a monthly basis,
according to the following schedule:
<TABLE>
<CAPTION>
Daily Total Net Assets* Management Fee
----------------------- --------------
<S> <C>
For the first $125 million................................. .6500%
For the next $125 million.................................. .6375%
For the next $250 million.................................. .6250%
For the next $500 million.................................. .6125%
For the next $1 billion.................................... .6000%
For assets over $2 billion................................. .5750%
</TABLE>
- --------
*Including net assets attributable to MuniPreferred Shares.
In addition to the fee of Nuveen Advisory, the Fund pays all other costs
and expenses of its operations, including compensation of its trustees (other
than those affiliated with Nuveen Advisory), custodian, transfer and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
For the first ten years of the Fund's operation, Nuveen Advisory has agreed
to reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
Year Ending Percentage
July 31, Reimbursed
- ----------- ----------
<S> <C>
1999*............ .30%
2000............. .30%
2001............. .30%
2002............. .30%
2003............. .30%
2004............. .30%
</TABLE>
<TABLE>
<CAPTION>
Year Ending Percentage
July 31, Reimbursed
- ----------- ----------
<S> <C>
2005............. 0.25%
2006............. 0.20%
2007............. 0.15%
2008............. 0.10%
2009............. 0.05%
</TABLE>
- --------
*From the commencement of operations.
Nuveen Advisory has not agreed to reimburse the Fund for any portion of its
fees and expenses beyond July 31, 2009.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. eastern time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated by taking the
fair value of the Fund's total assets, including interest or dividends accrued
but not yet collected, less all liabilities, and dividing by the total number
of shares outstanding. The result, rounded to the nearest cent, is the net
asset value per share.
20
<PAGE>
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are
valued at market value. The prices of municipal bonds are provided by a
pricing service and based on the mean between the bid and asked price. When
price quotes are not readily available (which is usually the case for
municipal bonds), the pricing service establishes a fair market value based on
prices of comparable municipal bonds. All valuations are subject to review by
the Fund's Board of Trustees or its delegate, Nuveen Advisory.
DISTRIBUTIONS
Commencing with the first dividend, the Fund intends to make regular
monthly cash distributions to Common Shareholders at a rate that reflects the
past and projected performance of the Fund. Distributions can only be made
from net investment income after paying any accrued dividends to MuniPreferred
Shareholders. The Fund's ability to maintain a level dividend rate will depend
on a number of factors, including dividends payable on the MuniPreferred
Shares. The net income of the Fund consists of all interest income accrued on
portfolio assets less all expenses of the Fund. Expenses of the Fund are
accrued each day. Over time, all the net investment income of the Fund will be
distributed. At least annually, the Fund also intends to distribute net
capital gains and ordinary taxable income, if any, after paying any accrued
dividends or making any liquidation payments to MuniPreferred Shareholders.
Initial distributions to Common Shareholders are expected to be declared
approximately 45 days, and paid approximately 60 to 90 days, from the
completion of this offering, depending on market conditions. Although it does
not now intend to do so, the Board of Trustees may change the Fund's dividend
policy, and the amount or timing of the distributions, based on a number of
factors, including the amount of the Fund's undistributed net investment
income and historical and projected investment income and the amount of the
expenses and dividend rates on the outstanding MuniPreferred Shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would
be available to supplement future distributions. As a result, the
distributions paid by the Fund for any particular monthly period may be more
or less than the amount of net investment income actually earned by the Fund
during the period. Undistributed net investment income will be added to the
Fund's net asset value and, correspondingly, distributions from undistributed
net investment income will be deducted from the Fund's net asset value.
DIVIDEND REINVESTMENT PLAN
You may elect to have all dividends or capital gains distributions on your
Common Shares, or both, automatically reinvested by Chase Global Funds
Services Company, as agent for the Common Shareholders (the "Plan Agent"), in
additional Common Shares under the Dividend Reinvestment Plan (the "Plan").
You may elect to participate in the Plan by completing the Dividend
Reinvestment Plan Application Form. If you do not participate, you will
receive all distributions in cash paid by check mailed directly to you by
Chase Global Funds Services Company as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
21
<PAGE>
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the dividend payment
date. Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will
be held by the Plan Agent in non-certificated form. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that
you do not have to pay income taxes due upon receiving dividends and
distributions.
The Fund reserves the right to amend or terminate the Plan if change seems
desirable to the Board of Trustees. There is no direct service charge to
participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained from Chase Global Funds Services
Company, P.O. Box 5186, Bowling Green Station, New York, NY 10275-0672
(regular mail) or 4 New York Plaza, 6th Floor, New York, NY 10004 (for
overnight courier), (800) 257-8787.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares, par value $.01 per share. All Common Shares have equal rights to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will
have no preemptive or conversion rights or rights to cumulative voting.
Whenever MuniPreferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued
dividends on MuniPreferred Shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to MuniPreferred Shares would be at
least 200% after giving effect to the distributions. See "MuniPreferred
Shares" below.
22
<PAGE>
The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
by the amount of the sales load and organization and offering expenses paid by
the Fund. Nuveen has agreed to pay organizational expenses and offering costs
(other than sales load) that exceed $0.02 per Common Share. See "Use of
Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade
on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than
net asset value and during other periods have traded at prices lower than net
asset value. Because the market value of the Fund's Common Shares may be
influenced by such factors as dividend levels (which are in turn affected by
expenses), call protection, dividend stability, portfolio credit quality, net
asset value, relative demand for and supply of such shares in the market,
general market and economic conditions, and other factors beyond the control
of the Fund, the Fund cannot assure you that Common Shares will trade at a
price equal to or higher than net asset value in the future. The Common Shares
are designed primarily for long-term investors, and investors in the Common
Shares should not view the Fund as a vehicle for trading purposes. See
"MuniPreferred Shares and Leverage" and the Statement of Additional
Information under "Repurchase of Fund Shares; Conversion to Open-End Fund."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees, by action of the
Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the MuniPreferred Shares are issued)
approximately three to six months after completion of the offering of Common
Shares. Any such decision is subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of MuniPreferred Shares is likely to achieve the benefits to the
Common Shareholders described in this Prospectus. Although the terms of the
MuniPreferred Shares will be determined by the Board of Trustees (subject to
applicable law and the Fund's Declaration) if and when it authorizes a
MuniPreferred Shares offering, the Board has determined that the MuniPreferred
Shares at least initially would likely pay cumulative dividends at rates
determined over relatively shorter-term periods (such as 7 days), by providing
for the periodic redetermination of the dividend rate through an auction or
remarketing procedure. The Board of Trustees has indicated that the preference
on distribution, liquidation preference, voting rights and redemption
provisions of the MuniPreferred Shares will likely be as stated below.
23
<PAGE>
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred shares is more than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such
dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and MuniPreferred Shares discussed in this
Prospectus, the liquidation value of the MuniPreferred Shares is expected to
be approximately 35% of the value of the Fund's total net assets. The Fund
intends to purchase or redeem MuniPreferred Shares, if necessary, to keep that
fraction below one-half.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.
Voting Rights. MuniPreferred Shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the Statement of Additional Information and except as
otherwise required by applicable law, holders of MuniPreferred Shares will
vote together with Common Shareholders as a single class.
Holders of MuniPreferred Shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees. The remaining trustees will be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. In the unlikely event that two full years of
accrued dividends are unpaid on the MuniPreferred Shares, the holders of all
outstanding MuniPreferred Shares, voting as a separate class, will be entitled
to elect a majority of the Fund's trustees until all dividends in arrears have
been paid or declared and set apart for payment. In order for the Fund to take
certain actions or enter into certain transactions, a separate class vote of
holders of MuniPreferred Shares will be required, in addition to the single
class vote of the holders of MuniPreferred Shares and Common Shares. See the
Statement of Additional Information under "Description of Shares--
MuniPreferred Shares--Voting Rights."
Redemption, Purchase and Sale of MuniPreferred Shares. The terms of the
MuniPreferred Shares may provide that they are redeemable at certain times, in
whole or in part, at the original purchase price per share plus accumulated
dividends. The terms may also state that the Fund may tender for or purchase
MuniPreferred Shares and resell any shares so tendered. Any redemption or
purchase of MuniPreferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage. See "MuniPreferred Shares and Leverage."
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of MuniPreferred Shares. If the Board of
Trustees determines to authorize such an offering, the terms of the
MuniPreferred Shares may be the same as, or different from, the terms
described above, subject to applicable law and the Fund's Declaration.
24
<PAGE>
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each agreement, obligation or instrument entered into or executed
by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is very remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of
at least two-thirds of the Common Shares and MuniPreferred Shares, voting
together as a single class, except as described below, to authorize (1) a
conversion of the Fund from a closed-end to an open-end investment company,
(2) a merger or consolidation of the Fund, or a series or class of the Fund,
with any corporation, association, trust or other organization or a
reorganization or recapitalization of the Fund, or a series or class of the
Fund, (3) a sale, lease or transfer of all or substantially all of the Fund's
assets (other than in the regular course of the Fund's investment activities),
(4) in certain circumstances, a termination of the Fund, or a series or class
of the Fund or (5) removal of trustees, and then only for cause, unless such
transaction has already been authorized by the affirmative vote of two-thirds
of the total number of trustees fixed in accordance with the Declaration or
the By-laws, in which case the affirmative vote of the holders of at least a
majority of the Fund's Common Shares and MuniPreferred Shares outstanding at
the time, voting together as a single class, is required, provided, however,
that where only a particular class or series is affected, only the required
vote by the applicable class or series will be required. None of the foregoing
may be amended except by the vote of at least two-thirds of the Common Shares
and MuniPreferred Shares, voting together as a single class. In the case of
the conversion of the Fund to an open-end investment company, or in the case
of any of the foregoing transactions constituting a plan of reorganization
which adversely affects the holders of MuniPreferred Shares, the action in
question will also require the affirmative vote of the holders of at least
two-thirds of the Fund's MuniPreferred Shares outstanding at the time, voting
as a separate class, or, if such action has been authorized by the affirmative
vote of two-thirds of the total number of trustees fixed in accordance with
the Declaration or the By-laws, the affirmative vote of the holders of at
least a majority of the Fund's MuniPreferred Shares outstanding at the time,
voting as a separate class. The votes required to approve the conversion of
the Fund from a closed-end to an open-end investment company or to approve
transactions constituting a plan of reorganization which adversely affects the
holders of MuniPreferred Shares are higher than those required by the 1940
Act. The Board of Trustees believes that the provisions of the Declaration
relating to such higher votes are in the best interest of the Fund and its
shareholders. See the Statement of Additional Information under "Certain
Provisions in the Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its
25
<PAGE>
management regarding the price to be paid and facilitating the continuity of
the Fund's investment objectives and policies. The Board of Trustees of the
Fund has considered the foregoing anti-takeover provisions and concluded that
they are in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers will actually
reduce market discount.
If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
would no longer be listed on the New York Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less any redemption charge that is in effect at the time of redemption.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable
to the conversion of the Fund to an open-end company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a discount, the Board of Trustees may determine that,
in the interest of the Fund and its shareholders, no action should be taken.
See the Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the statement of additional information
provides general tax information related to an investment in the Common
Shares. Because tax laws are complex and often change, you should consult your
tax adviser about the tax consequences of an investment in the Fund.
