<PAGE>
As filed with the Securities and Exchange Commission on December 28, 2000
================================================================================
1933 Act File No. 333-49266
1940 Act File No. 811-09465
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
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
Nuveen Connecticut Dividend Advantage Municipal 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:
Stacy H. Winick Thomas S. Harman Sarah E. Cogan
Bell, Boyd & Lloyd LLC Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett
70 W. Madison St. 1800 M Street, N.W. 425 Lexington Avenue
Chicago, IL 60602 Washington, D.C. 20036 New York, NY 10017
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)
____________________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
========================================================================================================================
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 per value 1,000,000 Shares $15.00 $15,000,000 $3,960
========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) All of which has previously been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 28, 2000
PROSPECTUS
1,000,000 Shares
Nuveen Connecticut Dividend Advantage Municipal Fund
Common Shares
$15.00 per share
NUVEEN LOGO ----------
Investment Objectives. The Fund is a newly-organized, non-diversified,
closed-end management investment company. The Fund's investment objectives are:
. to provide current income exempt from regular federal and Connecticut
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. Under normal market conditions, the Fund will invest its
net assets in a portfolio of municipal bonds that are exempt from regular
federal and Connecticut income taxes. Under normal market conditions, the Fund
expects to be fully invested in such tax-exempt municipal bonds. Through
December 31, 2001, the Fund may invest in municipal bonds that are exempt from
regular federal income tax but not from Connecticut income tax, provided that
no more than 10% of the Fund's investment income during that time may be
derived from investments in those bonds. The Fund will invest at least 80% of
its net assets in investment grade quality municipal bonds. The Fund may invest
up to 20% of its net assets in municipal bonds that are rated Ba/BB or B or
that are unrated but judged to be of comparable quality by the Fund's
investment adviser. The Fund cannot assure you that it will achieve its
investment objectives.
----------
Investing in common shares involves certain risks. See "Risks" beginning on
page 17.
No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors expecting to sell their shares in a relatively short
period after completion of the public offering. The common shares have been
approved for listing on the American Stock Exchange, subject to notice of
issuance. The trading or "ticker" symbol of the common shares is expected to be
"NFC."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------
<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 expect to deliver the common shares to purchasers on or
about , 2001.
----------
Salomon Smith Barney
Nuveen Investments
Deutsche Banc Alex. Brown
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg LLC
Advest, Inc.
Raymond James & Associates, Inc.
, 2001
<PAGE>
You should read the Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated , 2001, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus. You may request a free copy of the Statement of Additional
Information, the table of contents of which is on page 35 of this Prospectus,
by calling (800) 257-8787 or by writing to the Fund, or obtain a copy (and
other information regarding the Fund) from the Securities and Exchange
Commission web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The underwriters named in this Prospectus may purchase up to
additional common shares from the Fund under certain circumstances.
2
<PAGE>
You should rely only on the information contained or incorporated by refer-
ence 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 in-
formation contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Summary of Fund Expenses................................................... 9
The Fund................................................................... 11
Use of Proceeds............................................................ 11
The Fund's Investments..................................................... 11
MuniPreferred Shares and Leverage.......................................... 14
Risks...................................................................... 17
How the Fund Manages Risk.................................................. 20
Management of the Fund..................................................... 21
Net Asset Value............................................................ 23
Distributions.............................................................. 23
Dividend Reinvestment Plan................................................. 24
Description of Shares...................................................... 25
Certain Provisions in the Declaration of Trust............................. 27
Repurchase of Fund Shares; Conversion to Open-End Fund..................... 29
Tax Matters................................................................ 29
Other Matters.............................................................. 31
Underwriting............................................................... 31
Custodian and Transfer Agent............................................... 34
Legal Opinions............................................................. 34
Table of Contents for the Statement of Additional Information.............. 35
</TABLE>
------------
Until , 2001 (25 days after the date of this Prospectus), all dealers
that buy, sell or trade the Common Shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
3
<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 Connecticut Dividend Advantage Municipal Fund
(the "Fund") is a newly organized, non-diversified,
closed-end management investment company. The Fund is
designed to provide tax benefits to investors who are
residents of Connecticut. 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., Nuveen Investments
("Nuveen"), Deutsche Banc Alex. Brown, A.G. Edwards &
Sons, Inc., Prudential Securities Incorporated, UBS
Warburg LLC, Advest, Inc. and Raymond James &
Associates, 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." Nuveen Investments has
agreed to pay (i) all organizational expenses and
(ii) offering costs (other than sales load) that
exceed $0.03 per Common Share.
Investment Objectives.. The Fund's investment objectives are to provide
current income exempt from regular federal and
Connecticut income tax and enhance portfolio value
relative to the municipal bond market by investing in
tax-exempt municipal bonds that the Fund's investment
adviser believes are underrated or undervalued or
that represent municipal market sectors that are
undervalued. Under normal market conditions, the Fund
will invest its net assets in a portfolio of
municipal bonds that are exempt from regular federal
and Connecticut income taxes. Under normal market
conditions, the Fund expects to be fully invested in
such tax-exempt municipal bonds. Through December 31,
2001, the Fund may invest in municipal bonds that are
exempt from regular federal income tax but not from
Connecticut income tax ("Out of State Bonds"),
provided that no more than 10% of the Fund's
investment income during that time, as measured on
the date of purchase of such bond, may be derived
from Out of State Bonds. The Fund will invest at
least 80% of its net assets in municipal bonds that
at the time of investment are investment grade
quality. Investment grade quality bonds are bonds
rated within the four highest grades (Baa or BBB or
better by Moody's Investor Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") or Fitch IBCA,
Inc. ("Fitch")), or bonds that are unrated but judged
to be of comparable quality by the Fund's investment
adviser. The Fund may invest up to 20% of its net
assets in municipal bonds that, at the time of
investment, are rated Ba/BB or B by Moody's, S&P or
Fitch or that are unrated but judged to be
4
<PAGE>
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."
Special If the Fund invests in Out of State Bonds, a portion
Considerations........ of your dividends will be subject to Connecticut
income taxes. 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, or as a result of investment in
the Fund would become, subject to the federal
alternative minimum tax, the Fund may not be a
suitable investment for you. In addition, capital
gains distributions will be subject to capital
gains taxes. See "Tax Matters."
Proposed Offering of
MuniPreferred(R)
Shares............... Subject to market conditions, approximately one to
three months after completion of this offering, 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 investment
in Common Shares. Leverage involves special risks.
There is no assurance that the Fund will issue
MuniPreferred Shares or that, if issued, the Fund's
leveraging strategy will be successful. See
"Risks--Leverage Risk." The money the Fund obtains
by selling the MuniPreferred Shares will be
invested in long-term municipal bonds, which will
generally pay fixed rates of interest over the life
of the bond. The MuniPreferred Shares will pay
dividends based on shorter-term rates, which will
be reset frequently. So long as the rate of return,
net of applicable Fund expenses, on the long-term
bonds purchased by the Fund exceeds MuniPreferred
Share dividend rates as reset periodically, the
investment of the proceeds of the MuniPreferred
Shares will generate more income than will be
needed to pay dividends on the MuniPreferred
Shares. If so, the excess will be used to pay
higher 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
contractually agreed to reimburse the Fund for fees
and expenses in
5
<PAGE>
the amount of .30% of average daily total net
assets of the Fund for the first five full years of
the Fund's operations (through January 31, 2006),
and for a declining amount for an additional five
years (through January 31, 2011). Nuveen Advisory
is a wholly owned subsidiary of Nuveen. See
"Management of the Fund."
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 American 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 "NFC."
Custodian............. The Chase Manhattan Bank will serve as custodian of
the Fund's assets. See "Custodian and Transfer
Agent."
Market Price of Shares of closed-end investment companies frequently
Shares................ trade at prices lower than net asset value. Shares
of closed-end investment companies like the Fund
that invest predominantly 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 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
6
<PAGE>
Shares; Conversion to Open-End Fund" and the
Statement of Additional Information under
"Repurchase of Fund Shares; Conversion to Open-End
Fund." The Common Shares are designed primarily for
long-term investors, and you should not view the
Fund as a vehicle for trading purposes.
Special Risk
Considerations........
No Operating History. The Fund is a newly organized,
non-diversified, closed-end management investment
company with no history of operations.
Interest Rate Risk. Generally, when market interest
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. Conversely, the values of lower-rated and
comparable unrated debt securities are less likely
than those of investment grade and comparable
unrated debt securities to fluctuate inversely with
changes in interest rates. 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. Municipal bonds of below
investment grade quality are predominately
speculative with respect to the issuer's capacity
to pay interest and repay principal when due, and
therefore involve a greater risk of default.
Concentration in Connecticut Issuers. The Fund's
policy of investing primarily in municipal
obligations of issuers located in Connecticut 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
7
<PAGE>
MuniPreferred Shares offering in long-term,
typically fixed rate, municipal bonds. So long as
the Fund's municipal bond portfolio provides a
higher rate of return (net of Fund expenses) than
the MuniPreferred dividend rate, as reset
periodically, the leverage will cause Common
Shareholders to receive a higher current rate of
return than if the Fund were not leveraged. If,
however, long and/or short-term rates rise, the
MuniPreferred dividend rate could exceed the rate
of return on long-term bonds held by the Fund that
were acquired during periods of generally lower
interest rates, reducing return to Common
Shareholders. Leverage creates two major types of
risks for Common Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares,
because changes in the value of the Fund's bond
portfolio (including bonds bought with the
proceeds of the MuniPreferred Shares offering)
are borne entirely by the Common Shareholders;
and
. the possibility either that Common Share income
will fall if the MuniPreferred dividend rate
rises, or that Common Share income will
fluctuate because the MuniPreferred dividend
rate varies.
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.
Non-Diversification. Because the Fund is classified
as "non-diversified" under the Investment Company
Act of 1940, as amended (the "1940 Act"), it can
invest a greater portion of its assets in
obligations of a single issuer. As a result, the
Fund will be more susceptible than a more widely
diversified fund to any single corporate, economic,
political or regulatory occurrence. See "The Fund's
Investments." In addition, the Fund must satisfy
certain asset diversification rules in order to
qualify as a regulated investment company for
federal income tax purposes.
Anti-takeover Provisions. The Fund's Declaration of
Trust (the "Declaration") includes provisions that
could limit the ability of other entities or
persons to acquire control of the Fund or convert
the Fund to open-end status. The provisions of the
Declaration described above could have the effect
of depriving the Common Shareholders of
opportunities to sell their Common Shares at a
premium over the then current market price of the
Common Shares.
8
<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>
<S> <C>
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering
price)............................................. 4.50%
Dividend Reinvestment Plan Fees..................... None(/1/)
<CAPTION>
Percentage of Net
Assets Attributable
to Common Shares(/2/)
---------------------
<S> <C>
Annual Expenses
Management Fees....................................... 1.00%
Other Expenses........................................ .31%
----
Total Annual Expenses................................. 1.31%
Fee and Expense Reimbursement (Years 1-5)............. (.46%)(/3/)
----
Total Net Annual Expenses (Years 1-5)................. .85% (/3/)
----
</TABLE>
--------
(1) 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.
(2) Stated as percentages of the Fund's total net assets, and again assuming
the issuance of MuniPreferred Shares in an amount equal to 35% of the
Fund's capital (after their issuance), the Fund's expenses would be
estimated to be as follows:
<TABLE>
<CAPTION>
Percentage
of Total
Net Assets
----------
<S> <C>
Annual Expenses
Management Fees......... .65%
Other Expenses.......... .20%
----
Total Annual Expenses... .85%
Fees and Expense
Reimbursement (Years 1-
5)..................... (.30%)(/3/)
----
Total Net Annual
Expenses (Years 1-5)... .55% (/3/)
----
</TABLE>
(3) Nuveen Advisory has contractually agreed to reimburse the Fund for fees
and expenses in the amount of .30% of average daily total net assets for
the first 5 full 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 (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per Common Share (.20% 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 approximately
3,700,000 Common Shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."