26
<PAGE>
The Fund primarily invests in municipal bonds from issuers located in
California or in municipal bonds whose income is otherwise exempt from regular
federal and California income tax. Consequently, the regular monthly dividends
you receive will be exempt from regular federal and California income taxes. A
portion of these dividends, however, will likely be subject to the federal
alternative minimum tax ("AMT").
Although the Fund does not seek to realize taxable income or capital gains,
the Fund may realize and distribute taxable income or capital gains from time
to time as a result of the Fund's normal investment activities. The Fund will
distribute at least annually any taxable income or realized capital gains.
Distributions of net short-term gains are taxable as ordinary income.
Distributions of net long-term capital gains are taxable as long-term capital
gains regardless of how long you have owned your investment. Taxable dividends
do not qualify for a dividends received deduction if you are a corporate
shareholder.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the
source of investment income by state and the portion of income that is subject
to the AMT. You will receive this statement from the firm where you purchased
your Common Shares if you hold your investment in street name; the Fund will
send you this statement if you hold your shares in registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its earnings and to pay tax-free
dividends, the Fund must meet certain I.R.S. requirements that govern the
Fund's sources of income, diversification of assets and distribution of
earnings to shareholders. The Fund intends to meet these requirements. If the
Fund failed to do so, the Fund would be required to pay corporate taxes on its
earnings and all your distributions would be taxable as ordinary income. In
particular, in order for the Fund to pay tax-free dividends, at least 50% of
the value of the Fund's total assets must consist of tax-exempt obligations.
The Fund intends to meet this requirement. If the Fund failed to do so, it
would not be able to pay tax-free dividends and your distributions
attributable to interest received by the Fund from any source would be taxable
as ordinary income.
The Fund may be required to withhold 31% of certain of your dividends if
you have not provided the Fund with your correct taxpayer identification
number (normally your Social Security number), or if you are otherwise subject
to back-up withholding. If you receive Social Security benefits, you should be
aware that tax-free income is taken into account in calculating the amount of
these benefits that may be subject to federal income tax. If you borrow money
to buy Fund shares, you may not deduct the interest on that loan. Under I.R.S.
rules, Fund shares may be treated as having been bought with borrowed money
even if the purchase of the Fund shares cannot be traced directly to borrowed
money.
If you are subject to the AMT, a portion of your regular monthly dividends
may be taxable.
California Tax Matters
The Fund's regular monthly dividends will not be subject to California
personal income taxes to the extent they are paid out of income earned on
obligations that, when held by individuals, pay interest that is exempt from
taxation by California under California law (e.g., obligations of California
and its political subdivisions) or federal laws, so long as at the close of
each quarter of the Fund's taxable year at least 50 percent of the value of
the Fund's total assets consist of such obligations. The portion
27
<PAGE>
of the Fund's monthly dividends that is attributable to income other than as
described in the preceding sentence will be subject to the California income
taxes. The Fund expects to earn no or only a minimal amount of such non-exempt
income. Gain from the sale, exchange or other distribution of Common Shares
will be subject to the California personal income and franchise taxes. You
also will be subject to California personal income taxes to the extent the
Fund distributes any taxable income or realized capital gains, or if you sell
or exchange Common Shares and realize a capital gain on the transaction.
Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax adviser.
OTHER MATTERS
A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end
funds sponsored by Nuveen is currently pending in federal district court. The
plaintiffs allege that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' directors and Nuveen Advisory and various misrepresentations and
omissions in prospectuses and shareholder reports relating to the use of
leverage through the issuance and periodic auctioning of preferred stock and
the basis of the calculation and payment of management fees to Nuveen Advisory
and Nuveen. Plaintiffs also filed a motion to certify defendant and plaintiff
classes.
The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the
court granted most of the defendants' motion to dismiss and denied plaintiffs'
motion to certify defendant and plaintiff classes. The court dismissed all
claims against the funds, the funds' directors and Nuveen. The court dismissed
these claims without prejudice (which means that the plaintiffs can re-file
the claims if they can correct the defect that led to the claim being
dismissed) on the ground that the claims should have been brought as
derivative claims on behalf of the funds. The only remaining claim is brought
under Section 36(b) of the 1940 Act against Nuveen Advisory, and relates
solely to advisory fees Nuveen Advisory received from the six relevant funds.
While the Fund cannot assure you that the litigation will be decided in Nuveen
Advisory's favor, Nuveen Advisory believes a decision, if any, against the
defendants would have no material effect on the Fund, its Common Shares, or
the ability of Nuveen Advisory to perform its duties under the investment
management agreement.
28
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
Number of
Name Shares
- ---- ---------
<S> <C>
Salomon Smith Barney Inc..............................................
John Nuveen & Co. Incorporated........................................
BT Alex. Brown Incorporated...........................................
A.G. Edwards & Sons, Inc..............................................
PaineWebber Incorporated..............................................
Prudential Securities Incorporated....................................
Crowell, Weedon & Co..................................................
EVEREN Securities, Inc................................................
Gruntal & Co., L.L.C..................................................
Raymond James & Associates, Inc.......................................
Sutro & Co. Incorporated..............................................
Wedbush Morgan Securities Inc.........................................
---------
Total............................................................... 4,000,000
---------
</TABLE>
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Common Shares
(other than those covered by the over-allotment option described below) if
they purchase any of the Common Shares. The representatives have advised the
Fund that the Underwriters do not intend to confirm any sales to any accounts
over which they exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc., John Nuveen & Co.
Incorporated, BT Alex. Brown Incorporated, A.G. Edwards & Sons, Inc.,
PaineWebber Incorporated, Prudential Securities Incorporated, Crowell, Weedon
& Co., EVEREN Securities, Inc., Gruntal & Co., L.L.C., Raymond James &
Associates, Inc., Sutro & Co. Incorporated and Wedbush Morgan Securities Inc.
are acting as representatives, propose to offer some of the Common Shares
directly to the public at the public offering price set forth on the cover
page of this Prospectus and some of the Common Shares to certain dealers at
the public offering price less a concession not in excess of $0.45 per Common
Share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of per Common Share on sales to certain other dealers. If
all of the Common Shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
Investors must pay for any Common Shares purchased on or before , 1999. In
connection with this offering, Nuveen may perform clearing services without
charge for brokers and dealers for whom it regularly provides clearing
services that are participating in the offering as members of the selling
group.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to additional Common
Shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares approximately
proportionate to such Underwriter's initial purchase commitment.
29
<PAGE>
The Fund and Nuveen Advisory have agreed that, for a period of 180 days
from the date of this Prospectus, they will not, without the prior written
consent of Salomon Smith Barney Inc., on behalf of the Underwriters, dispose
of or hedge any Common Shares or any securities convertible into or
exchangeable for Common Shares. Salomon Smith Barney Inc. in its sole
discretion may release any of the securities subject to these agreements at
any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, Nuveen Advisory and the
representatives. There can be no assurance, however, that the price at which
the Common Shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after
this offering. The Common Shares have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
The Fund and Nuveen Advisory have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Fund has agreed to pay the Underwriters as partial reimbursement
of expenses incurred in connection with the offering. Nuveen has agreed to pay
all organizational expenses and offering costs (other than sales load) that
exceed $0.02 per share.
In connection with the requirements for listing the Fund's Common Shares on
the New York Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 2,000 beneficial owners in the
United States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading
in the Common Shares has commenced on the New York Stock Exchange. No
Underwriter is however, obligated to conduct market-making activities and any
such activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any market-
making activities undertaken by any Underwriter. This Prospectus is to be used
by any Underwriter in connection with the offering and, during the period in
which a prospectus must be delivered, with offers and sales of the Common
Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares at
a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Shares. A "covering transaction" is a bid for or purchase of the Common
Shares on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a
contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting syndicate and the Common
Shares purchased can be traced to a particular Underwriter or member of the
selling group, the underwriting syndicate may require the Underwriter or
selling group member in question to purchase the Common Shares in
30
<PAGE>
question at the cost price to the syndicate or may recover from (or decline to
pay to) the Underwriter or selling group member in question any or all
compensation (including, with respect to a representative, the applicable
syndicate management fee) applicable to the Common Shares in question. As a
result, an Underwriter or selling group member and, in turn, brokers may lose
the fees that they otherwise would have earned from a sale of the Common
Shares if their customer resells the Common Shares while the penalty bid is in
effect. The Underwriters are not required to engage in any of these
activities, and any such activities, if commenced, may be discontinued at any
time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of
any Underwriter to the Fund or Nuveen Advisory if, prior to delivery of and
payment for the Common Shares, (i) trading in securities generally on the New
York Stock Exchange shall have been suspended or materially limited, (ii)
additional material governmental restrictions not in force on the date of the
Underwriting Agreement have been imposed upon trading in securities generally
or a general moratorium on commercial banking activities in New York shall
have been declared by either federal or state authorities or (iii) any
outbreak or material escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, occurs, the effect of which is such as to make it, in the judgment
of the representatives, impracticable or inadvisable to commence or continue
the offering of the Common Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the
resale of the Common Shares by the Underwriters.
Representatives that sell at least a specified number of Common Shares will
share in the syndicate management fee based on the respective number of shares
sold by them.
The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act
as brokers while they are Underwriters.
John Nuveen & Co. Incorporated, one of the representatives of the
Underwriters, is the parent company of Nuveen Advisory.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. 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,
P.O. Box 5186, Bowling Green Station, New York, NY 10275-0672 (regular mail)
or 4 New York Plaza, 6th Floor, New York, NY 10004 (for overnight courier).
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd, Chicago, Illinois, and for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Bell, Boyd & Lloyd and Skadden, Arps, Slate, Meagher & Flom LLP
may rely as to certain matters of Massachusetts law on the opinion of Bingham
Dana LLP, Boston, Massachusetts and as to certain matters of California law on
the opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California.
31
<PAGE>
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Use of Proceeds.................................................... B-2
Investment Objectives and Policies................................. B-2
Investment Policies and Techniques................................. B-5
Other Investment Policies and Techniques........................... B-21
Management of the Fund............................................. B-23
Investment Adviser................................................. B-27
Portfolio Transactions............................................. B-28
Distributions...................................................... B-29
Description of Shares.............................................. B-30
Certain Provisions in the Declaration of Trust..................... B-33
Repurchase of Fund Shares; Conversion to Open-End Fund............. B-34
Tax Matters........................................................ B-36
Performance Related and Comparative Information.................... B-40
Experts............................................................ B-40
Additional Information............................................. B-40
Report of Independent Auditors..................................... B-41
Financial Statements............................................... B-42
Ratings of Investments (Appendix A)................................ A-1
Taxable Equivalent Yield Table (Appendix B)........................ B-1
Hedging Strategies and Risks (Appendix C).......................... C-1
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this Prospectus. The Fund
has not authorized anyone to provide you with different information. The Fund
is not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this Prospec-
tus is accurate as of any date other than the date on the front of this Pro-
spectus.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Summary of Fund Expenses................................................... 8
The Fund................................................................... 9
Use of Proceeds............................................................ 9
The Fund's Investments..................................................... 9
MuniPreferred Shares and Leverage.......................................... 13
Risks...................................................................... 15
How the Fund Manages Risk.................................................. 17
Management of the Fund..................................................... 19
Net Asset Value............................................................ 20
Distributions.............................................................. 21
Dividend Reinvestment Plan................................................. 21
Description of Shares...................................................... 22
Certain Provisions in the Declaration of Trust............................. 25
Repurchase of Common Shares; Conversion to Open-End Fund................... 26
Tax Matters................................................................ 26
Other Matters.............................................................. 28
Underwriting............................................................... 29
Custodian and Transfer Agent............................................... 31
Legal Opinions............................................................. 31
Table of Contents for the Statement of Additional Information.............. 32
</TABLE>
------------
Until 1999, all dealers that buy, sell or trade the Common Shares,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a pro-
spectus when acting as underwriters and with respect to their unsold allotments
or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
Nuveen California
Dividend Advantage
Municipal Fund
Common Shares
--------
PROSPECTUS
May , 1999
--------
Salomon Smith Barney
John Nuveen & Co.
Incorporated
BT Alex. Brown
A.G. Edwards & Sons, Inc.
PaineWebber Incorporated
Prudential Securities
Crowell, Weedon & Co.
EVEREN Securities, Inc.
Gruntal & Co.
Raymond James & Associates, Inc.
Sutro & Co. Incorporated
Wedbush Morgan Securities
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FRH-ACA-4-99
<PAGE>
The information in this Statement of Additional Information is not complete
and may be changed. No person may sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION--DATED APRIL 27, 1999
Nuveen California Dividend Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Nuveen California Dividend Advantage Municipal Fund (the "Fund") is a newly
organized, closed-end, diversified management investment company. On April 9,
1999, the name of the Fund was changed from Nuveen California Municipal
Advantage Fund to Nuveen California Dividend Advantage Municipal Fund. The
Fund's investment objective is to provide current income exempt from regular
federal and California income tax, and to enhance portfolio value relative to
the municipal bond market by investing in tax-exempt municipal bonds that the
the Fund's investment adviser believes are underrated or undervalued or that
represent municipal market sectors that are undervalued. This Statement of
Additional Information relating to Common Shares does not constitute a
prospectus, but should be read in conjunction with the Prospectus relating
thereto dated May __, 1999 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing Common Shares, and investors should obtain and read
the Prospectus prior to purchasing such shares. A copy of the Prospectus may be
obtained without charge by calling (800) 257-8787. You may also obtain a copy of
the Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Use of Proceeds.......................................................... B-2
Investment Objectives and Policies....................................... B-2
Investment Policies and Techniques....................................... B-5
Other Investment Policies and Techniques................................. B-21
Management of the Fund................................................... B-23
Investment Adviser....................................................... B-27
Portfolio Transactions................................................... B-28
Distributions............................................................ B-29
Description of Shares.................................................... B-30
Certain Provisions in the Declaration of Trust........................... B-33
Repurchase of Fund Shares; Conversion to Open-End Fund................... B-34
Tax Matters.............................................................. B-36
Performance Related and Comparative Information.......................... B-40
Experts.................................................................. B-40
Additional Information................................................... B-40
Report of Independent Auditors........................................... B-41
Financial Statements..................................................... B-42
Ratings of Investments (Appendix A)...................................... A-1
Taxable Equivalent Yield Table (Appendix B).............................. B-1
Hedging Strategies and Risks (Appendix C)................................ C-1
</TABLE>
This Statement of Additional Information is dated May __, 1999
<PAGE>
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$_______ ($_______ if the Underwriters exercise the over-allotment option in
full) after payment of organization and offering costs. Nuveen has agreed to pay
all organizational expenses and offering costs (other than sales load) that
exceed $0.02 per Common Share.
Pending investment in municipal bonds that meet the Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the Fund
may also purchase, as temporary investments, short-term taxable investments of
the type described under "Investment Objectives and Policies--Portfolio
Investments," the income on which is subject to regular Federal income tax and
securities of other open or closed-end investment companies that invest
primarily in municipal bonds of the type in which the Fund may invest
directly.
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to provide current income exempt from
regular federal and California income tax and enhance portfolio value relative
to the municipal bond market by investing in tax-exempt municipal bonds that
Nuveen Advisory Corp. ("Nuveen Advisory") believes are underrated or undervalued
or that represent municipal market sectors that are undervalued. Underrated
municipal bonds are those whose ratings do not, in Nuveen Advisory's opinion,
reflect their true creditworthiness. Municipal bonds may be underrated because
of the time that has elapsed since their rating was assigned or reviewed, or
because of positive factors that may not have been fully taken into account by
rating agencies, or for other similar reasons. Undervalued municipal bonds are
bonds that, in Nuveen Advisory's opinion, are worth more than the value assigned
to them in the marketplace. Nuveen Advisory may at times believe that bonds
associated with a particular municipal market sector (for example, electric
utilities), or issued by a particular municipal issuer, are undervalued. Nuveen
Advisory may purchase such a bond for the Fund's portfolio because it represents
a market sector or issuer that Nuveen Advisory considers undervalued, even if
the value of the particular bond appears to be consistent with the value of
similar bonds. Municipal bonds of particular types or purposes (e.g., hospital
bonds, industrial revenue bonds or bonds issued by a particular municipal
issuer) may be undervalued because there is a temporary excess of supply in that
market sector, or because of a general decline in the market price of municipal
bonds of the market sector for reasons that do not apply to the particular
municipal bonds that are considered undervalued.
The Fund's investment in underrated or undervalued municipal bonds will be
based on Nuveen Advisory's belief that their yield is higher than that available
on bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately reflect their true
creditworthiness. The Fund attempts to increase its portfolio value relative to
the municipal bond market by prudent selection of municipal bonds, regardless of
which direction the market may move. Any capital appreciation realized by the
Fund will generally result in the distribution of taxable capital gains to
Common Shareholders. The Fund's investment objectives are fundamental policies
of the Fund.
B-2
<PAGE>
The Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of federal tax law, and the Fund expects that a substantial portion
of the income it produces will be includable in alternative minimum taxable
income. Common Shares therefore would not ordinarily be a suitable investment
for investors who are subject to the federal alternative minimum tax or who
would become subject to such tax by purchasing Common Shares. The suitablility
of an investment in Common Shares will depend upon a comparison of the after-tax
yield likely to be provided from the Fund with that from comparable tax-exempt
investments not subject to the alternative minimum tax, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and MuniPreferred Shares voting together as a single class, and of the
holders of a majority of the outstanding MuniPreferred Shares voting as a
separate class:
(1) Issue senior securities, as defined in the Investment Company
Act of 1940, other than MuniPreferred Shares, except to the extent
permitted under the Investment Company Act of 1940, except as otherwise
described in the Prospectus;
(2) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount not
exceeding one-third of the value of the Fund's total assets (including the
amount borrowed) less the Fund's liabilities (other than borrowings);
(3) Act as underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and
sale of portfolio securities;
(4) Invest more than 25% of its total assets in securities of
issuers in any one industry; provided, however, that such limitation shall
not apply to municipal bonds other than those municipal bonds backed only
by the assets and revenues of non-governmental users;
(5) Purchase or sell real estate, but this shall not prevent the
Fund from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
(6) Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options, futures contracts,
derivative instruments or from investing in securities or other instruments
backed by physical commodities);
(7) Make loans, other than by entering into repurchase agreements
and through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations;
B-3
<PAGE>
(8) Invest more than 5% of its total assets in securities of any
one issuer, except that this limitation shall not apply to bonds issued by
the United States Government, its agencies and instrumentalities or to the
investment of 25% of its total assets.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
For the purpose of applying the limitation set forth in subparagraph (8)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental user, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to be
the sole issuer. Where a security is also backed by the enforceable obligation
of a superior or unrelated governmental or other entity (other than a bond
insurer), it shall also be included in the computation of securities owned that
are issued by such governmental or other entity. Where a security is guaranteed
by a governmental entity or some other facility, such as a bank guarantee or
letter of credit, such a guarantee or letter of credit would be considered a
separate security and would be treated as an issue of such government, other
entity or bank. When a municipal bond is insured by bond insurance, it shall not
be considered a security that is issued or guaranteed by the insurer; instead,
the issuer of such municipal bond will be determined in accordance with the
principles set forth above. The foregoing restrictions do not limit the
percentage of the Fund's assets that may be invested in municipal bonds insured
by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up to
10% of its total assets in the aggregate in shares of other shares of other
investment companies and only up to 5% of its total assets in any one investment
company, provided the investment does not represent more than 3% of the voting
stock of the acquired investment company at the time such shares are purchased.
As a stockholder in any investment company, the Fund will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Fund's management, advisory and administrative fees with respect to assets
so invested. Common Shareholders would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks", the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
In addition to the foregoing fundamental investment policies, the Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, unless the Fund owns or has the right
to obtain securities equivalent in kind and amount to the securities sold
at no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act of 1940 or
any exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
B-4
<PAGE>
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control.
(6) Invest in inverse floating rate securities (which are securities
that pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund intends to apply for ratings for the MuniPreferred Shares from
Moody's and/or S&P. In order to obtain and maintain the required ratings, the
Fund may be required to comply with investment quality, diversification and
other guidelines established by Moody's or S&P. Such guidelines will likely be
more restrictive than the restrictions set forth above. The Fund does not
anticipate that such guidelines would have a material adverse effect on the
Fund's Common Shareholders or its ability to achieve its investment objectives.
The Fund presently anticipates that any MuniPreferred Shares that it intends to
issue would be initially given the highest ratings by Moody's ("Aaa") or by S&P
("AAA"), but no assurance can be given that such ratings will be obtained. No
minimum rating is required for the issuance of MuniPreferred Shares by the Fund.
Moody's and S&P receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
Prospectus.