9
<PAGE>
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
in years 1 through 5, increasing to 1.23% in year 10 and (2) a 5% annual
return:(/1/)
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years(/2/)
------ ------- ------- -------------
<S> <C> <C> <C>
$53 $71 $90 $160
</TABLE>
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
--------
(1) The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at 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. The expenses
you would pay, based on the Fund's expenses stated as a percentage of the
Fund's total net assets (assuming the issuance of MuniPreferred Shares in
an amount equal to 35% of the Fund's capital after their issuance) and
otherwise on the assumptions in the example would be: 1 year $50; 3 years
$62; 5 years $74; and 10 years $121.
(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 January 31, 2011. See
"Management of the Fund--Investment Management Agreement."
10
<PAGE>
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on June 1, 1999, pursuant to a Declaration
governed by the laws of The Commonwealth of Massachusetts. As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at 333 West Wacker Drive, Chicago, Illinois 60606, and its
telephone number is (800) 257-8787. The Fund is designed to provide tax
benefits to investors who are residents of Connecticut.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the over-allotment
option in full) after payment of the estimated organization and offering
costs. Nuveen has agreed to pay (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed $0.03 per Common Share. The
Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in municipal 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 Connecticut
income tax; and
. to enhance portfolio value relative to the municipal bond market by
investing in tax-exempt municipal bonds that Nuveen Advisory believes
are underrated or undervalued or that represent municipal market sectors
that are undervalued.
Underrated municipal bonds are those whose ratings do not, in Nuveen
Advisory's opinion, reflect their true creditworthiness. Undervalued municipal
bonds are bonds that, in Nuveen Advisory's opinion, are worth more than the
value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond appears to be consistent
with the value of similar bonds. Municipal bonds of particular types (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. The Fund's
investment in underrated or undervalued municipal bonds will be based on
Nuveen Advisory's belief that their yield is higher than that available on
bonds bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise (relative to the
market) to reflect their true value. The Fund attempts to increase its
portfolio value relative to the municipal bond market by prudent selection of
municipal bonds regardless of the direction the market may move. Any capital
appreciation realized by the Fund will generally result in the distribution of
taxable capital gains to Common Shareholders.
11
<PAGE>
Under normal market conditions, the Fund will invest its net assets in a
portfolio of municipal bonds that are exempt from regular federal and
Connecticut income taxes. Under normal market conditions, the Fund expects to
be fully invested (at least 95% of its assets) in such tax-exempt municipal
bonds. After the completion of the offering through December 31, 2001, the
Fund may invest in Out of State Bonds, provided that no more than 10% of the
Fund's investment income during that time, as measured on the date of purchase
of such bond, may be derived from Out of State Bonds. The Fund will purchase
Out of State Bonds if other suitable investments are not available. Investment
in Out of State Bonds would result in a portion of your dividends being
subject to Connecticut income taxes. For more information, see the Statement
of Additional Information. The Fund will invest at least 80% of its net assets
in investment grade quality municipal bonds. Investment grade quality means
that such bonds are rated, at the time of investment, within the four highest
grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but
judged to be of comparable quality by Nuveen Advisory. The Fund may invest up
to 20% of its net assets in municipal bonds that are rated, at the time of
investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged
to be of comparable quality by Nuveen Advisory. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds
of below investment grade quality are regarded as having predominately
speculative characteristics with respect to capacity to pay interest and repay
principal. The foregoing credit quality policies apply only at the time a
security is purchased, and the Fund is not required to dispose of a security
in the event that a rating agency downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or
sell such a security, Nuveen Advisory may consider such factors as Nuveen
Advisory's assessment of the credit quality of the issuer of such security,
the price at which such security could be sold and the rating, if any,
assigned to such security by other rating agencies. A general description of
Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix
A to the Statement of Additional Information. See "--Municipal Bonds" below
for a general description of the economic and credit characteristics of
municipal issuers in Connecticut. 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 Connecticut income taxes. For more information, see the Statement of
Additional Information.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and MuniPreferred
Shares voting together as a single
12
<PAGE>
class, and of the holders of a "majority of the outstanding" MuniPreferred
Shares voting as a separate class. A "majority of the outstanding" Common
Shares means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less. See "Description of
Shares--MuniPreferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--MuniPreferred Shares--Voting Rights"
for additional information with respect to the voting rights of holders of
MuniPreferred Shares.
If you are, or as a result of investment in the Fund would become, subject
to the federal alternative minimum tax, the Fund may not be a suitable
investment for you because the Fund expects that a substantial portion of its
investments will pay interest that is taxable under the federal alternative
minimum tax. Special rules apply to corporate holders. In addition, capital
gains distributions will be subject to capital gains taxes. See "Tax Matters."
Municipal Bonds
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 Connecticut, a city in Connecticut, 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 Connecticut income taxes,
although the interest may be subject to the federal alternative minimum tax.
The Fund may invest in municipal bonds issued by United States territories
(such as Puerto Rico or Guam) that are exempt from regular federal and
Connecticut income taxes. Through December 31, 2001, the Fund also may invest
in Out of State Bonds subject to the limitations described under "--Investment
Objectives and Policies."
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The market value of municipal
bonds will vary with changes in interest rate levels and as a result of
changing evaluations of the ability of their issuers to meet interest and
principal payments.
The Fund will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
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<PAGE>
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 advisory and administrative fees with respect to assets so invested.
Common Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. Nuveen Advisory will
take expenses into account when evaluating the investment merits of an
investment in the investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks," the net asset value and market value of leveraged shares will be more
volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that approximately
95% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades or
are unrated but judged to be of comparable quality by Nuveen Advisory
(approximately 50% in Aaa/AAA; 25% in Aa/AA; 10% in A; and 10% in Baa/BBB).
The Fund will generally select obligations which may not be redeemed at the
option of the issuer for approximately seven to nine years from the date of
purchase by the Fund. See the Statement of Additional Information under "Other
Investment Policies and Techniques--Portfolio Trading and Turnover Rate."
Subject to market availability, the Fund would likely seek to invest
approximately 5% of its initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade or that are unrated
but judged to be of comparable quality by Nuveen Advisory. See "--Investment
Objectives and Policies."
MUNIPREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer
MuniPreferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the MuniPreferred Shares.
14
<PAGE>
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 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. 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.
Under 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
15
<PAGE>
dividends on MuniPreferred Shares for two years, MuniPreferred Shareholders
would be entitled to elect a majority of the trustees of the Fund.
The Fund may be subject to certain restrictions imposed by guidelines of
one or more rating agencies which may issue ratings for MuniPreferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed on the
Fund by the 1940 Act. It is not anticipated that these covenants or guidelines
will impede Nuveen Advisory from managing the Fund's portfolio in accordance
with the Fund's investment objectives and policies.
The Fund may also borrow money for repurchase of its shares or as a
temporary measure for extraordinary or emergency purposes, including the
payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.
Assuming that the MuniPreferred Shares will represent approximately 35% of
the Fund's capital and pay dividends at an annual average rate of 3.50%, the
income generated by the Fund's portfolio (net of estimated expenses) must
exceed 1.23% 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 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 5.10% yield on the Fund's investment
portfolio, net of expenses, and the Fund's currently projected annual
MuniPreferred Share dividend rate of 3.50%. See "Risks" and "MuniPreferred
Shares and Leverage."
<TABLE>
<CAPTION>
(10)% (5)% 0% 5% 10%
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Components of Portfolio
Return
Net Income.............. 5.10 % 5.10 % 5.10 % 5.10 % 5.10%
Capital (Loss) or Gain.. (15.10)% (10.10)% (5.10)% (0.10)% 4.90%
Assumed Portfolio Total
Return................... (10.00)% (5.00)% 0.00 % 5.00 % 10.00%
Common Share Dividends.. 5.96 % 5.96 % 5.96 % 5.96 % 5.96%
Common Share Capital
Gain/(Loss)............ (23.23)% (15.54)% (7.85)% (0.15)% 7.54%
Common Share Total Return. (17.27)% (9.58)% (1.88)% 5.81 % 13.50%
</TABLE>
Common Share total return is composed of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on MuniPreferred
Shares) and gains or losses on the value of the securities the Fund owns. As
required by Securities and Exchange Commission rules, the table assumes that
the Fund is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0%, the Fund must
assume that the tax-exempt interest it receives on its municipal 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.
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<PAGE>
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 and municipal bond market risk, each of
which is more fully described below.
Newly Organized. The Fund is a newly organized, non-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. Conversely, the values of lower-rated and comparable unrated debt
securities are less likely than those of investment grade and comparable
unrated debt securities to fluctuate inversely with changes in interest rates.
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 on 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.
Concentration Risk. As described above, except to the extent the Fund
invests in temporary investments, the Fund will invest substantially all of
its net assets in Connecticut municipal bonds. The Fund is therefore
susceptible to political, economic or regulatory factors affecting issuers of
Connecticut municipal bonds. The information set forth below is derived from
sources that are generally available to investors. The information is intended
to give a recent historical description and is not intended to indicate future
or continuing trends in the financial or other positions of Connecticut.
Connecticut continues to lag the nation in job growth, but the State has
reclaimed the jobs it lost to the recession of the early 1990's. Once heavily
reliant on the insurance, defense manufacturing, finance and real estate
industries, the State's economy has become more diversified, benefiting from
growth in service sector employment and personal services, health care, legal
services, private
17
<PAGE>
education and gaming. Unemployment has improved and is now below national
averages, registering 2.3% in the first half of 2000 versus the national
average of 4.0% for the same time period. Since 1995, the State has
experienced slow, steady population growth, although it has not yet replaced
all of the residents it lost during the recession of the early 1990's.
Connecticut continues to rank first among states in per capita personal income
($39,300 in 1999), and since 1990 its per capita income has increased at a
greater rate each year than that of the entire nation. The State's urban
centers, however, continue to struggle with population losses, above average
rates of unemployment, and low per capita income levels.
In October, 1998, S&P's upgraded Connecticut's general obligation debt
rating to AA from AA-minus. As of June 15, 2000, Moody's and Fitch maintained
Aa3 and AA ratings on the State's general obligation debt. These ratings
reflect the State's credit quality only, and do not indicate the
creditworthiness of other tax-exempt securities in which the Fund may invest.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal bonds and does
not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of municipal bonds held by the Fund are
subject. Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of the municipal bonds, could affect or could have an adverse impact
on the financial condition of the issuers. The Fund is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of the municipal bonds, the market value or marketability of the municipal
bonds or the ability of the respective issuers of the municipal bonds acquired
by the Fund to pay interest on or principal of the municipal bonds. This
information has not been independently verified.
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.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays in
collecting principal and interest and the Fund may not, in all circumstances,
be able to collect all principal and interest to which it is entitled. To
enforce its rights in the event of a default in the payment of interest or
repayment of principal, or both, the Fund may take possession of and manage
the assets securing the issuer's obligations on such securities, which may
increase the Fund's operating expenses. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt.
18
<PAGE>
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 returns.
Leverage Risk. Leverage risk is the risk associated with the issuance of
the MuniPreferred Shares to leverage the Common Shares. There can be no
assurance that the Fund's leveraging strategy will be successful. Once the
MuniPreferred Shares are issued, the net asset value and market value of
Common Shares will be more volatile, and the yield to Common Shareholders will
tend to fluctuate with changes in the shorter-term dividend rates on the
MuniPreferred Shares. Long-term municipal bond rates of return are typically,
although not always, higher than shorter-term municipal bond rates of return.
If the dividend rate on the MuniPreferred Shares approaches the net rate of
return on the Fund's investment portfolio, the benefit of leverage to Common
Shareholders would be reduced. If the dividend 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. Because the long-term bonds included in the Fund's
portfolio will typically pay fixed rates of interest while the dividend rate
on the MuniPreferred Shares will be adjusted periodically, this could occur
even when both long-term and short-term municipal rates rise. In addition, the
Fund will pay (and Common Shareholders will bear) any costs and expenses
relating to the issuance and ongoing maintenance of the MuniPreferred Shares.
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 may result in capital loss and may reduce returns to
Common Shareholders.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate
the increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
Common Shareholders. Changes in the future direction of interest rates are
very difficult to predict accurately. If the Fund were to reduce leverage
based on a prediction about future changes to interest rates, and that
prediction turned out to be incorrect, the reduction in leverage would likely
operate to reduce the income and/or total returns to Common Shareholders
relative to the circumstance where the Fund had not reduced leverage. The Fund
may decide that this risk outweighs the likelihood of achieving the desired
reduction to volatility in income and share price if the prediction were to
turn out to be correct, and determine not to reduce leverage as described
above.