Investment in Municipal Bonds
Portfolio Investments
The Fund will invest its net assets in a diversified portfolio of municipal
bonds that are exempt from regular Federal and California income tax. Under
normal market conditions, and except for the temporary investments described
below, the Fund expects to be fully invested (at least 95% of its assets) in
such tax-exempt municipal bonds. The Fund will invest at least 80% of its net
assets in investment grade quality municipal bonds rated as such at the time of
investment. Investment grade quality means that such bonds are rated within the
four highest grades (Baa or BBB or better) by Moody's, S&P or Fitch or are
unrated but judged to be of comparable quality by Nuveen Advisory. The Fund may
invest up to 20% of its net assets in municipal bonds that are, at the time of
investment, rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as "junk bonds." Issuers
of bonds rated Ba/BB or B are regarded as having current capacity to make
principal and interest payments but are subject to business, financial or
economic conditions which could adversely affect such payment capacity. The
foregoing policies are fundamental policies of the Fund. Municipal bonds rated
Baa or BBB are considered "investment grade" securities; municipal bonds rated
Baa are considered medium grade obligations which lack outstanding investment
characteristics and have speculative characteristics, while municipal bonds
rated BBB are regarded as having adequate capacity to pay principal and
interest. Municipal bonds rated AAA in which the Fund may invest may have been
so rated on the basis of the existence of insurance guaranteeing the
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timely payment, when due, of all principal and interest. Municipal bonds of
below investment grade quality are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and, therefore,
carry greater investment risk, including the possibility of issuer default and
bankruptcy and increased market price volatility. Municipal bonds rated below
investment grade tend to be less marketable than higher-quality bonds because
the market for them is less broad. The market for unrated municipal bonds is
even narrower. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Fund
may have greater difficulty selling its portfolio securities. The Fund will be
more dependent on Nuveen Advisory's research and analysis when investing in
these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the average
weighted maturity may be shortened from time to time depending on market
conditions. As a result, the Fund's portfolio at any given time may include both
long-term and intermediate-term municipal bonds. Moreover, during temporary
defensive periods (e.g., times when, in Nuveen Advisory's opinion, temporary
imbalances of supply and demand or other temporary dislocations in the tax-
exempt bond market adversely affect the price at which long-term or
intermediate-term municipal bonds are available), and in order to keep 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 and securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund intends to invest in taxable short-
term investments only in the event that suitable tax-exempt temporary
investments are not available at reasonable prices and yields. Tax-exempt
temporary investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation notes, tax
anticipation notes and revenue anticipation notes or other such municipal bonds
maturing in three years or less from the date of issuance) and municipal
commercial paper. The Fund will invest only in taxable temporary investments
which are U.S. Government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. See Appendix A for
a general description of Moody's, S&P's and Fitch's ratings of securities in
such categories. Taxable 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. See "Certain Trading
Strategies of The Fund--Repurchase Agreements." To the extent the Fund invests
in taxable investments, the Fund will not at such times be in a position to
achieve its investment objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security, and the Fund will not be
required to dispose of securities in the event
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Moody's, S&P or Fitch downgrades its assessment of the credit characteristics of
a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that it believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued. Underrated municipal bonds are those whose ratings do not, in
Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more
than the value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities) , or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond is consistent with the
value of similar bonds. Municipal bonds of particular types or purposes (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on Nuveen
Advisory's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately reflect their true value.
The Fund has not established any limit on the percentage of its portfolio
investments that may be invested in municipal bonds subject to the alternative
minimum tax provisions of Federal tax law. The Fund expects that a substantial
portion of the current income it produces will be included in alternative
minimum taxable income. Special considerations apply to corporate investors.
See "Tax Matters."
Also included within the general category of municipal bonds described in
the Prospectus are participations in lease obligations or installment purchase
contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However,
certain Municipal Lease Obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. In the case of a "non-appropriation" lease, the Fund's
ability to recover under the lease in the event of non-appropriation or default
will be limited solely to the repossession of the leased property, without
recourse to the general credit of the lessee, and disposition or releasing of
the property might prove difficult. In order to reduce this risk, the Fund will
only purchase Municipal Lease Obligations where Nuveen Advisory believes the
issuer has a strong incentive to continue making appropriations until maturity.
During temporary defensive periods and in order to keep the Fund's cash
fully invested, including the period during which the net proceeds of the
offering are being invested, the Fund may invest up to 100% of its net assets in
short-term investments including high quality, short-term securities that may be
either tax-exempt or taxable. To the extent the Fund invests in
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taxable short-term investments, the Fund will not at such times be in a position
to achieve that portion of its investment objective of seeking current income
exempt from Federal income tax. For further information, see, "Short-Term
Investments" below.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
The Fund may also invest in securities of other open or closed-end
investment companies that invest primarily in municipal bonds of the type in
which the Fund may invest directly. The Fund will generally select obligations
which may not be redeemed at the option of the issuer for approximately seven to
nine years .
Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested,
the Fund may invest up to 100% of its total assets in cash equivalents and
short-term taxable fixed-income securities, although the Fund intends to invest
in taxable short-term investments only in the event that suitable tax-exempt
short-term investments are not available at reasonable prices and yields. Short-
term taxable fixed income investments are defined to include, without
limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the dated
specified thereon. Under current FDIC regulations, the maximum insurance
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payable as to any one certificate of deposit is $100,000; therefore,
certificates of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Fund purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities
to the seller, who also simultaneously agrees to buy back the securities at
a fixed price and time. This assures a predetermined yield for the Fund
during its holding period, since the resale price is always greater than
the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Fund to invest temporarily available cash.
The Fund may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Fund may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Fund is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The investment adviser
monitors the value of the collateral at the time the action is entered into
and at all times during the term of the repurchase agreement. The
investment adviser does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon repurchase price to be
paid to the Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate the collateral could be
delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. The investment adviser will consider the financial condition
of the corporation (e.g., earning power, cash flow, and other liquidity
ratios) and will continuously monitor the corporation's ability to meet all
of its financial obligations, because the Fund's liquidity might be
impaired if the corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited to commercial paper
rated in the highest categories by a major rating agency and which mature
within one year of the date of purchase or carry a variable or floating
rate of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
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Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally
to be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes
due to, among other things, a decline in its tax base or a rise in
delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute
general obligations of the issuer. A decline in the receipt of projected
revenues, such as anticipated revenues from another level of government, could
adversely affect an issuer's ability to meet its obligations on outstanding
RANs. In addition, the possibility that the revenues would, when received, be
used to meet other obligations could affect the ability of the issuer to pay the
principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities or municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for
issues of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or a tax-exempt money market
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 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.
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Hedging Strategies
The Fund may periodically engage in hedging transactions. Hedging is a term
used for various methods of seeking to preserve portfolio capital value of
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in financial futures and index futures as well as related put and
call options on such instruments. Both parties entering into an index or
financial futures contract are required to post an initial deposit of 1% to 5%
of the total contract price. Typically, option holders enter into offsetting
closing transactions to enable settlement in cash rather than take delivery of
the position in the future of the underlying security. The Fund will only sell
covered futures contracts, which means that the Fund segregates assets equal to
the amount of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by 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. Successful implementation of most
hedging strategies would generate taxable income, and the Fund has no present
intention to use these strategies. For further information regarding these
investment strategies and risks presented thereby, see Appendix C to this
Statement of Additional Information.
Factors Pertaining to California
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved significantly since 1994, with ratings increases since 1996. The
ratings of certain related debt of other issuers for which California has an
outstanding lease purchase, guarantee or other contractual obligation (such as
for state-insured hospital bonds) are generally linked directly to California's
rating. Should the financial condition of California deteriorate again, its
credit ratings could be reduced, and the market value and marketability of all
outstanding notes and bonds issued by California, its public authorities or
local governments could be adversely affected.
Economic Factors
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.8% in 1996 and 1.6% in 1997. During the
early 1990's, net population growth in the State was due to births and foreign
immigration, but in recent years, in-migration from the other states has
increased.
Total personal income in the State, at an estimated $846 billion in 1997,
accounts for almost 13% of all personal income in the nation. Total employment
is over 15 million, the majority of which is in the service, trade and
manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10% recession peak to under 6% in early 1999. Economic indicators show
a steady and strong recovery underway in California since the start of 1994
particularly in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production, and
other services, entertainment and tourism, and both residential and commercial
construction. The Asian economic crisis beginning in mid-1997 has significantly
reduced exports to that region, although this has been offset by increased
exports to Latin America and other areas. Overall, the Asian crisis has had a
moderate dampening effect on the State's economy, but the economy is still
expected to match or outpace the nation in 1999. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
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Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations may
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value of the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, but it was upheld by the U.S. Supreme Court in 1992.
Article XIIIA prohibits local governments from raising revenues through ad
valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a two-
thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide
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the property related service or are used for unrelated purposes. There are new
notice, hearing and protest procedures for levying or increasing property
related fees and charges, and, except for fees or charges for sewer, water and
refuse collection services (or fees for electrical and gas service, which are
not treated as "property related" for purposes of Article XIIID), no property
related fee or charge may be imposed or increased without majority approval by
the property owners subject to the fee or charge or, at the option of the local
agency, two-thirds voter approval by the electorate residing in the affected
area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject to
an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post-
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's
economy.
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"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $6.8 billion under the limit for
fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID of
the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California municipal obligations or on the ability of the
State or local governments to pay debt service on such California municipal
obligations. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of February
1, 1999, the State had outstanding approximately $19.2 billion of long-term
general obligation bonds, plus $484 million of general obligation commercial
paper which will be refunded by long-term bonds in the future, and $6.7 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $15.8 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1997-98, debt service on general obligation
bonds and lease purchase debt was approximately 4.4% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1996-1997 were the
California personal income tax (47% of total revenues), the sales tax (34%),
bank and corporation taxes (12%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
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General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Recent Budgets. As a result of the severe economic recession from 1990-94
and other factors, the State experienced substantial revenue shortfalls, and
greater than anticipated social service costs, in the early 1990's. The State
accumulated and sustained a budget deficit in the budget reserve, the SFEU,
approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the Years 1991-92 to 1994-95
(although not all of these actions were taken in each year):
* significant cuts in health and welfare program expenditures;
* transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in
mandates on local government;
* transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other
districts to local school districts, thereby reducing State funding
for schools;
* reduction in growth of support for higher education programs,
coupled with increases in student fees;
* revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
* increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested);
and
* various one-time adjustments and accounting changes (some of which
have been challenged in court and reversed).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so
B-15
<PAGE>
serious that from late spring 1992 until 1995, the State had to rely on issuance
of short term notes which matured in a subsequent fiscal year to finance its
ongoing deficit, and pay current obligations. For a two-month period in the
summer of 1992, pending adoption of the annual Budget Act, the State was forced
to issue registered warrants (IOUs) to some of its suppliers, employees and
other creditors. The last of these deficit notes was repaid in April, 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.1 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled about $400 million as of June 30, 1997 and $1.8 billion at
June 30, 1998.
FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that the
State had acted illegally in 1993 and 1994 by using a deferral of payments to
the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education units
in the State also increased by about 6 percent. Because of the pension payment,
most other State programs were funded at levels consistent with prior years, and
several initiatives had to be dropped. The final results for FY 1997-98 showed
General Fund revenues and transfers of $54.7 billion and expenditures of $53.3
billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid.
FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21, 1998.
After giving effect to line-item vetoes made by the Governor, the Budget plan
resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act, the
Legislature passed a number of additional fiscal bills, which resulted in a net
increase of expenditures of about $250 million, but the Administration also
B-16
<PAGE>
raised its estimate of revenues from the 1997-98 fiscal year. In total, the
Administration projected in September, 1998 that the balance in the SFEU at June
30, 1999 would be about $1.2 billion.
The Administration released new projections for the balance of FY 1998-99
on January 8, 1999 as part of the Governor's Proposed Budget for 1999-2000 (the
"Governor's Budget"). As a result of somewhat slower economic growth largely due
to the Asian economic slowdown, resulting in reduced revenues, and higher health
and welfare caseloads than projected, the Administration projected that the SFEU
would be reduced to about $600 million as of June 30, 1999. However, a later
report in February, 1999 from the State Legislative Analyst stated that economic
activity in the State appeared to be stronger in late 1998 than the Governor's
Budget predicted, and revenues for 1998-99 could be as much as $750 million
higher than projected by the Governor's Budget.
As has been the case in the last several years, spending on K-12 education
increased significantly, by a total of $2.2 billion, with projected per-pupil
spending of $5,695, more than one-third higher than the per-pupil spending
during the last recession year of 1993-94. Funding to support higher education
was also increased significantly (15% for the University of California and 14%
for the California State University system). The Budget included some increases
in health and welfare programs, including the first increase in the monthly
welfare grant since levels were cut during the recession.
One of the most important elements of the 1998-99 Budget Act was agreement
on substantial tax cuts. The largest of these is a phased-in cut in the Vehicle
License Fee (an annual tax on the value of cars registered in the State, the
"VLF"). Starting in 1999, the VLF is reduced by 25%. Under current law, VLF
funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years (a development which appears unlikely given more recent revenue
projections), the cut could reach as much as 67.5% by the year 2003. The initial
25% VLF cut will be offset by about $500 million in General Fund money in FY
1998-99, and $1 billion for future years. Other tax cuts in FY 1998-99 include
an increase in the dependent credit exemption for personal income tax filers,
restoration of a renter's tax credit for taxpayers, and a variety of business
tax relief measures. The total cost of these tax cuts is estimated at $1.4
billion for FY 1998-99.
Although, as noted, the 1998-99 Budget Act projects a budget reserve in the
SFEU of about $1.2 billion on June 30, 1999 (since reduced in the Governor's
Budget), the General Fund fund balance on that date also reflects $1.0 billion
of "loans" which the General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level. Settlement
of litigation over these transactions in July 1996 calls for repayment of these
loans over the period ending in 2001-02, about equally split between outlays
from the General Fund and from schools' entitlements. The 1998-99 Budget Act
contained a $300 million appropriation from the General Fund toward this
settlement
B-17
<PAGE>
Proposed FY 1999-2000 Budget. The newly elected Governor, Gray Davis,
released his proposed FY 1999-00 Budget in January. It projected somewhat lower
General Fund revenues than in earlier projections, due to slower economic
growth, but totaling an estimated $60.3 billion. (This figure could be higher
based on the more recent revenue estimates from the State Legislative Analyst.)
The proposed budget assumes certain one-time revenues, receipt of the first
installment payment from the tobacco manufacturer's litigation settlement, and
increased federal aid for the cost of incarcerating illegal aliens.
The Governor's Budget proposes expenditures of about $60.5 billion, which
would result in a balance in the SFEU at June 30, 2000 of about $400 million.
Major expenditures initiatives include increased funding and some new programs
for K-12 schools, a modest increase in funding for higher education, an increase
in certain State-funded welfare programs, combined with decreased caseloads for
Medi-Cal and CalWORKs (the replacement to the old welfare system, following the
1996 federal welfare reform law).
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
After 1996, the three major rating agencies raised their ratings of California's
general obligation bonds, which as of February 1999 were assigned ratings of
"A+" from Standard & Poor's, "Aa3" from Moody's and "AA-" from Fitch.
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
B-18
<PAGE>
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
State agencies, instrumentalities and political subdivisions of the State that
issue Municipal Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1996-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly
B-19
<PAGE>
reduced county services and personnel, and faces strict financial conditions
following large investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
Other Considerations
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which, typically, are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not possible, at present, to predict the extent to which any such legislation
will be enacted. Nor is it possible, at present, to determine the impact of any
such legislation on California Municipal Obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
B-20
<PAGE>
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable), including, but not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"); and repurchase
agreements with maturities in excess of seven days.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at a fair value as determined in good
faith by the Board of Trustees or its delegate.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what Nuveen Advisory
believes to be a temporary price disparity between the two securities. Temporary
price disparities between two comparable securities may result from supply and
demand imbalances where, for example, a temporary oversupply of certain bonds
may cause a temporarily low price for such bonds, as compared with other bonds
of like quality and characteristics. The Fund may also engage to a limited
extent in short-term trading consistent with its investment objectives.
Securities may be sold in anticipation of a market decline (a rise in interest
rates) or purchased in anticipation of a market rise (a decline in interest
rates) and later sold, but the Fund will not engage in trading solely to
recognize a gain.
Subject to the foregoing, the Fund will attempt to achieve its investment
objectives by prudent selection of municipal bonds with a view to holding them
for investment. While there can be no assurance thereof, the Fund anticipates
that its annual portfolio turnover rate will generally not exceed 100%. However,
the rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, the annual portfolio turnover rate of the Fund may exceed 100% in
particular years.
Other Investment Companies
The Fund may invest in securities of other open or closed-end investment
companies that have similar investment objectives and policies to the Fund. The
Fund generally expects to invest in other investment companies either during
periods when it has large amounts of uninvested cash, such as the period shortly
after the Fund receives the proceeds of the offering of its Common Shares or
MuniPreferred Shares, or during periods when there is a shortage of attractive,
high-yielding municipal bonds available in the market. As a stockholder in an
investment company, the Fund will bear its ratable share of that investment
company's expenses and would remain subject to payment of the Fund's management,
advisory and administrative fees with respect to assets so invested. Common
Shareholders would therefore be subject to duplicative expenses to the extent
the Fund invests in other investment companies. Nuveen Advisory will take
expenses into account when evaluating the investment merits of an investment in
the investment company relative to available municipal bond investments. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks," the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
When-Issued and Delayed Delivery Transactions
The Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer
B-21
<PAGE>
enters into the commitment. Beginning on the date the Fund enters into a
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund is required under rules of the Securities and Exchange Commission to
maintain in a separate account liquid assets, consisting of cash, cash
equivalents or liquid securities having a market value at all times of at least
equal to the amount of the commitment. Income generated by any such assets which
provide taxable income for federal income tax purposes is includable in the
taxable income of the Fund. The Fund may enter into contracts to purchase
municipal bonds on a forward basis (i.e., where settlement will occur more than
60 days from the date of the transaction) only to the extent that the Fund
specifically collateralizes such obligations with a security that is expected to
be called or mature within sixty days before or after the settlement date of the
forward transaction. The commitment to purchase securities on a when-issued,
delayed delivery or forward basis may involve an element of risk because no
interest accrues on the bonds prior to settlement and at the time of delivery
the market value may be less than cost.
Repurchase Agreements
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and MuniPreferred Shares, if any. The Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of Nuveen Advisory, present minimal credit risk. The risk to the
Fund is limited to the ability of the issuer to pay the agreed-upon repurchase
price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds
the agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default, the
collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. Nuveen
Advisory will monitor the value of the collateral at the time the transaction is
entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, Nuveen Advisory will demand additional collateral
from the issuer to increase the value of the collateral to at least that of the
repurchase price, including interest.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. 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.
B-22
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees. 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." 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 and Trustee Chairman since July 1, 1996 of The John Nuveen
333 W. Wacker Drive Company, John Nuveen & Co. Incorporated, Nuveen
Chicago, IL 60606 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.
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri 66 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.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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), prior thereto, Assistant Portfolio Manager of
Nuveen Advisory Corp.; Chartered Financial Analyst.
- -----------------------------------------------------------------------------------------------------------------------------------
Stephen D. Foy 44 Vice President and Vice President of John Nuveen & Co. Incorporated;
333 W. Wacker Drive Controller Certified Public Accountant.
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-24
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Positions and Principal Occupations
Name and Address Age Offices with the Fund During Past Five Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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., Portfolio Manager prior
thereto; Vice President (since September 1996),
previously Assistant Vice President (since May
1995), of Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto; Chartered Financial
Analyst.
- -----------------------------------------------------------------------------------------------------------------------------------
Stephen S. Peterson 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 42 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>
B-25
<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.;
Assistant Secretary, The John Nuveen Company (since
May 1994); 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.
Mr. Schwertfeger is also a director or trustee, as the case of may be, of
100 Nuveen open-end and closed-end funds advised by Nuveen Advisory and Nuveen
Institutional Advisory Corp.
The other trustees of the Fund are directors or trustees, as the case may
be, of 36 open-end funds and 53 Nuveen closed-end funds advised by Nuveen
Advisory.
The Common Shareholders will elect trustees at the next annual meeting of
Common Shareholders, unless any MuniPreferred Shares are outstanding at that
time, in which event holders of MuniPreferred Shares, voting as a separate
class, will elect two trustees and the remaining trustees shall be elected by
Common Shareholders and holders of MuniPreferred Shares, voting together as a
single class. Holders of MuniPreferred Shares will be entitled to elect a
majority of the Fund's trustees under certain circumstances. See "Description of
Shares--MuniPreferred Shares--Voting Rights."
B-26
<PAGE>
The following table sets forth compensation to be paid by the Fund
projected through the end of the Fund's first full fiscal year. The Fund has no
retirement or pension plans. The officers and trustees affiliated with Nuveen
serve without any compensation from the Fund.
<TABLE>
<CAPTION>
Estimate Aggregate Estimate Total
Compensation From Compensation From Fund
Name of Trustee Fund* and Fund Complex**
--------------- ------------------ ----------------------
<S> <C> <C>
Robert P. Bremner $132 $68,000(1)
Lawrence H. Brown $143 $74,000
Anne E. Impellizzeri $132 $68,000(2)
Peter R. Sawers $132 $68,000(2)
William J. Schneider $132 $68,000(2)
Judith M. Stockdale $132 $68,000(3)
</TABLE>
---------------------
* Based on the estimated compensation to be earned by the independent
Trustees for the period from inception to the fiscal year ending 10/31/99 for
services to the Fund.
**Based on the estimated compensation paid to the Trustees for the one year
period ending 12/31/99 for services to the open-end and closed-end funds advised
by Nuveen Advisory.
(1) Includes $7,871 in estimated deferred compensation.
(2) Includes $52,470 in estimated deferred compensation.
(3) includes $13,118 in estimated deferred compensation.
The Fund has no employees. Its officers are compensated by Nuveen Advisory
or Nuveen.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to the Fund, with responsibility
for the overall management of the Fund. Its address is 333 West Wacker Drive,
Chicago, Illinois 60606. Nuveen Advisory is also responsible for managing the
Fund's business affairs and providing day-to-day administrative services to the
Fund. For additional information regarding the management services performed by
Nuveen Advisory, see "Management of the Fund" in the Prospectus.
Nuveen Advisory is a wholly-owned subsidiary of Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (57) and
fund assets under management ($26 billion). Overall, Nuveen and its affiliates
manage more than $55 billion in assets in a variety of products. 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 a publicly-traded
company located in
B-27
<PAGE>
St. Paul Minnesota, and is principally engaged in providing property-liability
insurance through subsidiaries.
Pursuant to an investment management agreement between Nuveen Advisory and
the Fund, the Fund has agreed to pay for the services and facilities provided by
Nuveen Advisory an annual management fee, payable on a monthly basis, according
to the following schedule:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Management Fee
----------------------------- --------------
<S> <C>
For the first $125 million .6500%
For the next $125 million .6375%
For the next $250 million .6250%
For the next $500 million .6125%
For the next $1billion .6000%
For assets over $2 billion .5750%
</TABLE>
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, Nuveen Advisory has agreed
to reduce the Fund's operating expenses by waiving the percentage of its
management fee set forth below:
<TABLE>
<CAPTION>
Year Ending Percentage Year Ending Percentage
July 31, Reimbursed July 31, Reimbursed
----------- ---------- ----------- ----------
<S> <C> <C> <C>
1999* .30% 2005 0.25%
2000 .30% 2006 0.20%
2001 .30% 2007 0.15%
2002 .30% 2008 0.10%
2003 .30% 2009 0.05%
2004 .30%
</TABLE>
-----------
*From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount of
income available for the Common Shareholders. Nuveen Advisory has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond July 31,
2009.