The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage
19
<PAGE>
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.
Non-Diversification. Because the Fund is classified as "non-diversified"
under the 1940 Act it can invest a greater portion of its assets in
obligations of a single issuer. As a result, the Fund will be more susceptible
than a more widely diversified fund to any single corporate, economic,
political or regulatory occurrence. See "The Fund's Investments." In addition,
the Fund must satisfy certain asset diversification rules in order to qualify
as a regulated investment company for federal income tax purposes.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and, if issued, 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. Among other
restrictions, the Fund may not invest more than 25% of total Fund assets in
securities of issuers in any one industry, except that this limitation does
not apply to municipal bonds backed by the assets and revenues of governments
or political subdivisions of governments.
The Fund may become subject to guidelines which are more limiting than the
investment restriction set forth above in order to obtain and maintain ratings
from Moody's or S&P on the MuniPreferred Shares 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" in the Statement of
Additional Information for information about these guidelines and a complete
list of the fundamental and non-fundamental investment policies of the Fund.
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
20
<PAGE>
MuniPreferred Shares was ever more than one-half of 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 immediately after the time
of issuance, if the Fund sells all the Common 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 interest 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.
Hedging Strategies
The Fund may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of Nuveen Advisory,
correlate with the prices of the Fund's investments. Successful implementation
of most hedging strategies would generate taxable income, and the Fund has no
present intention to use these strategies.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by Nuveen Advisory. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined
in the 1940 Act) and six of whom are not "interested persons." The
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<PAGE>
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 Funds" 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 "Investment Adviser."
Nuveen Advisory is responsible for execution of specific investment
strategies and day-to-day investment operations. Nuveen Advisory manages the
Fund using a team of analysts and portfolio managers that focus on a specific
group of funds. Paul L. Brennan is the portfolio manager of the Fund and will
provide daily oversight for, and execution of, the Fund's investment
activities. Mr. Brennan became a portfolio manager of Flagship Financial Inc.
in 1991, and subsequently became an Assistant Vice President of Nuveen
Advisory upon the acquisition of Flagship Resources Inc. by The John Nuveen
Company in January 1997. Mr. Brennan currently manages investments for 19
Nuveen-sponsored investment companies.
Nuveen Advisory is a wholly owned subsidiary of Nuveen, 333 West Wacker
Drive, Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates
have over $61 billion of net assets under management or surveillance. Nuveen
is a subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
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>
Up to $125 million......................................... .6500%
$125 million to $250 million............................... .6375%
$250 million to $500 million............................... .6250%
$500 million to $1 billion................................. .6125%
$1 billion to $2 billion................................... .6000%
$2 billion and over........................................ .5750%
</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),
22
<PAGE>
custodian, transfer agency and dividend disbursing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
For the first ten years of the Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
Jan. 31, net assets)
----------- ----------------
<S> <C>
2001*........... 0.30%
2002............ 0.30%
2003............ 0.30%
2004............ 0.30%
2005............ 0.30%
2006............ 0.30%
</TABLE>
<TABLE>
<CAPTION>
Percentage
Reimbursed
(as a percentage
Year Ending of average daily
Jan. 31, net assets)
----------- ----------------
<S> <C>
2007............ 0.25%
2008............ 0.20%
2009............ 0.15%
2010............ 0.10%
2011............ 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 January 31, 2011.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. eastern time) on each day the New York Stock
Exchange is open for business. Net asset value is calculated by taking the
fair value of the Fund's total assets, including interest or dividends accrued
but not yet collected, less all liabilities, and dividing by the total number
of shares outstanding. The result, rounded to the nearest cent, is the net
asset value per share.
In determining net asset value, expenses are accrued and applied daily and
securities and other assets for which market quotations are available are
valued at market value. The prices of municipal bonds are provided by a
pricing service and based on the mean between the bid and asked price. When
price quotes are not readily available (which is usually the case for
municipal bonds), the pricing service establishes a fair market value based on
prices of comparable municipal bonds. All valuations are subject to review by
the Fund's Board of Trustees or its delegate, Nuveen Advisory.
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
realized capital gains and ordinary taxable income, if any, after paying any
accrued dividends or making any liquidation payments to
23
<PAGE>
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 The Chase Manhattan Bank,
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 The Chase
Manhattan Bank as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value at the time
of valuation, the Fund will issue new shares at the then current market
price; or
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the American Stock
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the 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.
24
<PAGE>
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 in the
judgment of the Board of Trustees the change is warranted. 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 The
Chase Manhattan Bank, 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 pre-emptive 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.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund'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 (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed $0.03 per Common Share. See
"Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade
on an exchange
25
<PAGE>
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 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 one to three 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.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the MuniPreferred Shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the MuniPreferred shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such
dividend or distribution) immediately after the distribution. If the Fund
sells all the Common Shares and MuniPreferred Shares discussed in this
Prospectus, the liquidation value of the MuniPreferred Shares is expected to
be approximately 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.
26
<PAGE>
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.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each agreement, obligation or instrument entered into or executed
by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration
27
<PAGE>
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) a removal of trustees by
shareholders, and then only for cause, unless, with respect to (1) through
(4), such transaction has already been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Fund's Common Shares and MuniPreferred Shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected
(or, in the case of removing a trustee, when the trustee has been elected by
only one class), only the required vote by the applicable class or series will
be required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues Common Shares in connection with the
acquisition of assets (including those subject to liabilities) from any other
investment company or similar entity. None of the foregoing provisions may be
amended except by the vote of at least two-thirds of the Common Shares and
MuniPreferred Shares, voting together as a single class. In the case of the
conversion of the Fund to an open-end investment company, or in the case of
any of the foregoing transactions constituting a plan of reorganization which
adversely affects the holders of MuniPreferred Shares, the action in question
will also require the affirmative vote of the holders of at least two-thirds
of the Fund's MuniPreferred Shares outstanding at the time, voting as a
separate class, or, if such action has been authorized by the affirmative vote
of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the 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 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.
28
<PAGE>
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers will actually
reduce market discount.
If the Fund converted to an open-end company, it would be required to
redeem all MuniPreferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would
no longer be listed on the American Stock Exchange. In contrast to a closed-
end investment company, shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less any redemption charge that is in effect at the time of redemption.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust" for a discussion of the voting requirements applicable
to the conversion of the Fund to an open-end 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 advisor about the tax consequences of an investment in the Fund.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
and intends to distribute substantially all of its net income and gains to its
shareholders. Therefore, it is not expected that the Fund will be subject to
any federal income tax. The Fund primarily invests in municipal bonds from
issuers located in Connecticut or in municipal bonds whose income is otherwise
exempt from regular federal and Connecticut income taxes. Thus, substantially
all of the Fund's dividends to you will qualify as "exempt-interest
dividends." A shareholder treats an exempt-interest dividend as interest on
state and local bonds exempt from
29
<PAGE>
regular federal income tax. Some or all of an exempt-interest dividend,
however, may be subject to federal alternative minimum tax imposed on the
shareholder. Different federal alternative tax rules apply to individuals and
to corporations.
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 net 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. The Fund will
allocate distributions to shareholders that are treated as tax-exempt interest
and as long-term capital gain and ordinary income, if any, proportionately
among the Common Shares and MuniPreferred Shares. As long as the Fund
qualifies as a regulated investment company, distributions paid by the Fund
generally will not be eligible for the dividends received deduction allowed to
corporations.
Each year, you will receive a year-end statement that describes the tax
status of dividends paid to you during the preceding year, including the
source of investment income by state and the portion of income that is subject
to the federal alternative minimum tax. 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 exempt-interest 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 exempt-interest 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 and certain certifications), or
if you are otherwise subject to back-up withholding. If you receive Social
Security benefits, you should be aware that exempt-interest dividends are
taken into account in calculating the amount of these benefits that may be
subject to federal income tax. If you borrow money to buy Fund shares, you may
not deduct the interest on that loan. Under I.R.S. rules, Fund shares may be
treated as having been bought with borrowed money even if the purchase of the
Fund shares cannot be traced directly to borrowed money.
If you are subject to the federal alternative minimum tax, a portion of
your regular monthly dividends may be taxable.
Connecticut Tax Matters
The Fund's regular monthly dividends will not be subject to the Connecticut
personal income tax to the extent they are paid out of interest income earned
on Connecticut municipal bonds or out of
30
<PAGE>
interest income earned on obligations of U.S. territories and possessions. For
shareholders who hold their Fund shares as capital assets, the portion of the
Fund's monthly dividends attributable to long-term capital gains realized by
the Fund from the sale of Connecticut municipal bonds also will not be subject
to the Connecticut personal income tax. All other portions of the Fund's
monthly dividends will be subject to the Connecticut personal income tax. You
also will be subject to Connecticut personal income tax if you sell or
exchange Fund shares and realize a capital gain on the transaction.
The treatment of corporate shareholders of the Fund differs from that
described above. Corporate shareholders are subject to tax on all of the
Fund's monthly dividends.
All shareholders should refer to the Statement of Additional Information
for more detailed information and are urged to consult their tax advisors.
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 on the ground that the claims should have been
brought as derivative claims on behalf of the funds. The only remaining claim
is brought under Section 36(b) of the 1940 Act against Nuveen Advisory, and
relates solely to advisory fees Nuveen Advisory received from the six relevant
funds. Discovery is underway on that single claim. While the Fund cannot
assure you that the litigation will be decided in Nuveen Advisory's favor,
Nuveen Advisory believes a decision, if any, against it would have no material
adverse effect on the Fund, its Common Shares, or the ability of Nuveen
Advisory to perform its duties under the investment management agreement.
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
Name of Shares
---- ---------
<S> <C>
Salomon Smith Barney Inc..............................................
-------
Nuveen Investments....................................................
-------
Deutsche Banc Alex. Brown.............................................
-------
A.G. Edwards & Sons, Inc. ............................................
-------
Prudential Securities Incorporated....................................
-------
UBS Warburg LLC.......................................................
-------
Advest, Inc. .........................................................
-------
Raymond James & Associates, Inc. .....................................
-------
Total...............................................................
-------
</TABLE>
31
<PAGE>
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., Nuveen, Deutsche Banc
Alex. Brown, A.G. Edwards & Sons, Inc., Prudential Securities Incorporated,
UBS Warburg LLC, Advest, Inc. and Raymond James & Associates, 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
sales load the Fund will pay of $0.675 per share is equal to 4.5% of the
initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 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 , 2001. 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 sales load. 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.
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
American 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 of 1933, as amended.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.
32
<PAGE>
In connection with the requirements for listing the Fund's Common Shares on
the American Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of 400 beneficial owners 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 American 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 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 the Common Shares or securities
generally on the New York Stock Exchange, American Stock Exchange, Nasdaq
National Market or the Nasdaq Stock Market 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
33
<PAGE>
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.
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.
Nuveen, one of the representatives of the Underwriters, is the parent
company of Nuveen Advisory.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
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 also The Chase Manhattan Bank.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd &
Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of
Massachusetts law on the opinion of Bingham Dana LLP, Boston, Massachusetts.
34
<PAGE>
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Use of Proceeds...................................................... 3
Investment Objectives ............................................... 4
Investment Policies and Techniques................................... 10
Other Investment Policies and Techniques............................. 18
Management of the Funds.............................................. 21
Investment Adviser................................................... 27
Portfolio Transactions............................................... 28
Distributions........................................................ 29
Description of Shares................................................ 30
Certain Provisions in the Declaration of Trust....................... 33
Repurchase of Fund Shares; Conversion to Open-End Fund............... 34
Tax Matters.......................................................... 37
Performance Related and Comparative Information...................... 40
Experts.............................................................. 41
Custodian............................................................ 41
Additional Information............................................... 41
Reports of Independent Auditors...................................... 42
Financial Statements................................................. 42
Appendices
Appendix A--Ratings of Investments................................. A-1
Appendix B--Taxable Equivalent Yield Tables........................ B-1
Appendix C--Hedging Strategies and Risks........................... C-1
Appendix D--Factors Pertaining to Each State....................... D-1
Appendix E--Performance Related and Comparative Information........ E-1
</TABLE>
35
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1,000,000 Shares
Nuveen Connecticut Dividend Advantage
Municipal Fund
Common Shares
--------
PROSPECTUS
, 2001
--------
Salomon Smith Barney
Nuveen Investments
Deutsche Banc Alex. Brown
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg LLC
Advest, Inc.