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will
normally be purchased directly from an underwriter or in the over-the-counter
market from the principal dealers in such securities, unless it appears that a
better price or execution may be obtained through other means. Portfolio
securities will not be purchased from Nuveen or its affiliates except in
compliance with the 1940 Act.
The Fund expects that substantially all portfolio transactions will be
effected on a principal (as opposed to an agency) basis and, accordingly, does
not expect to pay any brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers will include the spread between the bid and asked price.
It is the policy of Nuveen Advisory to seek the best execution under the
circumstances of each trade. Nuveen Advisory evaluates price as the primary
consideration, with the financial condition, reputation and responsiveness of
the dealer considered secondary in determining best execution. Given the best
execution obtainable, it will be Nuveen Advisory's practice to select dealers
which, in addition, furnish research information (primarily credit analyses of
issuers and general economic reports) and statistical and other services to
Nuveen Advisory. It is not possible to place a dollar value on information and
statistical and other services received from dealers. Since it is only
supplementary to Nuveen Advisory's own research efforts, the receipt of research
information is not expected to reduce significantly Nuveen Advisory's expenses.
While Nuveen Advisory will be primarily responsible for the placement of the
business of the Fund, the policies and practices of Nuveen Advisory in this
regard must be consistent with the foregoing and will, at all times, be subject
to review by the Board of Trustees of the Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, Nuveen Advisory seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell securities by the Fund and another advisory account. In
making such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from Nuveen Advisory's organization will outweigh any
disadvantage that may arise from exposure to simultaneous transactions.
Under the 1940 Act, the Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The Rule set forth requirements relating to,
among other things, the terms of an issue of municipal bonds purchased by the
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of the Fund that may be invested in a particular issue. In addition,
purchases of securities made pursuant to the terms of the Rule must be approved
at least quarterly by the Board of Trustees, including a majority of the members
thereof who are not interested persons of the Fund.
B-28
<PAGE>
DISTRIBUTIONS
As described in the Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering, depending on
market conditions. To permit the Fund to maintain a more stable monthly
distribution, the Fund will initially (prior to its first distribution) and may
from time to time thereafter, distribute less than the entire amount of net
investment income earned in a particular period. Such undistributed net
investment income would be available to supplement future distributions,
including distributions which might otherwise have been reduced by a decrease in
the Fund's monthly net income due to fluctuations in investment income or
expenses, or due to an increase in the dividend rate on the Fund's outstanding
MuniPreferred Shares. As a result, the distributions paid by the Fund for any
particular period may be more or less than the amount of net investment income
actually earned by the Fund during such period. Undistributed net investment
income will be added to the Fund's net asset value and, correspondingly,
distributions from undistributed net investment income will be deducted from the
Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net capital
gains and other taxable income, if any, between Common Shares and MuniPreferred
Shares in proportion to total
B-29
<PAGE>
distributions paid to each class for the year in which such net capital gains or
other taxable income is realized. For information relating to the impact of the
issuance of MuniPreferred Shares on the distributions made by the Fund to Common
Shareholders, see the Prospectus under "MuniPreferred Shares and Leverage."
While any MuniPreferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the MuniPreferred Shares
have been paid and (2) the net asset value of the Fund's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of any outstanding MuniPreferred Shares. This
latter limitation on the Fund's ability to make distributions on its Common
Shares could under certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company. See
"Tax Matters."
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares, par value $.01 per share. All Common Shares have equal rights as to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will have
no pre-emptive or conversion rights or rights to cumulative voting. At any time
when the Fund's MuniPreferred Shares are outstanding, Common Shareholders will
not be entitled to receive any distributions from the Fund unless all accrued
dividends on MuniPreferred Shares have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to MuniPreferred Shares would be at least
200% after giving effect to such distributions. See "MuniPreferred Shares"
below.
The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest predominately in investment grade municipal bonds have during
some periods traded at prices higher than net asset value and during other
periods have traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering after payment of the sales load and
organization and offering expenses. Net asset value generally increases when
interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon the Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of the Fund's Common Shares will be determined by factors
B-30
<PAGE>
beyond the control of the Fund, the Fund cannot predict whether the Common
Shares will trade at, below, or above net asset value or at, below or above the
initial public offering price. Accordingly, the Common Shares are designed
primarily for long-term investors, and investors in the Common Shares should not
view the Fund as a vehicle for trading purposes. See "Repurchase of Fund Shares;
Conversion to Open-End Fund" and the Prospectus under "MuniPreferred Shares and
Leverage" and "The Fund's Investments--Municipal Bonds."
MuniPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
MuniPreferred Shares, par value $.01 per share, in one or more classes or
series, with rights as determined by the Board of Trustees, by action of the
Board of Trustees without the approval of the Common Shareholders.
The Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the MuniPreferred Shares are issued) within
approximately one to three months after completion of the offering of Common
Shares, subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of MuniPreferred
Shares is likely to achieve the benefits to the Common Shareholders described in
this Statement of Additional Information. Although the terms of the
MuniPreferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees (subject to applicable law and the Fund's Declaration) if and when it
authorizes a MuniPreferred Shares offering, the Board has stated that the
initial series of MuniPreferred Shares would likely pay cumulative dividends at
relatively shorter-term periods (such as 7 days); by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees has indicated that the liquidation preference,
preference on distribution, voting rights and redemption provisions of the
MuniPreferred Shares will likely be as stated below.
Distribution Preference. The MuniPreferred Shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
MuniPreferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of MuniPreferred Shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as
B-31
<PAGE>
otherwise required by applicable law, holders of MuniPreferred Shares will vote
together with Common Shareholders as a single class.
In connection with the election of the Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of the Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of MuniPreferred Shares, voting together as a single
class. In addition, if at any time dividends on the Fund's outstanding
MuniPreferred Shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding MuniPreferred Shares, voting
as a separate class, will be entitled to elect a majority of the Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
The affirmative vote of the holders of a majority of the outstanding
MuniPreferred Shares of any class or series, as the case may be, voting as a
separate class, will be required to, among other things (1) take certain actions
which would affect the preferences, rights, or powers of such class or series or
(2) authorize or issue any class or series ranking prior to the MuniPreferred
Shares. Except as may otherwise be required by law, (1) the affirmative vote of
the holders of at least two-thirds of the MuniPreferred Shares outstanding at
the time, voting as a separate class, will be required to approve any conversion
of the Fund from a closed-end to an open-end investment company and (2) the
affirmative vote of the holders of at least two-thirds of the outstanding
MuniPreferred Shares, voting as a separate class, shall be required to approve
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares, provided however, that such separate class vote shall be
a majority vote if the action in question has previously been approved, adopted
or authorized by the affirmative vote of two-thirds of the total number of
Trustees fixed in accordance with the Declaration or the By-laws. The
affirmative vote of the holders of a majority of the outstanding MuniPreferred
Shares, voting as a separate class, shall be required to approve any action not
described in the preceding sentence requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
Fund's investment objectives or changes in the investment restrictions described
as fundamental policies under "Investment Objectives and Policies--Investment
Restrictions." The class or series vote of holders of MuniPreferred Shares
described above shall in each case be in addition to any separate vote of the
requisite percentage of Common Shares and MuniPreferred Shares necessary to
authorize the action in question.
The foregoing voting provisions will not apply with respect to the Fund's
MuniPreferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (1) redeemed or (2) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
Redemption, Purchase and Sale of MuniPreferred Shares by the Fund. The
terms of the MuniPreferred Shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends, that the Fund may tender for or purchase
MuniPreferred Shares and that the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of MuniPreferred Shares by
the Fund will reduce
B-32
<PAGE>
the leverage applicable to Common Shares, while any resale of shares by the Fund
will increase such leverage. See "Special Considerations Relating to California
Municipal Bonds and Leverage."
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of MuniPreferred Shares. If the Board of
Trustees determines to authorize such an offering, the terms of the
MuniPreferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
very remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and MuniPreferred Shares, voting together as a single class, except as
described below, to authorize (1) a conversion of the Fund from a closed-end to
an open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of trustees, and then only for cause,
unless such transaction has already been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders of
at least a majority of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected,
only the required vote by the applicable class or series will be required. None
of the foregoing provisions may be amended except by the vote of at least two-
thirds of the Common Shares and MuniPreferred Shares, voting together as a
single class. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
MuniPreferred Shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the Fund's MuniPreferred Shares
outstanding at the time, voting as a separate class, or, if such action has been
authorized by the affirmative vote of two-thirds of the total number of trustees
fixed in accordance with the Declaration or the By-laws, the affirmative vote of
the holders of at least a majority of the Fund's MuniPreferred Shares
outstanding at the time, voting as a separate class. The votes required to
approve the conversion of the Fund from a closed-end to an open-end investment
company or to approve transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares are higher than those
required by the 1940 Act. The Board of Trustees believes that the provisions of
the Declaration relating to such
B-33
<PAGE>
higher votes are in the best interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objectives and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not binding
upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Fund's Common Shares will trade in the open market at a price that will be a
function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount.
Notwithstanding the foregoing, at any time when the Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange
B-34
<PAGE>
Commission currently requires that any tender offer made by a closed-end
investment company for its shares must be at a price equal to the net asset
value of such shares on the close of business on the last day of the tender
offer. Any service fees incurred in connection with any tender offer made by the
Fund will be borne by the Fund and will not reduce the stated consideration to
be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board at the time it considers such issue, it is
the Board's present policy, which may be changed by the Board, not to authorize
repurchases of Common Shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the Common
Shares from the New York Stock Exchange, or (b) impair the Fund's status as a
regulated investment company under the Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund) or as a
registered closed-end investment company under the 1940 Act; (2) the Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objectives and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or California banks in
which the Fund invests, (d) material limitation affecting the Fund or the
issuers of its portfolio securities by Federal or state authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees may in the future modify these conditions in
light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, and of the holders
of at least two-thirds of the Fund's MuniPreferred Shares outstanding at the
time, voting as a separate class, provided however, that such separate class
vote shall be a majority vote if the action in question has previously been
approved, adopted or authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or By-laws.
See the Prospectus under "Description of Shares--Certain Provisions in the
Declaration of Trust" for a discussion of voting requirements applicable to
conversion of the Fund to an open-end company. If the Fund converted to an open-
end company, it would be required to redeem all MuniPreferred Shares then
outstanding, and the Fund's Common Shares would no longer be listed on the New
York Stock Exchange. Shareholders of an open-end investment company may require
the company to redeem their shares at any time (except in certain circumstances
as authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the
B-35
<PAGE>
time of redemption. In order to avoid maintaining large cash positions or
liquidating favorable investments to meet redemptions, open-end companies
typically engage in a continuous offering of their shares. Open-end companies
are thus subject to periodic asset in-flows and out-flows that can complicate
portfolio management. The Board of Trustees may at any time propose conversion
of the Fund to an open-end company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease the
Fund's total assets which would likely have the effect of increasing the Fund's
expense ratio. Any purchase by the Fund of its Common Shares at a time when
MuniPreferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Prospectus and this
Statement of Additional Information under "Special Considerations Relating to
California Municipal Bonds and Leverage."
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the
advice of Bell, Boyd & Lloyd, special counsel to the Fund.
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 Common
Shareholders. First, the Fund must derive at least 90% of its annual gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including but not limited
to gains from options and futures) derived with respect to its business of
investing in such stock, securities or currencies (the "90% gross income test").
Second, the Fund must diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
is comprised of cash, cash items, United States Government securities,
securities of
B-36
<PAGE>
other regulated investment companies and other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the value of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of 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 business.
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 Common Shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their share of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund 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 Common 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 Common Shareholder's
gross income and the tax deemed paid by the Common Shareholder under clause (ii)
of the preceding sentence. The Fund intends to distribute at least annually to
its Common 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.
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 Common
Shareholders as ordinary income whether received in cash or additional shares.
Any net long-term capital gains realized by the Fund and distributed to Common
Shareholders in cash or additional shares, will be taxable to Common
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
B-37
<PAGE>
Common Shareholder's tax basis in his or her shares. Any excess will be treated
as gain from the sale of his or her shares, as discussed below.
If the Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Fund, defer the Fund's losses, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends or distributions which are expected to be or
have been declared, but not paid. Any dividend or distribution declared shortly
after a purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Common
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 Common Shareholders) on December 31.
The redemption or exchange of Common Shares normally will result in capital
gain or loss to the Common Shareholders. Generally, a Common Shareholder's gain
or loss will be long-term gain or loss if the shares have been held for more
than one year. 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-term capital loss) with respect to securities will be taxed
at a maximum rate of 20%, while short-term capital gains and other ordinary
income will be 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 Common Shares cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
Common Shares or shares of 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 Common
Shareholder's tax basis in the shares subsequently acquired. In addition, no
loss will be allowed on the redemption or exchange of Common Shares if the
Common Shareholder purchases other shares of the Fund (whether through
reinvestment of distributions or otherwise) or the Common Shareholder acquires
or enters into a contract or option to acquire securities that are substantially
identical to shares of the Fund within a period of 61 days beginning 30 days
before and ending 30 days after such redemption or exchange. If disallowed, the
loss will be reflected in an adjustment to the basis of the shares acquired.
In order to avoid a 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
B-38
<PAGE>
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
any excess of realized capital gains over realized capital losses for the prior
year that was not distributed during such year and on which the Fund paid no
federal income tax. For purposes of the excise tax, a regulated investment
company may reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year. The Fund
intends to make timely distributions in compliance with these requirements and
consequently it is anticipated that it generally will not be required to pay the
excise tax.
If in any year the Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Fund would incur a regular
corporate federal income tax upon its income for that year, and distributions to
its Common Shareholders would be taxable to Common Shareholders as ordinary
dividend income for federal income tax purposes to the extent of the Fund's
earnings and profits.
The Fund is required in certain circumstances to withhold 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 Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax Advisers for more detailed information concerning the federal
taxation of the Fund and the income tax consequences to its Common Shareholders.
State Tax Matters
The following is a general, abbreviated summary of certain provisions of
the applicable California tax law as presently in effect as it directly governs
the taxation of resident individual and corporate Common Shareholders of the
Fund. This summary does not address the taxation of other shareholders nor does
it discuss any local taxes that may be applicable. These provisions are subject
to change by legislative or administrative action, and any such change may be
retroactive with respect to transactions of the Fund.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as a regulated investment company, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as exempt-
interest dividends to shareholders for federal and California purposes, and that
it will distribute all interest and dividends it receives to the
shareholders.
The Fund will be subject to the California corporate franchise and
corporation income tax only if it has a sufficient nexus with California. If it
is subject to the California franchise or corporation income tax, the Fund does
not expect to pay a material amount of such tax.
B-39
<PAGE>
If at the close of each quarter of the Fund's taxable year at least 50% of
the value of its total assets consists of obligations that, when held by
individuals, pay interest that is exempt from tax by California under California
or federal law, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to capital
gains, will be includable in gross income for purposes of the California
personal income tax.
Interest on indebtedness incurred or continued for the purpose of acquiring
or maintaining an investment in the Common Shares will not be deductible for
purposes of the California personal income tax.
All distributions of the Fund, regardless of source, to corporate Common
Shareholders that are subject to the California corporate franchise tax will be
included in gross income for purposes of such tax.
Gain on the sale, exchange, or other disposition of Common Shares will be
subject to the California personal income and corporate franchise tax.
In addition, any loss realized by a holder of Common Shares upon the sale
of shares held for six months or less may be disallowed to the extent of any
exempt interest dividends received with respect to such shares. Moreover, any
loss realized upon the sale of Common Shares within thirty days before or after
the acquisition of other Common Shares may be disallowed under the "wash sale"
rules.
Common Shares may be subject to the California estate tax if held by a
California decedent at the time of death.
Common Shareholders are advised to consult with their own tax advisers for
more detailed information concerning California tax matters.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may be a suitable investment for a shareholder that is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding. California municipal bonds can provide double, tax-
free income (exempt from both regular federal and California income taxes) for
California residents. Because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax, the Fund may not be a suitable investment for shareholders that are
subject to the federal alternative minimum tax.
The Fund may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar or other
independent services. Comparison of the Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
The Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg') and Lipper, that the Fund believes to be generally
accurate.
Past performance is not indicative of future results. At the time Common
Shareholders sell their shares, they may be worth more or less than their
original investment.
Share Prices and Dividends of Similar Funds
(as of March 31, 1999)
<TABLE>
<CAPTION>
Adjusted Not Adjusted
------------------------ -----------------------
Ticker sym Div Close price Div Close price
<S> <C> <C> <C> <C>
NCA $0.7470 $14.72 $0.0415 $ 9.81
VKC $0.9180 $16.31 $0.0510 $10.88
DCM $0.8460 $15.09 $0.0470 $10.06
NCP $0.9960 $17.69 $0.0830 $17.69
NCO $1.0140 $18.06 $0.0845 $18.06
NQC $0.9540 $17.19 $0.0795 $17.19
NVC $0.9480 $17.13 $0.0790 $17.13
VQC $0.9900 $17.69 $0.0825 $17.69
NUC $0.9780 $17.88 $0.0815 $17.88
MYC $0.8012 $15.56 $0.0667 $15.56
VIC $0.9900 $17.81 $0.0825 $17.81
NCU $0.7620 $14.50 $0.0635 $14.50
PCA $0.8700 $16.06 $0.0725 $16.06
RAA $0.8775 $16.44 $0.0731 $16.44
VCV $0.8100 $16.00 $0.0675 $16.00
IQC $0.7500 $14.00 $0.0625 $14.00
GCM $0.7350 $16.09 $0.0490 $12.88
</TABLE>
An analysis of California closed-end municipal funds represented in the
Lipper California Municipal Debt Funds category show the positive correlation
between higher dividends and higher market prices. For comparative purposes, the
prices and dividends for each fund noted under the heading "Adjusted" have been
normalized as necessary to calibrate each fund's initial offering price with the
Fund's $15 initial offering price.
Market price is affected by many factors, including market interest rates,
income tax rates, the common shares' net asset value and dividend stability, the
portfolio's duration, call protection and credit quality, analyst
recommendations, and other market factors. Any of these factors individually or
collectively may, at any given time, be as or more important to market price
than annualized dividend rates. A positive correlation does not necessarily mean
that higher dividends cause or result in higher market prices, and you should
not assume that any particular level of dividends will result in any particular
market price. In addition, the positive correlation between dividends and market
price of this group of funds does not necessarily mean that every fund in the
group exhibits a positive correlation between dividend and market price, and it
is possible that the Fund may not exhibit such a correlation. There can be no
assurance that the correlation suggested by the above data will continue in the
future.
EXPERTS
The Statement of Net Assets of the Fund as of May __, 1999 [and Statement
of Operations for period ______________] appearing in this Statement of
Additional Information has been audited by Ernst & Young LLP, 223 South Wacker
Drive, Chicago, Illinois 60606, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. Ernst & Young LLP, located at Ernst & Young LLP, provides accounting
and auditing services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. The
Prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Fund and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the Prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
B-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen California Dividend Advantage Municipal Fund
[To Come]
B-41
<PAGE>
NUVEEN CALIFORNIA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
B-42
<PAGE>
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation--A brief description of the applicable Standard &
Poor's Corporation ("S&P") rating symbols and their meanings (as published by
S&P) follows:
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.
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
A-1
<PAGE>
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.
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
A-2
<PAGE>
grace period. The `D' rating also will be used upon the filing 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.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flow.
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.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
--Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
A-3
<PAGE>
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with 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
A-4
<PAGE>
circumstances.
Moody's Investors Service, Inc.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt 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 most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
A-5
<PAGE>
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.
Con(...) Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals
which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination
of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
category from Aa to B in the public finance sectors. The modifier 1
indicates that the issuer is in the higher end of its letter rating
category; the modifier 2 indicates a mid-range ranking; the modifier 3
indicates that the issuer is in the lower end of the letter ranking
category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support
or demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less
well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
A-6
<PAGE>
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- 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 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, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch)
follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of
adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are
not investment grade.
B Highly speculative. 'B' ratings indicate that significant
credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however,
capacity for continued payment is contingent upon a sustained,
favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A 'CC' rating
indicates that default of some kind appears probable. 'C'
ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based
on their prospects for achieving partial or full recovery in a
reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated
with any precision, the following serve as general guidelines.
'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest.
'DD' indicates potential recoveries in the range of 50%-90%,
and 'D' the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated 'DDD' have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated
'DD' and 'D' are generally undergoing a formal reorganization
or liquidation process; those rated 'DD' are likely to satisfy
a higher portion of their outstanding obligations, while
entities rated 'D' have a poor prospect for repaying all
obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result
in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' long-term rating
category, to categories below 'CCC', or to short-term ratings other than 'F1'.
'NR' indicates that Fitch IBCA does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify investors that there is
a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
A-7
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield 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:
<TABLE>
<CAPTION>
Taxable Equivalent of Tax-Free Yields
Tax Free Yield
<S> <C> <C> <C> <C> <C>
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00%
- ------------------------------------------------------------------------
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% 9.38%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93%
</TABLE>
CALIFORNIA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Joint Return Bracket Bracket* Bracket*
------------- ------------ ------- -------- --------
<S> <C> <C> <C> <C>
$0-25,750 $0-43,050 15.00% 6.00% 20.00%
25,750-62,450 43,050-104,050 28.00% 9.30% 34.50%
62,450-130,250 104,050-158,550 31.00% 9.30% 37.50%
130,250-283,150 158,550-283,150 36.00% 9.30% 42.00%
Over 283,150 Over 283,150 39.60% 9.30% 45.00%
</TABLE>
- ---------------------
* The State tax brackets are those for 1998. The 1999 brackets will be adjusted
to take into account changes in the California Consumer Price Index and are
rounded down to the nearest tenth. These adjustments have not yet been released.
Please note that the table does not reflect (i) any federal or state limitations
on the amounts of allowable itemized deductions, phase-outs of personal or
dependent exemption credits or other allowable credits, (ii) any local taxes
imposed, or (iii) any taxes other than personal income taxes. The table assumes
that federal taxable income is equal to state income subject to tax, and in
cases where more than one state rate falls within a federal bracket, the highest
state rate corresponding to the highest income within that federal bracket is
used.