Raymond James & Associates, Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-NFC-12-00
<PAGE>
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION--DATED DECEMBER 28, 2000
Nuveen Arizona Dividend Advantage Municipal Fund
Nuveen Connecticut Dividend Advantage Municipal Fund
Nuveen Maryland Dividend Advantage Municipal Fund
Nuveen Massachusetts Dividend Advantage Municipal Fund
Nuveen North Carolina Dividend Advantage Municipal Fund
Nuveen Virginia Dividend Advantage Municipal Fund
STATEMENT OF ADDITIONAL INFORMATION
Each of Nuveen Arizona Dividend Advantage Municipal Fund (a "Fund" or the
"Arizona Fund"), Nuveen Connecticut Dividend Advantage Municipal Fund (a "Fund"
or the "Connecticut Fund"), Nuveen Maryland Dividend Advantage Municipal Fund (a
"Fund" or the "Maryland Fund"), Nuveen Massachusetts Dividend Advantage
Municipal Fund (a "Fund" or the "Massachusetts Fund"), Nuveen North Carolina
Dividend Advantage Municipal Fund (a "Fund" or the "North Carolina Fund") and
Nuveen Virginia Dividend Advantage Municipal Fund (a "Fund" or the "Virginia
Fund") (collectively, the "Funds") is a newly organized, non-diversified closed-
end management investment company.
This Statement of Additional Information relating to common shares of each
of the Funds ("Common Shares") does not constitute a prospectus, but should be
read in conjunction with a Fund's Prospectus relating thereto dated ___________
__, 2001 (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 a Fund's
Prospectus prior to purchasing such shares. A copy of a Fund's Prospectus may
be obtained without charge by calling (800) 257-8787. You may also obtain a
copy of a Fund's Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Use of Proceeds 3
Investment Objectives 4
Investment Policies and Techniques 10
Other Investment Policies and Techniques 18
Management of the Funds 21
Investment Adviser 27
Portfolio Transactions 28
Distributions 29
Description of Shares 30
Certain Provisions in the Declaration of Trust 33
Repurchase of Fund Shares; Conversion to Open-End Fund 34
Tax Matters 37
Performance Related and Comparative Information 40
Experts 41
Custodian 41
Additional Information 41
Reports of Independent Auditors 42
Financial Statements 42
Ratings of Investments (Appendix A) A-1
Taxable Equivalent Yield Tables (Appendix B) B-1
Hedging Strategies and Risks (Appendix C) C-1
Factors Pertaining to Each State (Appendix D) D-1
Performance Related and Comparative Information (Appendix E) E-1
</TABLE>
This Statement of Additional Information is dated ___________ __, 2001
2
<PAGE>
USE OF PROCEEDS
Arizona Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
Connecticut Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
Maryland Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
Massachusetts Fund - The net proceeds of the offering of Common Shares of
the Fund will be approximately: $_______ ($_______ if the Underwriters exercise
the over-allotment option in full) after payment of organization and offering
costs.
North Carolina Fund - The net proceeds of the offering of Common Shares of
the Fund will be approximately: $_______ ($_______ if the Underwriters exercise
the over-allotment option in full) after payment of organization and offering
costs.
3
<PAGE>
Virginia Fund - The net proceeds of the offering of Common Shares of the
Fund will be approximately: $_______ ($_______ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
For each Fund, Nuveen Advisory has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share.
Pending investment in municipal bonds that meet a 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, a 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 a Fund may invest
directly.
INVESTMENT OBJECTIVES
Each Fund's investment objective is set forth below:
Arizona Fund - to provide current income exempt from regular federal and
Arizona income tax, and to enhance portfolio value relative to the municipal
bond market by investing in
4
<PAGE>
tax-exempt municipal bonds that the Fund's investment adviser believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued.
Connecticut Fund - to provide current income exempt from regular federal
and Connecticut 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.
Maryland Fund - to provide current income exempt from regular federal and
Maryland 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.
Massachusetts Fund - to provide current income exempt from regular federal
and Massachusetts 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.
North Carolina Fund - to provide current income exempt from regular federal
and North Carolina 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.
Virginia Fund - to provide current income exempt from regular federal and
Virginia 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.
5
<PAGE>
A 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. Each 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 a Fund will
6
<PAGE>
generally result in the distribution of taxable capital gains to holders of
Common Shares. Each Fund's investment objectives are fundamental policies of the
Fund.
No Fund has 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 each 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 suitability
of an investment in Common Shares will depend upon a comparison of the after-tax
yield likely to be provided from a 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, each Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, MuniPreferred Shares (as hereinafter defined) voting
together as a single class, and of the holders of a majority of the outstanding
MuniPreferred Shares voting as a separate class:
(1) Issue senior securities, as defined in the Investment Company Act
of 1940, other than MuniPreferred Shares, except to the extent permitted
under the Investment Company Act of 1940 and except as otherwise described
in the Prospectus;
(2) Borrow money, except from banks for temporary or emergency
purposes or for repurchase of its shares, and then only in an amount not
exceeding one-third of the value of the Fund's total assets (including the
amount borrowed) less the Fund's liabilities (other than borrowings);
(3) Act as underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities;
(4) Invest more than 25% of its total assets in securities of issuers
in any one industry; provided, however, that such limitation shall not
apply to municipal bonds other than those municipal bonds backed only by
the assets and revenues of non-governmental users;
7
<PAGE>
(5) Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests
therein or foreclosing upon and selling such security;
(6) Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed by
physical commodities);
(7) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal bonds or short-term investments in
accordance with its investment objectives, policies and limitations;
(8) Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 10% of the Fund's total assets
would then be invested in securities of a single issuer or if as a result
the Fund would hold more than 10% of the outstanding voting securities of
any single issuer; provided that, with respect to 50% of the Fund's assets,
the Fund may invest up to 25% of its assets in the securities of any one
issuer.
For purposes of the foregoing and "Description of Shares--MuniPreferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of a Fund, means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
For the purpose of applying the limitation set forth in subparagraph (8)
above, an issuer shall be deemed the sole issuer of a security when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a non-
governmental issuer, such as an industrial corporation or a privately owned or
operated hospital, if the security is backed only by the assets and revenues of
the non-governmental issuer, then such non-governmental issuer would be deemed
to be the sole issuer. Where a security is also backed by the enforceable
obligation of a superior or unrelated governmental or other entity (other than a
bond insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would be
considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Fund's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act of 1940, a Fund may invest only up to 10%
of its total assets in the aggregate in shares of other investment companies and
only up to 5% of its total assets in any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired
investment company at the time such shares are purchased. As a stockholder in
any investment company, a Fund will bear its ratable share of
8
<PAGE>
that investment company's expenses, and would remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of Common Shares would therefore be subject to duplicative
expenses to the extent a 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, each Fund is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the Board of Trustees. A Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to
obtain securities equivalent in kind and amount to the securities sold at
no added cost, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments
are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 or any
exemptive relief obtained thereunder.
(3) Enter into futures contracts or related options or forward
contracts, if more than 30% of the Fund's net assets would be represented
by futures contracts or more than 5% of the Fund's net assets would be
committed to initial margin deposits and premiums on futures contracts and
related options.
(4) Purchase securities when borrowings exceed 5% of its total assets
if and so long as MuniPreferred Shares are outstanding.
(5) Purchase securities of companies for the purpose of exercising
control.
(6) Invest in inverse floating rate securities (which are securities
that pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
Each Fund intends to apply for ratings for its preferred shares (called
"MuniPreferred Shares" herein) from Moody's and/or S&P. In order to obtain and
maintain the required ratings, a 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. No Fund anticipates that such guidelines would have a material
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adverse effect on its Common Shareholders or its ability to achieve its
investment objectives. Each 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 a 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 each Fund's
investment objectives, policies, and techniques that are described in the Funds'
respective Prospectuses.
Investment in Municipal Bonds
Portfolio Investments
The Arizona Fund will invest its net assets in a portfolio of municipal
bonds that are exempt from regular federal and Arizona income tax. The
Connecticut Fund will invest its net assets in a portfolio of municipal bonds
that are exempt from regular federal and Connecticut income tax. The Maryland
Fund will invest its net assets in a portfolio of municipal bonds that are
exempt from regular federal and Maryland income tax. The Massachusetts Fund will
invest its net assets in a portfolio of municipal bonds that are exempt from
regular federal and Massachusetts income tax. The North Carolina Fund will
invest its net assets in a portfolio of municipal bonds that are exempt from
regular federal and North Carolina income tax. The Virginia Fund will invest its
net assets in a portfolio of municipal bonds that are exempt from regular
federal and Virginia income tax.
Under normal market conditions, and except for the temporary investments
described below, each Fund expects to be fully invested (at least 95% of its
assets) in such tax-exempt municipal bonds described above. Through December 31,
2001, each Fund may invest in municipal bonds that are exempt from regular
federal income tax but not from a Fund's particular state income tax ("Out of
State Bonds"), provided that no more than 10% of a Fund's investment income
during that time, as measured on the date of purchase of such bonds, may be
derived from Out of State Bonds.
Each Fund will invest at least 80% of its net assets in municipal bonds
that at the time of investment are investment grade quality. Investment
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grade quality bonds are bonds rated within the four highest grades (Baa or BBB
or better by Moody's, S&P or Fitch) or bonds that are unrated but judged to be
of comparable quality by Nuveen Advisory. A 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
Nuveen Advisory. Bonds of below investment grade quality (Ba/BB or below) are
commonly referred to as junk bonds. Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions which could adversely
affect such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities; municipal bonds rated Baa are considered medium
grade obligations which lack outstanding investment characteristics and have
speculative characteristics, while municipal bonds rated BBB are regarded as
having adequate capacity to pay principal and interest. Municipal bonds rated
AAA in which a Fund may invest may have been so rated on the basis of the
existence of insurance guaranteeing the timely payment, when due, of all
principal and interest. Municipal bonds rated below investment grade quality are
obligations of issuers that are considered 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 a Fund may have greater difficulty selling its
portfolio securities. A 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.
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Each Fund will primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15-30 years, but
the average weighted maturity of obligations held by a Fund may be shortened,
depending on market conditions. As a result, a 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 a Fund's cash fully invested, including the period during which the net
proceeds of the offering are being invested, a Fund may invest any percentage of
its net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open or closed-end investment companies that
invest primarily in municipal bonds of the type in which a Fund may invest
directly. Each Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Tax-exempt short-term investments include various
obligations issued by state and local governmental issuers, such as tax-exempt
notes (bond anticipation notes, tax anticipation notes and revenue anticipation
notes or other such municipal bonds maturing in three years or less from the
date of issuance) and municipal commercial paper. Each Fund will invest only in
taxable short-term investments which are U.S. Government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and which
mature within one year from the date of purchase or carry a variable or floating
rate of interest. See Appendix A for a general description of Moody's, S&P's and
Fitch's ratings of securities in such categories. Taxable short-term investments
of a 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 "Repurchase Agreements." To the extent a Fund invests
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in taxable investments, a 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 a Fund will not be required
to dispose of securities in the event Moody's, S&P or Fitch downgrades its
assessment of the credit characteristics of a particular issuer.
Nuveen Advisory seeks to enhance portfolio value relative to the municipal
bond market by investing in tax-exempt municipal bonds that it believes are
underrated or undervalued or that represent municipal market sectors that are
undervalued. Underrated municipal bonds are those whose ratings do not, in
Nuveen Advisory's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in Nuveen Advisory's opinion, are worth more
than the value assigned to them in the marketplace. Nuveen Advisory may at times
believe that bonds associated with a particular municipal market sector (for
example, electric utilities), or issued by a particular municipal issuer, are
undervalued. Nuveen Advisory may purchase such a bond for the Fund's portfolio
because it represents a market sector or issuer that Nuveen Advisory considers
undervalued, even if the value of the particular bond is consistent with the
value of similar bonds. Municipal bonds of particular types or purposes (e.g.,
hospital bonds, industrial revenue bonds or bonds issued by a particular
municipal issuer) may be undervalued because there is a temporary excess of
supply in that market sector, or because of a general decline in the market
price of municipal bonds of the market sector for reasons that do not apply to
the particular municipal bonds that are considered undervalued. A 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.
No Fund has established any limit on the percentage of its portfolio
investments that may be invested in municipal bonds subject to the federal
alternative minimum tax provisions of federal tax law, and each Fund expects
that a substantial portion of the current income it produces will be includable
in alternative minimum taxable income. Special considerations apply to corporate
investors. See "Tax Matters."
Also included within the general category of municipal bonds described in
a Fund's Prospectus are participations in lease obligations or installment
purchase contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, a 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, a Fund will only
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purchase Municipal Lease Obligations where Nuveen Advisory believes the issuer
has a strong incentive to continue making appropriations until maturity.
Upon Nuveen Advisory's recommendation, during temporary defensive periods
and in order to keep a Fund's cash fully invested, including the period during
which the net proceeds of the offering are being invested, a 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 a
Fund invests in taxable short-term investments, a Fund will not at such times be
in a position to achieve that portion of its investment objective of seeking
current income exempt from regular federal income tax. For further information,
see, "Short-Term Investments" below.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
Each Fund also may invest up to 10% of its net assets in securities of
other open or closed-end investment companies that invest primarily in municipal
bonds of the type in which the Fund may invest directly. The Fund will generally
select obligations which may not be redeemed at the option of the issuer for
approximately seven to nine years.
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Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully invested, a
Fund may invest up to 100% of its total assets in cash equivalents and short-
term taxable fixed-income securities, although each Fund intends to invest in
taxable short-term investments only in the event that suitable tax-exempt short-
term investments are not available at reasonable prices and yields. Short- term
taxable fixed income investments are defined to include, without limitation, the
following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the date
specified thereon. Under current FDIC regulations, the maximum insurance
payable as to any one certificate of deposit is $100,000; therefore,
certificates of deposit purchased by a Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time a 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 a 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 a Fund to invest
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temporarily available cash. Each 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 a Fund may invest. Repurchase agreements may be considered loans to
the seller, collateralized by the underlying securities. The risk to a 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 a 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, a 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 a Fund. If
the seller were to be subject to a federal bankruptcy proceeding, the
ability of a 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 a Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by a Fund at
any time. Nuveen Advisory will consider the financial condition of the
corporation (e.g., earning power, cash flow, and other liquidity ratios)
and will continuously monitor the corporation's ability to meet all of its
financial obligations, because a Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
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Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies,
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies, such
as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term
unsecured, negotiable promissory notes issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom. Maturities or municipal paper generally will be shorter than the
maturities of TANs, BANs or RANs. There is a limited secondary market for issues
of Municipal Paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or a tax-exempt money market
index.
While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are available
in the marketplace and the Fund may invest in such other types of notes to the
extent permitted under its investment objectives, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
Hedging Strategies
Each Fund may periodically engage in hedging transactions. Hedging is a
term used for various methods of seeking to preserve portfolio capital value by
offsetting price changes in one investment through making another investment
whose price should tend to move in the opposite direction. It may be desirable
and possible in various market environments to partially hedge the portfolio
against fluctuations in market value due to interest rate fluctuations by
investment in
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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. A Fund will only sell covered
futures contracts, which means that a Fund segregates assets equal to the amount
of the obligations.
These transactions present certain risks. In particular, the imperfect
correlation between price movements in the futures contract and price movements
in the securities being hedged creates the possibility that losses on the hedge
by a Fund may be greater than gains in the value of the securities in a Fund's
portfolio. In addition, futures and options markets may not be liquid in all
circumstances. As a result, in volatile markets, a 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. A 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 a Fund's net assets. A
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 Specific States
Factors pertaining to Arizona are set forth in Appendix D-1; factors
pertaining to Connecticut are set forth in Appendix D-2; factors pertaining to
Maryland are set forth in Appendix D-3; factors pertaining to Massachusetts are
set forth in Appendix D-4; factors pertaining to North Carolina are set forth in
Appendix D-5; and factors pertaining to Virginia are set forth in Appendix
D-6.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Illiquid Securities
A 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.
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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 a Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a 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 a 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. A 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, a 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, each 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 a Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, the annual portfolio turnover rate of a Fund may exceed 100% in
particular years.
Other Investment Companies
Each Fund may invest in securities of other open or closed-end investment
companies that invest primarily in municipal bonds of the types in which the
Fund may invest directly. A 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, a Fund will bear its
ratable share of that investment company's expenses and would remain subject to
payment of a 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 a 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 each Fund's Prospectus in the
section entitled "Risks," the net asset value and market value of leveraged
shares will be more
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volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares.
When-Issued and Delayed Delivery Transactions
Each Fund may buy and sell municipal bonds on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions the payment obligation
and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date a Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, a 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 a Fund. A
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 a 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, each 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 a 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. A 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 a
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 a 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 a 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
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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
Each 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 a Fund accrues income with
respect to these securities prior to the receipt of such interest, it may have
to dispose of portfolio securities under disadvantageous circumstances in order
to obtain cash needed to pay income dividends in amounts necessary to avoid
unfavorable tax consequences.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The management of each Fund, including general supervision of the duties
performed for a Fund under the Management Agreement, is the responsibility of
the Board of Trustees of that Fund. The number of trustees of each
Fund is currently set at seven, one of whom is an "interested" person (as the
term "interested" persons is defined in the Investment Company Act of 1940) and
six of whom are not "interested" persons. None of the trustees who are not
"interested" persons of a Fund has ever been a director or employee of, or
consultant to, Nuveen or its affiliates. The names and business addresses of the
trustees and officers of a 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 a Fund indicated by an asterisk.
<TABLE>
<CAPTION>
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Timothy R. Schwertfeger* 3/28/49 Chairman of the Chairman and Director (since July 1996) of The John Nuveen Company,
333 West Wacker Drive Board, President Nuveen Investments, Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 and Trustee Advisory Corp.; prior thereto, Executive Vice President and Director
of The John Nuveen Company and Nuveen Investments; Director (since
1992) and Chairman (since 1996) of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Chairman and Director (since January
1997) of Nuveen Asset Management, Inc.; Director (since 1996) of
Institutional Capital Corporation; Chairman and Director of
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Rittenhouse Financial Services Inc. (since 1999); Chief Executive
Officer (since September 1999) of Nuveen Senior Loan Asset Management
Inc.
Robert P. Bremner 8/22/40 Trustee Private Investor and Management Consultant.
3725 Huntington Street,
N.W.
Washington, D.C. 20015
Lawrence H. Brown 7/29/34 Trustee Retired (August 1989) as Senior Vice President of The Northern Trust
201 Michigan Avenue Company
Highwood, IL 60040
Anne E. Impellizzeri 1/26/33 Trustee Executive Director (since 1998) of Manitoga (Center for Russel
3 West 29th Street Wright's Design with Nature), formerly President and Chief Executive
New York, NY 10001 Officer of Blanton-Peale Institutes of Religion and Health (since
December 1990); prior thereto, Vice President, Metropolitan Life
Insurance Co.
Peter R. Sawers 4/3/33 Trustee Adjunct Professor of Business and Economics, University of Dubuque,
22 The Landmark Iowa; formerly (1991-2000) Adjunct Professor, Lake Forest Graduate
Northfield, IL 60093 School of Management, Lake Forest, Illinois; prior thereto, Executive
Director, Towers Perrin Australia; Chartered Financial Analyst;
Certified Management Consultant.
William J. Schneider 9/24/44 Trustee Senior Partner and Chief Operating Officer, Miller-Valentine Partners,
4000 Miller-Valentine Ct. Vice President, Miller-Valentine Group, a development and contract
P. O. Box 744 company; Member Community Advisory Board, National City Bank, Dayton,
Dayton, OH 45401 Ohio; Business Advisory Council, Cleveland Federal Reserve Bank.
Judith M. Stockdale 12/29/47 Trustee Executive Director, Gaylord and Dorothy Donnelley Foundation (since
35 E. Wacker Drive 1994); prior thereto, Executive Director, Great Lakes Protection Fund
Suite 2600 (from 1990 to 1994).
Chicago, IL 60601
Alan G. Berkshire 12/28/60 Vice President and Senior Vice President and General Counsel (since September 1997) and
333 W. Wacker Drive Assistant Secretary Secretary (since May 1998) of The
Chicago, IL 60606
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
John Nuveen Company, Nuveen
Investments, Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp., Senior Vice President and
Secretary (since September 1999) of
Nuveen Senior Loan Management Inc.;
prior thereto, Partner in the law firm
of Kirkland & Ellis.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Treasurer (since January 1999), prior thereto,
Chicago, IL 60606 Assistant Vice President (from January
1997); formerly, Associate of Nuveen
Investments; Vice President and
Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management
Inc.; Chartered Financial Analyst.
Michael S. Davern 6/26/57 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. (Since January 1997); prior
Chicago, IL 60606 thereto, Vice President and Portfolio
Manager of Flagship Financial.
Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments;
333 W. Wacker Drive Vice President (since January 1998) of
Chicago, IL 60606 Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. (since December 1995);
Chicago, IL 60606 Assistant Vice President of Nuveen
Advisory Corp. (from September 1992
to December 1995), prior thereto,
Assistant Portfolio Manager of Nuveen
Advisory Corp.; Chartered Financial
Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments
333 W. Wacker Drive Controller and (since May 1998) The John Nuveen
Chicago, IL 60606 Company, Vice President (since
September 1999) of Nuveen Senior Loan
Management Inc.; Certified Public
Accountant.
J. Thomas Futrell 7/5/55 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.; Chartered Financial Analyst.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
Chicago, IL 60606
Richard A. Huber 3/26/63 Vice President Vice President of Nuveen Institutional
333 W. Wacker Drive Advisory Corp. (since March 1998) and
Chicago, IL 60606 Nuveen Advisory Corp. (since January
1997); prior thereto, Vice President
and Portfolio Manager of Flagship
Financial, Inc.
Steven J. Krupa 8/21/57 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp.
Chicago, IL 60606
David J. Lamb 3/22/63 Vice President Vice President (since March 2000) of Nuveen
Investments, previously Assistant Vice
President (since January 1999), prior thereto,
Associate of Nuveen Investments; Certified
Public Accountant
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Assistant Secretary and Assistant General Counsel of
Chicago, IL 60606 Nuveen Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Assistant Secretary of the John
Nuveen Company and (since January 1997)
Nuveen Asset Management, Inc.; Vice
President and Assistant Secretary
(since September 1999) of Nuveen Senior
Loan Asset Management Inc.
Edward F. Neild, IV 7/7/65 Vice President Vice President (since September 1996),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since December 1993) of Nuveen
Advisory Corp., Portfolio Manager
prior thereto; Vice President (since
September 1996), previously Assistant
Vice President (since May 1995) of
Nuveen Institutional Advisory Corp.,
Portfolio Manager prior thereto;
Chartered Financial Analyst.
Stephen S. Peterson 9/20/57 Vice President Vice President (since September 1997),
333 W. Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since September 1996), Portfolio
Manager, prior thereto,
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name and Address Birthdate Positions and Principal Occupations During
---------------- --------- ------------- ----------------------------
Offices with a Past Five Years
-------------- ---------------
Fund
----
<S> <C> <C> <C>
of Nuveen Advisory Corp.; Chartered
Financial Analyst.
Thomas C. Spalding, Jr. 7/31/51 Vice President Vice President of Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Chartered Financial
Analyst.
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary
333 W. Wacker Drive Secretary and Associate General Counsel, formerly
Chicago, IL 60606 Assistant General Counsel, of Nuveen
Investments; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Vice President and Assistant
Secretary of The John Nuveen Company
(since May 1994); Vice President and
Assistant Secretary (since September
1999) of Nuveen Senior Loan Asset
Management Inc.; Chartered Financial
Analyst.
</TABLE>
Peter R. Sawers and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of each Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The trustees of each Fund are also directors or trustees, as the case may
be, of 35 Nuveen open-end funds and 54 Nuveen closed-end funds advised by Nuveen
Advisory Corp. Mr. Schwertfeger is a director or trustee, as the case may be, of
13 Nuveen open-end and closed-end funds advised by Nuveen Institutional Advisory
Corp. and two funds advised by Nuveen Senior Loan Asset Management Inc. None of
the independent trustees has ever been a director, officer, or employee of, or
a consultant to, Nuveen Advisory, Nuveen or their affiliates.