B-1
<PAGE>
APPENDIX C
HEDGING STRATEGIES AND RISKS
Set forth below is additional information regarding the various defensive
hedging techniques.
Futures and Index Transactions
Financial Futures
A financial future is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade which have been designated "contracts markets" by the Commodity Futures
Trading Commission ("CFTC").
The purchase of financial futures is for the purpose of hedging a Fund's
existing or anticipated holdings of long-term debt securities. When 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.
C-1
<PAGE>
The market prices of financial futures may also be affected by factors
other than interest rates. One of these factors is the possibility that rapid
changes in the volume of closing transactions, whether due to volatile markets
or movements by speculators, would temporarily distort the normal relationship
between the markets in the financial future and the chosen debt securities. In
these circumstances as well as in periods of rapid and large price movements.
The Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures
The Fund may also purchase put or call options on financial futures which
are traded on a U.S. Exchange or board of trade and enter into closing
transactions with respect to such options to terminate an existing position.
Currently, options can be purchased with respect to financial futures on U.S.
Treasury Bonds on The Chicago Board of Trade. The purchase of put options on
financial futures is analogous to the purchase of put options by 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.
C-2
<PAGE>
Nuveen California Dividend
Advantage Municipal Fund
4,000,000 Common Shares
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
May __, 1999
<PAGE>
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act will be filed by pre-effective amendment to this registration
statement.
2. Exhibits:
a.1 Agreement and Declaration of Trust dated December 1, 1998. Filed as Exhibit
a.1 to Registrant's Registration Statement on Form N-2 (File No. 333-69035)
and incorporated herein by reference.
a.2 Certificate of Amendment to Declaration of Trust dated April 9, 1999. Filed
as Exhibit a.2 to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-69035) and incorporated
herein by reference.
b. By-laws of Registrant. Filed as Exhibit b to Registrant's Registration
Statement on Form N-2 (File No. 333-69035) and incorporated herein by
reference.
c. None.
d. None.
e. Dividend Investment Plan.*
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated _________. Filed as Exhibit g to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-2 (File
No. 333-69035) and incorporated herein by reference.
h. Form of Underwriting Agreement.*
i. Deferred Compensation Plan for Non-Employee Trustees. Filed as Exhibit i to
Pre-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-2 (File No. 333-69035) and incorporated herein by reference.
j. Exchange Traded Fund Custody Agreement between Registrant and The Chase
Manhattan Bank dated _______. Filed as Exhibit j to Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-2 (File No. 333-
69035) and incorporated herein by reference.
k.1 Transfer Agency Agreement between Registrant and Chase Global Funds
Services Company dated ________. Filed as Exhibit k.1 to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-2 (File
No. 333-69035) and incorporated herein by reference.
k.2 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp. dated _______, 1999. Filed as Exhibit k.2 to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on Form N-2 (File
No. 333-69035) and incorporated herein by reference.
l.1 Opinion and consent of Bell, Boyd & Lloyd.*
l.2 Opinion and consent of Bingham Dana LLP.*
1.3 Opinion and consent of Orrick, Herrington & Sutcliffe LLP.*
m. None.
n. Consent of Ernst & Young LLP.*
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated April 12, 1999. Filed
as Exhibit p to Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-2 (File No. 333-69035) and incorporated herein by
reference.
q. None.
r. None.
s. Powers of Attorney. Filed as Exhibit s to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2 (File No. 333-69035) and
incorporated herein by reference.
___________________
* To be filed by amendment.
Item 25: Marketing Arrangements
See Section 3 of the Underwriting Agreement filed as Exhibit h to this
Registration Statement.
Part C - 1
<PAGE>
Item 26: Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission fees.................. $16,680
National Association of Securities Dealers, Inc. fees.... 6,500
Printing and engraving expenses.......................... *
Legal fees............................................... *
New York Stock Exchange listing fees..................... *
Accounting expenses...................................... *
Blue Sky filing fees and expenses........................ *
Transfer agent fees...................................... *
Miscellaneous expenses................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ------------
*To be completed by amendment.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At April 16, 1999
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Common Shares, $.01 par value.............. 0
</TABLE>
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides
as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final
adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the
Part C - 2
<PAGE>
conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office by the court or other body approving the settlement or other
disposition or a reasonable determination, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that he did not
engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising
out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including, as such Disinterested Trustee,
anyone who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
Part C - 3
<PAGE>
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment Trust
Errors and Omission policies in the aggregate amount of $20,000,000 (with a
maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involve willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of Registrant
or where he or she had reasonable cause to believe this conduct was unlawful).
Section 8 of the Underwriting Agreement filed as Exhibit h to this
Registration Statement provides for each of the parties thereto, including the
Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Item 30: Business and Other Connections of Investment Adviser
Nuveen Advisory Corp. serves as investment adviser to the following open-
end management type investment companies: Nuveen Flagship Multistate Trust I,
Nuveen Flagship Multistate II, Nuveen Flagship Multistate Trust III, Nuveen
Flagship Multistate Trust IV, Nuveen Flagship Municipal Trust, Nuveen California
Tax Free Fund, Inc., Nuveen Tax-Free Money Market Fund, Inc., Nuveen Tax-Exempt
Money Market Fund, Inc., Nuveen Tax-Free Reserves, Inc. and Nuveen Taxable Funds
Inc., Nuveen Advisory Corp. also serves as investment adviser to the following
closed-end management type investment companies other than the Registrant:
Nuveen Municipal Value Fund, Inc., Nuveen California Municipal Value Fund, Inc.,
Nuveen New York Municipal Value Fund, Inc., Nuveen Municipal Income Fund, Inc.,
Nuveen Premium Income Municipal Fund, Inc., Nuveen Performance Plus Municipal
Fund, Inc., Nuveen California Performance Plus Municipal Fund, Inc., Nuveen New
York Performance Plus Municipal Fund, Inc., Nuveen Municipal Advantage Fund,
Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen California
Municipal Market Opportunity Fund, Inc., Nuveen New York Municipal Market
Opportunity Fund, Inc., Nuveen Investment Quality Municipal Fund, Inc., Nuveen
California Investment Quality Municipal Fund, Inc., Nuveen New York Investment
Quality Municipal Fund, Inc., Nuveen Insured Quality Municipal Fund, Inc.,
Nuveen Florida Investment Quality Municipal Fund, Nuveen New Jersey Investment
Quality Municipal Fund, Inc., Nuveen Pennsylvania Investment Quality Municipal
Fund, Nuveen Select Quality Municipal Fund, Inc., Nuveen California Select
Quality Municipal Fund, Inc., Nuveen New York Select Quality Municipal Fund,
Inc., Nuveen Quality Income Municipal Fund, Inc., Nuveen Insured Municipal
Opportunity Fund, Inc., Nuveen Florida Quality Income Municipal Fund, Nuveen
Michigan Quality Income Municipal Fund, Inc., Nuveen Ohio Quality Income
Municipal Fund, Inc., Nuveen Texas Quality Income Municipal Fund, Nuveen
California Quality Income Municipal Fund, Inc., Nuveen New York Quality Income
Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen Premier
Insured Municipal Income Fund, Inc., Nuveen Insured California Premium
Part C - 4
<PAGE>
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc.,
Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen New Jersey Premium Income Municipal Fund,
Inc., Nuveen Premium Income Municipal Fund 4, Inc., Nuveen Insured California
Premium Income Municipal Fund 2, Inc., Nuveen Insured New York Premium Income
Municipal Fund 2, Nuveen New Jersey Premium Income Municipal Fund 2, Nuveen
Pennsylvania Premium Income Municipal Fund 2, Nuveen Maryland Premium Income
Municipal Fund, Nuveen Massachusetts Premium Income Municipal Fund, Nuveen
Virginia Premium Income Municipal Fund, Nuveen Washington Premium Income
Municipal Fund, Nuveen Connecticut Premium Income Municipal Fund, Nuveen Georgia
Premium Income Municipal Fund, Nuveen Missouri Premium Income Municipal Fund,
Nuveen North Carolina Premium Income Municipal Fund, Nuveen California Premium
Income Municipal Fund and Nuveen Insured Premium Income Municipal Fund 2. Nuveen
Advisory Corp. has no other clients or business at the present time. For a
description of other business, profession, vocation or employment of a
substantial nature in which any director or officer of the investment adviser
has engaged during the last two years for his account or in the capacity of
director, officer, employee, partner or trustee, see the descriptions under
"Management of the Fund" in Part A of this Registration Statement.
Item 31: Location of Accounts and Records
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all Advisery material
of the investment adviser.
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004-2413
maintains all general and subsidiary ledgers, journals, trial balances, records
of all portfolio purchases and sales, and all other required records not
maintained by Nuveen Advisory Corp. or Chase Global Funds Services Company.
Part C - 5
<PAGE>
Chase Global Funds Services Company, P.O. Box 5186, Bowling Green Station,
New York, NY 10275-0672 (regular mail) or 4 New York Plaza, 6th Floor, New York,
NY 10004, maintains all the required records in its capacity as transfer and
dividend paying agent for the Registrant.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.
Part C - 6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 27th day of
April, 1999.
NUVEEN CALIFORNIA DIVIDEND
ADVANTAGE MUNICIPAL FUND
/s/ Gifford R. Zimmerman
--------------------------------------------
Gifford R. Zimmerman, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen D. Foy Vice President and April 27, 1999
- ---------------------------- Controller (Principal
Stephen D. Foy Financial and Accounting
Officer)
Timothy R. Schwertfeger Chairman of the Board )
and Trustee (Principal )
Executive Officer) ) By /s/ Gifford R. Zimmerman
) -------------------------------
Robert P. Bremner Trustee ) Gifford R. Zimmerman
) Attorney-in-Fact
Lawrence H. Brown Trustee )
)
Anne E. Impellizzeri Trustee )
)
Peter R. Sawers Trustee )
)
William J. Schneider Trustee ) April 27, 1999
)
Judith M. Stockdale Trustee )
</TABLE>
Original powers of attorney authorizing Alan G. Berkshire and Gifford R.
Zimmerman, among others, to execute this Registration Statement, and Amendments
thereto, for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, have been executed and filed as an exhibit.
<PAGE>
INDEX TO EXHIBITS
a.1 Agreement and Declaration of Trust dated December 1, 1998*
a.2 Certificate of Amendment to Declaration of Trust dated April 9,
1999.*
b. By-laws of Registrant.*
c. None.
d. None.
e. Dividend Investment Plan.**
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Advisory Corp. dated _________.*
h. Form of Underwriting Agreement.**
i. Deferred Compensation Plan for Non-Employee Trustees.*
j. Exchange Traded Fund Custody Agreement between Registrant and The Chase
Manhattan Bank dated _______.*
k.1 Transfer Agency Agreement between Registrant and Chase Global Funds
Services Company dated ________.*
k.2 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Advisory Corp. dated __, 1999.*
l.1 Opinion and consent of Bell, Boyd & Lloyd.**
l.2 Opinion and consent of Bingham Dana LLP.**
l.3 Opinion and consent of Orrick, Herrington & Sutcliffe LLP.**
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Subscription Agreement of Nuveen Advisory Corp. dated April 12, 1999.*
q. None.
r. None.
s. Powers of Attorney.*
___________________
* Previously filed.
** To be filed by amendment.