25
<PAGE>
The Common Shareholders of each Fund will elect trustees at the next annual
meeting of Common Shareholders, unless any MuniPreferred Shares are outstanding
at that time, in which event holders of MuniPreferred Shares, voting as a
separate class, will elect two trustees and the remaining trustees shall be
elected by Common Shareholders and holders of MuniPreferred Shares, voting
together as a single class. Holders of MuniPreferred Shares will be entitled to
elect a majority of a Fund's trustees under certain circumstances. See
"Description of Shares - MuniPreferred Shares - Voting Rights."
The following table sets forth estimated compensation to be paid by each
Fund projected during the Fund's first full fiscal year after commencement of
operation. No Fund has a retirement or pension plan. The officers and trustees
affiliated with Nuveen serve without any compensation from a Fund.
<TABLE>
<CAPTION>
Arizona Connecticut Maryland Massachusetts
Name of Trustee Fund* Fund* Fund* Fund*
------------------------ -------------------- -------------------- --------------------- -------------
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert P. Bremmer $120 $120 $120 $120
-----------------------------------------------------------------------------------------------------------------
Lawrence H. Brown $126 $126 $126 $126
-----------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $120 $120 $120 $120
-----------------------------------------------------------------------------------------------------------------
Peter R. Sawers $120 $120 $120 $120
-----------------------------------------------------------------------------------------------------------------
William J. Schneider $120 $120 $120 $120
-----------------------------------------------------------------------------------------------------------------
Judith M. Stockdale $120 $120 $120 $120
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
Total Compensation
North Carolina Virginia from Funds and Deferred
Name of Trustee Fund* Fund* Fund Complex** Compensation
--------------------- -------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Robert P. Bremmer $120 $120 $71,000 $ 8,368
-------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown $126 $126 $75,250 $ 0
-------------------------------------------------------------------------------------------------------------------------
Anne E. Impellizzeri $120 $120 $71,000 $55,784
-------------------------------------------------------------------------------------------------------------------------
Peter R. Sawers $120 $120 $71,000 $55,784
-------------------------------------------------------------------------------------------------------------------------
William J. Schneider $120 $120 $69,000 $54,216
-------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale $120 $120 $71,000 $13,946
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
--------------------
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of that Fund's first full
fiscal year for services to the Fund.
**Based on the estimated compensation paid to the trustees for the one year
period ending 12/31/00 for services to the open-end and closed-end funds advised
by Nuveen Advisory.
No Fund has any employees. Its officers are compensated by Nuveen Advisory
or Nuveen.
INVESTMENT ADVISER
Nuveen Advisory acts as investment adviser to each Fund, with
responsibility for the overall management of each Fund. Its address is 333 West
Wacker Drive, Chicago, Illinois 60606. Nuveen Advisory is also responsible for
managing a Fund's business affairs and providing day-to-day administrative
services to each Fund. For additional information regarding the management
services performed by Nuveen Advisory, see "Management of the Fund" in a Fund's
Prospectus.
Nuveen Advisory is a wholly owned subsidiary of Nuveen, which is also a co-
managing underwriter of each Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from Strategic Insight, Nuveen is the leading sponsor of
exchange-traded municipal bond funds as measured by number of funds (59) and
fund assets under management ($27 billion). Overall, Nuveen and its affiliates
have over $61 billion in assets under management or surveillance. 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
27
<PAGE>
located in St. Paul, Minnesota, and is principally engaged in providing
property-liability insurance through subsidiaries.
Pursuant to an investment management agreement between Nuveen Advisory and
each Fund, each 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>
Up to $125 million .6500%
$125 million to $250 million .6375%
$250 million to $500 million .6250%
$500 million to $1 billion .6125%
$1 billion to $2 billion .6000%
$2 billion and over .5750%
</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 each Fund and the sole shareholder
of that Fund.
For the first ten years of each Fund's operation, Nuveen Advisory has
contractually agreed to reimburse the Fund for fees and expenses in the amounts,
and for the time periods, set forth below:
<TABLE>
<CAPTION>
Year Ending Percentage Year Ending Percentage
Jan. 31, Reimbursed Jan. 31, Reimbursed
------------- ------------ ------------- -------------
<S> <C> <C> <C>
2001* .30% 2007 .25%
2002 .30% 2008 .20%
2003 .30% 2009 .15%
2004 .30% 2010 .10%
2005 .30% 2011 .05%
2006 .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 a Fund for any portion of its fees and expenses beyond January 31,
2011.
The Funds, Nuveen Advisory, Nuveen Investments, Salomon Smith Barney and
other related entities have adopted codes of ethics which essentially prohibit
certain of their personnel, including Nuveen fund portfolio managers, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of a client's, including each Fund's, anticipated or actual
portfolio transactions, and are designed to assure that the interests of
clients, including Fund shareholders, are placed before the interests of
personnel in connection with personal investment transactions. Text-only
versions of the codes of ethics can be viewed online or downloaded from the
EDGAR Database on the SEC's internet web site at www.sec.gov. You may also
review and copy those documents by visiting the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of
ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington,
DC 20549-0102 or by e-mail request at [email protected].
PORTFOLIO TRANSACTIONS
Nuveen Advisory is responsible for decisions to buy and sell securities for
a Fund and for the placement of a 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
28
<PAGE>
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.
Each 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 a 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 a Fund.
Nuveen Advisory may manage other investment accounts and investment
companies for other clients which have investment objectives similar to those of
a 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 a 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 a 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, a Fund may not purchase portfolio securities from any
underwriting syndicate of which Nuveen is a member except under certain limited
conditions set forth in Rule 10f-3. The rule sets forth requirements relating
to, among other things, the terms of an issue of municipal bonds purchased by a
Fund, the amount of municipal bonds which may be purchased in any one issue and
the assets of a Fund that may be invested in a particular issue. In addition,
purchases of securities made pursuant to the terms of the Rule must be approved
at least quarterly by the Board of Trustees of a Fund, including a majority of
the members thereof who are not interested persons of that Fund.
DISTRIBUTIONS
As described in each Fund's 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 of the Common
Shares, depending on market conditions. To permit a Fund to maintain a
29
<PAGE>
more stable monthly distribution, a 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 a Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on a Fund's
outstanding MuniPreferred Shares. As a result, the distributions paid by a Fund
for any particular period may be more or less than the amount of net investment
income actually earned by a Fund during such period. Undistributed net
investment income will be added to a Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from a Fund's net asset value.
For tax purposes, each Fund is currently required to allocate net capital
gain and other taxable income, if any, between Common Shares and MuniPreferred
Shares in proportion to total 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 a Fund to Common Shareholders, see a Fund's Prospectus
under "MuniPreferred Shares and Leverage."
While any MuniPreferred Shares are outstanding, a 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 a 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 a Fund's ability to make distributions on its Common Shares could
under certain circumstances impair the ability of a Fund to maintain its
qualification for taxation as a regulated investment company. See "Tax
Matters."
DESCRIPTION OF SHARES
Common Shares
Each Fund's Declaration of Trust (each a "Declaration") authorizes the
issuance of an unlimited number of Common Shares, par value $.01 per share. All
Common Shares of a Fund have equal rights as to the payment of dividends and the
distribution of assets upon liquidation of that Fund. 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 a 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 American Stock
Exchange, subject to notice of issuance. Each 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.
30
<PAGE>
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 a Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of a Fund's Common Shares will be determined by factors beyond the control
of a Fund, a 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 a Fund as a
vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and a Fund's 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 of a Fund, by action
of the Board of Trustees without the approval of the Common Shareholders.
Each Fund's Board of Trustees has indicated its intention to authorize an
offering of MuniPreferred Shares (representing approximately 35% of a 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 a 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 a Fund's Declaration) if and when it
authorizes a MuniPreferred Shares offering, each 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 of each Fund has indicated that the
liquidation preference, preference on distribution, voting rights and redemption
provisions of the MuniPreferred Shares will likely be as stated below.
Limited Issuance of MuniPreferred Shares. Under the 1940 Act, the Fund
could issue MuniPreferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the MuniPreferred Shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
MuniPreferred shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
MuniPreferred Shares discussed in this Prospectus, the liquidation value of the
MuniPreferred Shares is expected to be approximately 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.
31
<PAGE>
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of a 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 a Fund. A consolidation or
merger of a Fund with or into any Massachusetts business trust or corporation or
a sale of all or substantially all of the assets of a Fund shall not be deemed
to be a liquidation, dissolution or winding up of a Fund.
Voting Rights. In connection with any issuance of MuniPreferred Shares, a
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that MuniPreferred Shares be voting shares and have equal voting rights
with Common Shares. Except as otherwise indicated in this Statement of
Additional Information and except as otherwise required by applicable law,
holders of MuniPreferred Shares will vote together with Common Shareholders as a
single class.
In connection with the election of a Fund's trustees, holders of
MuniPreferred Shares, voting as a separate class, will be entitled to elect two
of a 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 a 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 a 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 a Fund's outstanding
MuniPreferred Shares of any class or series, as the case may be, voting as a
separate class, will be required to, among other things (1) take certain actions
which would affect the preferences, rights, or powers of such class or series or
(2) authorize or issue any class or series ranking prior to the MuniPreferred
Shares. Except as may otherwise be required by law, (1) the affirmative vote of
the holders of at least two-thirds of a Fund's MuniPreferred Shares outstanding
at the time, voting as a separate class, will be required to approve any
conversion of a Fund from a closed-end to an open-end investment company and (2)
the affirmative vote of the holders of at least two-thirds of the outstanding
MuniPreferred Shares, voting as a separate class, shall be required to approve
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares, provided however, that such separate class vote shall be
a majority vote if the action in question has previously been approved, adopted
or authorized by the affirmative vote of two-thirds of the total number of
Trustees fixed in accordance with the Declaration or the By-laws. The
affirmative vote of the holders of a majority of the outstanding MuniPreferred
Shares, voting as a separate class, shall be required to approve any action not
described in the preceding sentence requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in a Fund's
investment objectives or changes in the investment restrictions described as
fundamental policies under "Investment Objectives and Policies--Investment
Restrictions." The class or series vote of holders of MuniPreferred Shares
described
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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 a 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 a 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 a Fund may tender for or purchase MuniPreferred
Shares and that a Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of MuniPreferred Shares by a Fund will
reduce the leverage applicable to Common Shares, while any resale of shares by a
Fund will increase such leverage.
The discussion above describes each Fund's 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 a 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 a Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of a 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 a Fund for all loss and expense of any
shareholder held personally liable for the obligations of a 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. Each 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 a 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 a Fund from a closed-end to an open-end
investment company, (2) a merger or consolidation of a Fund, or a series or
class of a Fund, with any corporation, association, trust or other organization
or a reorganization or recapitalization of a Fund, or a series or class of a
Fund, (3) a sale, lease or transfer of all or substantially all of a Fund's
assets (other than in the regular course of a Fund's investment activities), (4)
in certain circumstances, a termination of a Fund, or a series or class of a
Fund or (5) removal of trustees, and then only for cause, unless, with respect
to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of a Fund's Common Shares and
MuniPreferred Shares
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outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected (or,
in the case of removing a trustee, when the trustee has been elected by only one
class), only the required vote by the applicable class or series will be
required. Approval of shareholders is not required, however, for any
transaction, whether deemed a merger, consolidation, reorganization or otherwise
whereby a Fund issues shares in connection with the acquisition of assets
(including those subject to liabilities) from any other investment company or
similar entity. None of the foregoing provisions may be amended except by the
vote of at least two-thirds of the Common Shares and MuniPreferred Shares,
voting together as a single class. In the case of the conversion of a 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 a Fund's MuniPreferred Shares outstanding
at the time, voting as a separate class. The votes required to approve the
conversion of a 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 a 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 a 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 a Fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of a Fund's investment objectives and policies. The Board of
Trustees of a Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of a 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 a Fund are not binding
upon the trustees of a Fund individually, but only upon the assets and property
of a Fund, and that the trustees shall not be liable for errors of judgment or
mistakes of fact or law. Nothing in the Declaration, however, protects a
trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
Each Fund is a closed-end investment company and as such its shareholders
will not have the right to cause a Fund to redeem their shares. Instead, a
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
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conditions and other factors. Because shares of a closed-end investment company
may frequently trade at prices lower than net asset value, each 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 a 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 a Fund's MuniPreferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued MuniPreferred Shares dividends
have been paid and (2) at the time of such purchase, redemption or acquisition,
the net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding MuniPreferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). The
staff of the Securities and Exchange Commission currently requires that any
tender offer made by a closed-end investment company for its shares must be at a
price equal to the net asset value of such shares 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 a Fund will be borne by a Fund and will not reduce the
stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, a 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 a Fund in
anticipation of share repurchases or tenders will reduce a Fund's net income.
Any share repurchase, tender offer or borrowing that might be approved by the
Board of Trustees would have to comply with the Securities Exchange Act of 1934,
as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of a Fund at the time it considers such
issue, it is each Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair a Fund's status as
a regulated investment company under the Code (which would make a Fund a taxable
entity, causing a Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from a Fund) or as a
registered closed-end investment company under the 1940 Act; (2) a Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with a 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 a Fund, (b) general
suspension of or limitation on prices for trading securities on the American
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting a 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
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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 a Fund or its shareholders if
shares were repurchased. The Board of Trustees of each Fund may in the future
modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the holders
of at least two-thirds of a 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 a 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 a
Fund to an open-end company. If a Fund converted to an open-end company, it
would be required to redeem all MuniPreferred Shares then outstanding, and a
Fund's Common Shares would no longer be listed on the American Stock Exchange.
Shareholders of an open-end investment company may require the company to redeem
their shares on any business day (except in certain circumstances as authorized
by or under the 1940 Act) at their net asset value, less such redemption charge,
if any, as might be in effect at the time of redemption. In order to avoid
maintaining large cash positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous offering of
their shares. Open-end companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Trustees of
each Fund may at any time propose conversion of the Fund to an open-end company
depending upon their judgment as to the advisability of such action in light of
circumstances then prevailing.
The repurchase by a 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 a Fund's shares trading at a
price equal to their net asset value. Nevertheless, the fact that a Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that a 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 a 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 a 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 each Fund's Prospectus under
"Risks--Concentration Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if a Fund's Common Shares trade
below net asset value, the Board of that Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if a 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.
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TAX MATTERS
Federal Income Tax Matters
The following discussion of federal income tax matters is based upon the
advice of Bell, Boyd & Lloyd LLC, special counsel to each Fund.
Each 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 and to satisfy certain conditions which will enable interest
from municipal obligations, which is exempt from regular federal income taxes in
the hands of each such Fund, to qualify as "exempt-interest dividends" when
distributed to such Fund's shareholders. In order to qualify for tax treatment
as a regulated investment company, a Fund must satisfy certain requirements
relating to the source of its income, diversification of its assets, and
distributions of its income to shareholders. First, a Fund must derive at least
90% of its annual gross income (including tax-exempt interest) from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"). Second, a Fund must diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the value of its total assets is comprised of cash, cash items, United
States Government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Fund's total assets and to not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than United States Government securities and securities of
other regulated investment companies) or two or more issuers controlled by such
Fund and engaged in the same, similar or related trades or businesses.
As a regulated investment company, a Fund will not be subject to federal
income tax in any taxable year with respect to "net investment income" (i.e.,
its "investment company taxable income," as that term is defined in the Code,
determined without reference to the deduction for dividends paid) and "net
capital gain" (i.e., the excess of a Fund's net long-term capital gain over its
net short-term capital loss), provided that it distributes at least 90% of the
sum of (i) its investment company taxable income (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than net capital gain and
is reduced by deductible expenses) and (ii) its net tax-exempt interest (the
excess of its gross tax-exempt interest income over certain disallowed
deductions). A Fund may retain for investment its net capital gain. However, if
a 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 a
Fund retains any net capital gain, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who, if subject to
federal income tax on long-term capital gains, (i) will be required to include
in income for federal income tax purposes, as long-term capital gain, their
share of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by a Fund on such undistributed amount
against their federal income tax liabilities, if any, and to claim refunds to
the extent the credit exceeds such liabilities. For federal income tax purposes,
the tax basis of shares owned by a shareholder of a Fund will be increased by an
amount equal under current law to the difference between the amount of
undistributed capital gains included in the shareholder's gross income and the
tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
Each
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Fund intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect (unless it
has made a taxable year election for excise tax purposes 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.
Each Fund intends to qualify to pay "exempt-interest dividends" by
satisfying the requirement that at the close of each quarter of such Fund's
taxable year at least 50% of the value of its total assets consist of tax-exempt
municipal obligations. Distributions from a Fund will constitute exempt-interest
dividends to the extent of its tax-exempt interest income (net of expenses and
amortized bond premium). Exempt-interest dividends distributed to Common
Shareholders are excluded from gross income for federal income tax purposes,
although they are required to be reported on the Common Shareholders' federal
income tax returns. Gain from the sale or redemption of Common Shares, however,
will be taxable to the Common Shareholders as capital gain (provided such Common
Shares were held as capital assets) even though the increase in value of such
Common Shares is attributable to tax-exempt interest income. In addition, gain
realized by a Fund from the disposition of a tax-exempt municipal obligation
that was purchased at a price less than the principal amount of the bond will be
taxable to the Fund's shareholders as ordinary income to the extent of accrued
market discount. Under the Code, interest on indebtedness incurred or continued
to purchase or carry Common Shares, which interest is deemed to relate to
exempt-interest dividends, will not be deductible by Common Shareholders for
federal income tax purposes. Moreover, while exempt-interest dividends are
excluded from gross income for federal income tax purposes, they may be subject
to alternative minimum tax ("AMT") and may have other collateral tax
consequences. Taxpayers that may be subject to the AMT should consult their
advisers before investing in Common Shares.
Distributions by a Fund of net interest received from certain taxable
temporary investments (such as certificates of deposit, commercial paper and
obligations of the U.S. Government, its agencies and instrumentalities) and net
short-term capital gain realized by a Fund, if any, will be taxable to Common
Shareholders as ordinary income whether received in cash or additional shares.
Any net long-term capital gain realized by a Fund and distributed to Common
Shareholders in cash or additional shares will be taxable to Common Shareholders
as long-term capital gain regardless of the length of time investors have owned
shares of the Fund. Distributions by a Fund to Common Shareholders 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 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 a Fund engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to a Fund, defer a Fund's losses, cause
adjustments in the holding periods of a 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 a Fund, an investor should carefully consider
the impact of dividends or distributions which are expected to be or have been
declared, but not paid. Any dividend or distribution declared shortly after a
purchase of such shares prior to the record date will have the effect of
reducing the per share net asset value by the per share amount of the dividend
or distribution.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by a Fund (and received by
the shareholders) on December 31.
The redemption or exchange of Common Shares normally will result in capital
gain or loss to the Common Shareholders who hold their Common Shares as capital
assets. However, any loss on the sale or exchange of a Common Share that has
been held for six months or less will be disallowed to the extent of any
distribution of exempt-interest dividends received with respect to such Common
Share. Generally, a Common Shareholder's gain or loss will be long-term gain or
loss if the shares have been held for more than one year. If a shareholder sells
or otherwise disposes of Common Shares before holding them for more than six
months, however, any loss on the sale or other disposition of such Common Shares
shall be treated as a long-term capital loss to the extent of any capital gain
dividends received by the Common Shareholder (or credited to the Common
Shareholder as an undistributed capital gain) with respect to such Common
Shares. Present law taxes both long- and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, net capital gain (i.e., the excess of net long-term capital
gain over net short-term capital loss) with respect to securities will be taxed
at a maximum rate of 20%, while short-term capital gain and other ordinary
income will be taxed at a maximum
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rate of 39.6%. The maximum long-term capital gain rate will decrease from 20%
to 18% for capital assets that have been held for more than five years and whose
holding periods begin after December 31, 2000. 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
shares of a Fund or another fund are subsequently acquired without payment of a
sales charge pursuant to a reinvestment right. Any disregarded portion of such
charge will result in an increase in the Common Shareholder's tax basis in the
shares subsequently acquired. In addition, no loss will be allowed on the
redemption or exchange of Common Shares if the Common Shareholder purchases
other shares of a 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 a
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, a Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of its capital gain net
income (the excess of its realized capital gains over its realized capital
losses, generally computed on the basis of the one-year period ending on October
31 of such year) and 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 a 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. Each 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 a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, a 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.
Each 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 a Fund their correct taxpayer identification numbers (in
the case of individuals, their Social Security number) and certain
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax and any amounts withheld may be credited
against the shareholder's federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code and Treasury Regulations presently in effect as they directly govern the
taxation of the Fund and its Common Shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Common Shareholders are advised to consult
their own tax
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advisors for more detailed information concerning the federal taxation of the
Fund and the income tax consequences to its Common Shareholders.
State Tax Matters
Tax matters pertaining to Arizona are set forth in Appendix D-1; tax
matters pertaining to Connecticut are set forth in Appendix D-2; tax matters
pertaining to Maryland are set forth in Appendix D-3; tax matters pertaining to
Massachusetts are set forth in Appendix D-4; tax matters pertaining to North
Carolina are set forth in Apppendix D-5; and tax matters pertaining to Virginia
are set forth in Appendix D-6.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
A Fund may be a suitable investment for a shareholder who is thinking of
adding bond investments to his portfolio to balance the appreciated stocks that
the shareholder is holding. Arizona, Connecticut, Maryland, Massachusetts, North
Carolina and Virginia municipal bonds can provide double tax-free income (exempt
from both regular federal and state income taxes) for residents of those states.
Because a 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.
A 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 Inc. or
other independent services. Comparison of a Fund to an alternative investment
should be made with consideration of differences in features and expected
performance. A Fund may obtain data from sources or reporting services, such as
Bloomberg Financial ("Bloomberg") and Lipper, that a 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.
See Appendix E for additional performance related and comparative information.
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EXPERTS
The Statement of Net Assets of each Fund as of _________________ 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 provides accounting and auditing
services to each Fund.
CUSTODIAN
The custodian of the assets of the Funds is The Chase Manhattan Bank, 4 New
York Plaza, New York, NY 10004-2413. The custodian performs custodial, fund
accounting and portfolio accounting services.
ADDITIONAL INFORMATION
Registration Statements on Form N-2, including amendments thereto, relating
to the shares of each Fund offered hereby, have been filed by each Fund with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. Each
Fund's Prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statements, including any
exhibits and schedules thereto. For further information with respect to a Fund
and the shares offered hereby, reference is made to that Fund's Registration
Statement. Statements contained in a Fund's Prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not
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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 Statements,
each such statement being qualified in all respects by such reference. Copies of
the Registration Statements 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.
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Arizona Dividend Advantage Municipal Fund
[TO COME]
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
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Nuveen Connecticut Dividend Advantage Municipal Fund
[TO COME]
NUVEEN CONNECTICUT DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Maryland Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MARYLAND DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Massachusetts Dividend Advantage Municipal Fund
[TO COME]
NUVEEN MASSACHUSETTS DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
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REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen North Carolina Dividend Advantage Municipal Fund
[TO COME]
44
<PAGE>
NUVEEN NORTH CAROLINA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Virginia Dividend Advantage Municipal Fund
[TO COME]
NUVEEN VIRGINIA DIVIDEND ADVANTAGE MUNICIPAL FUND
FINANCIAL STATEMENTS
[TO COME]
45
<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:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any credit rating
and may, on occasion, rely on unaudited financial information. Credit ratings
may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
A-1
<PAGE>
commitment on the obligation is extremely strong.
AA
An obligation rated `AA' differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated `A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet it
financial commitment on the obligation is still strong.
BBB
An obligation rated `BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, And C
Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as having
significant speculative characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB
An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B
An obligation rated `B' is more vulnerable to nonpayment than obligations
rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
CCC
An obligation rated `CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC
An obligation rated `CC' is currently highly vulnerable to nonpayment.
C
A-2
<PAGE>
The `C' rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D
An obligation rated `D' is in payment default. The `D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-) The ratings from `AA' to `CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c The `c' subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
r The `r' highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit
no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (`AAA', `AA', `BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
. Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
. Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3 Speculative capacity to pay principal and interest.
A-3
<PAGE>
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from `A-1' for the highest
quality obligations to `D' for the lowest. These categories are as follows:
A-1 A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity
to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The `D' rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action if payments on an obligation are
jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-4
<PAGE>
Moody's Investors Service, Inc.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated `Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated `Aa' are judged to be of high quality by all
standards. Together with the `Aaa' group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in `Aaa' securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in `Aaa' securities.
A Bonds which are rated `A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa Bonds which are rated `Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are rated `Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated `B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated `Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated `Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated `C' are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5
<PAGE>
Issues that are secured by escrowed funds held in trust, reinvested in direct,
non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the
condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic
rating category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-6
<PAGE>
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or
A-7
<PAGE>
financial alternatives may be available to allow financial commitments to
be met. Securities rated in this category are not investment grade.
B Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of
some kind appears probable. `C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization
or liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve
as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have
the highest prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities rated `DD' and
`D' are generally undergoing a formal reorganization or liquidation
process; those rated `DD' are likely to satisfy a higher portion of their
outstanding obligations, while entities rated `D' have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
A-8
<PAGE>
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.
Rating Watch: Ratings are placed on RatingWatch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a one
to two year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
companies whose outlooks are `stable' could be downgraded before an outlook
moves to positive or negative if circumstances warrant such an action.
Occasionally, Fitch may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
A-9
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like a
Fund with taxable alternative investments, the table below presents the taxable
equivalent yields for a range of hypothetical tax-free yields and tax rates:
Taxable Equivalent of Tax-Free Yields
Tax Free Yields
<TABLE>
Tax Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
28.0% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
36.0% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>
ARIZONA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- -------- --------
<S> <C> <C> <C> <C>
$0-26,250 15.00% 3.74% 18.20%
$0-43,850 15.00% 3.20% 17.70%
26,250-63,550 43,850-105,950 28.00% 4.72% 31.40%
63,550-132,600 105,950-161,450 31.00% 4.72% 34.30%
161,450-288,350 36.00% 4.72% 39.00%
132,600-288,350 36.00% 5.04% 39.20%
Over 288,350 Over 288,350 39.60% 5.04% 42.60%
</TABLE>
4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
----- ----- ----- ----- ----- ------
4.89% 5.50% 6.11% 6.72% 7.33% 7.95%
4.86% 5.47% 6.08% 6.68% 7.29% 7.90%
5.83% 6.56% 7.29% 8.02% 8.75% 9.48%
6.09% 6.85% 7.61% 8.37% 9.13% 9.89%
6.56% 7.38% 8.20% 9.02% 9.84% 10.66%
6.58% 7.40% 8.22% 9.05% 9.87% 10.69%
6.97% 7.84% 8.71% 9.58% 10.45% 11.32%
---------------------
* The State Tax Rates are those for 2000. 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, (iii) any taxes other
than personal income taxes or (iv) the deductibility of Arizona state income
taxes in computing Arizona income subject to tax. 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>
CONNECTICUT
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- -------- ------ --------
<S> <C> <C> <C> <C>
$0-43,850 15.00% 3.825% 18.30%
$0-26,250 15.00% 3.915% 18.30%
26,250-63,550 43,850-105,950 28.00% 4.500% 31.20%
63,550-132,600 105,950-161,450 31.00% 4.500% 34.10%
132,600-288,350 161,450-288,350 36.00% 4.500% 38.90%
Over 288,350 Over 288,350 39.60% 4.500% 42.30%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
----- ----- ----- ----- ----- -----
4.90% 5.51% 6.12% 6.73% 7.34% 7.96%
4.90% 5.51% 6.12% 6.73% 7.34% 7.96%
5.81% 6.54% 7.27% 7.99% 8.72% 9.45%
6.07% 6.83% 7.59% 8.35% 9.10% 9.86%
6.55% 7.36% 8.18% 9.00% 9.82% 10.64%
6.93% 7.80% 8.67% 9.53% 10.40% 11.27%
</TABLE>
---------------------
* The State Tax Rates are those for 2000. 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-2
<PAGE>
MARYLAND
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
$0-26,250 $0-43,850 15.00% 4.85% 19.10%
26,250-63,550 43,850-105,950 28.00% 4.85% 31.50%
63,550-132,600 105,950-161,450 31.00% 4.85% 34.30%
132,600-288,350 161,450-288,350 36.00% 4.85% 39.10%
Over 288,350 Over 288,350 39.60% 4.85% 42.50%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
---- ---- ---- ---- ---- ----
4.94% 5.56% 6.18% 6.80% 7.42% 8.03%
5.84% 6.57% 7.30% 8.03% 8.76% 9.49%
6.09% 6.85% 7.61% 8.37% 9.13% 9.89%
6.57% 7.39% 8.21% 9.03% 9.85% 10.67%
6.96% 7.83% 8.70% 9.57% 10.43% 11.30%
</TABLE>
---------------------
* The State Tax Rates are those for 2000. 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. Local taxes are imposed by
Baltimore City and the counties and, for 1999, ranged from 1.01% to 3.04%, in
addition to the state tax rate.
MASSACHUSETTS
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
$0-26,250 $0-43,850 15.00% 5.85% 20.00%
26,250-63,550 43,850-105,950 28.00% 5.85% 32.20%
63,550-132,600 105,950-161,450 31.00% 5.85% 35.00%
132,600-288,350 161,450-288,350 36.00% 5.85% 39.70%
Over 288,350 Over 288,350 39.60% 5.85% 43.10%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
---- ---- ---- ---- ---- ----
5.00% 5.63% 6.25% 6.88% 7.50% 8.13%
5.90% 6.64% 7.37% 8.11% 8.85% 9.59%
6.15% 6.92% 7.69% 8.46% 9.23% 10.00%
6.63% 7.46% 8.29% 9.12% 9.95% 10.78%
7.03% 7.91% 8.79% 9.67% 10.54% 11.42%
</TABLE>
---------------------
* The State Tax Rates are those for 2000. The Massachusetts state tax rate
shown is the rate at which interest is taxed. Certain other types of income are
taxed at other rates. In addition, 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.
B-3
<PAGE>
NORTH CAROLINA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
$0-26,250 $0-43,850 15.00% 7.00% 21.00%
26,250-63,550 43,850-105,950 28.00% 7.75% 33.60%
63,550-132,600 105,950-161,450 31.00% 7.75% 36.30%
132,600-288,350 161,450-288,350 36.00% 7.75% 41.00%
Over 288,350 Over 288,350 39.60% 7.75% 44.30%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
----- ----- ----- ----- ----- ------
5.06% 5.70% 6.33% 6.96% 7.59% 8.23%
6.02% 6.78% 7.53% 8.28% 9.04% 9.79%
6.28% 7.06% 7.85% 8.63% 9.42% 10.20%
6.78% 7.63% 8.47% 9.32% 10.17% 11.02%
7.18% 8.08% 8.98% 9.87% 10.77% 11.67%
</TABLE>
---------------------
* The State Tax Rates are those for 2000. 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. The numbers in the Combined
Tax Rate column are rounded to the nearest tenth.
B-4
<PAGE>
VIRGINIA
<TABLE>
<CAPTION>
Federal State Combined
Tax Tax Tax
Single Return Bracket Joint Return Bracket Rate Rate* Rate*
--------------------- -------------------- ------- ----- --------
<S> <C> <C> <C> <C>
$0-26,250 $0-43,850 15.00% 5.75% 19.90%
26,250-63,550 43,850-105,950 28.00% 5.75% 32.10%
63,550-132,600 105,950-161,450 31.00% 5.75% 35.00%
132,600-288,350 161,450-288,350 36.00% 5.75% 39.70%
Over 288,350 Over 288,350 39.60% 5.75% 43.10%
4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
----- ----- ----- ----- ----- -----
4.99% 5.62% 6.24% 6.87% 7.49% 8.11%
5.89% 6.63% 7.36% 8.10% 8.84% 9.57%
6.15% 6.92% 7.69% 8.46% 9.23% 10.00%
6.63% 7.46% 8.29% 9.12% 9.95% 10.78%
7.03% 7.91% 8.79% 9.67% 10.54% 11.42%
</TABLE>
---------------------
* The State Tax Rates are those for 2000. 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-5
<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. A Fund must make
additional payments to cover debits to its account and has the right to withdraw
credits in excess of the liquidity, a 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 a Fund to settle the final determination and a 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 a Fund's portfolio would decline, but the value of a Fund's
financial futures would be expected to increase at approximately the same rate
thereby keeping the net asset value of a Fund from declining as much as it
otherwise would have.
Among the risks associated with the use of financial futures by a 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, a 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, a 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. A
Fund might find it difficult or impossible to close out a particular
transaction.
Options on Financial Futures
Each 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
Each 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>
APPENDIX D-1
Factors Pertaining to Arizona
As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in Arizona
municipal bonds. The Fund is therefore susceptible to political, economic or
regulatory factors affecting issuers of Arizona municipal bonds. The
information set forth below is derived from sources that are generally available
to investors. The information is provided as general information intended to
give a recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of Arizona.
General Economic Conditions. Progressing from its traditional reliance on a
cyclical construction industry, Arizona's economic base is maturing and
diversifying. One of the nation's leaders in employment growth, Arizona has been
among the top five employment growth states for more than four years, and it
should remain there through 2000. From March 1999 through March 2000, Arizona's
non-agricultural job growth was 4.6%, the highest in the nation. The
unemployment rate was around 4.1% for 1998, 4.2% for 1999 and remained around
3.9% in the first half of 2000. Arizona's unemployment compares with a national
rate of 4.5% in 1998, 4.2% in 1999 and 4.0% in the first half of 2000. Personal
income grew approximately 7.9% in 1998, 7.4% in 1999 and is projected to grow by
about 7.8% in 2000. This compares with national personal income growth of about
5.9% in 1998 and in 1999.
Overall, Arizona's forecast is for continued but moderate rates of growth
in employment and personal income. Employment growth will continue to be
stronger in the Phoenix area than in the balance of the State. Housing has
probably peaked and is likely to decline after seven extremely strong years.
Retail sales should also continue to slow.
Population, because of continued employment growth, will record above-
average growth rates. Population grew 2.5% in 1998 and in 1999 and is expected
to do the same in 2000, which compares to national population growth of 1% over
the same periods.
Budgetary Process. Although Arizona's fiscal year runs from July 1st of
one year to June 30th of the next year, the Legislature adopts 2-year budgets.
The Budget Reform Act of 1997 made significant changes to the State's
planning and budgeting systems. Beginning with the Fiscal Biennium 2000-01, all
State agencies, including capital improvement budgeting, will be moved to a
biennial budgeting system. From fiscal year 2000 to 2006, all State agencies
will move to a budget format that reflects the program structure in the "Master
List of State Government Programs." The Budget Reform Act of 1993 established
the current budgeting system of one- and two-year budget reviews. Agencies
D-1-1
<PAGE>
selected for annual review and appropriation are designated as Major Budget
Units (MBUs). The 18 MBUs account for over 90% of the total General Fund
expenditures. Agencies selected for biennial review and appropriation are
designated as Other Budget Units (OBUs).
Revenues and Expenditures. The General Fund closed fiscal year 1999 with a
$255.5 million ending balance and the Executive Budget for fiscal year 2000
anticipates a $174.9 million balance. Overall, fiscal year 1999 General Fund
revenues totaled $6.141 billion. General Fund expenditures for fiscal year 1999
totaled $5.886 billion.
Debt Administration and Limitation. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona municipal bonds is detailed in the debt instruments themselves
and in related offering materials. There can be no assurances with respect to
whether the market value or marketability of any of the Arizona municipal bonds
issued by an entity other than the State of Arizona will be affected by
financial or other conditions of the State or of any entity located within the
State. In addition, it should be noted that the State of Arizona, as well as
counties, municipalities, political subdivisions and other public authorities of
the State, are subject to limitations imposed by Arizona's Constitution with
respect to ad valorem taxation, bonded indebtedness and other matters. For
example, the State legislature cannot appropriate revenues in excess of 7% of
the total personal income of the State in any fiscal year. These limitations
may affect the ability of the issuers to generate revenues to satisfy their debt
obligations.
In 1994, the Arizona Supreme Court held that the state school financing
scheme, with its reliance on disparate property tax assessments for wealthy and
poor school districts, violated Article XI of the Arizona State Constitution
which requires a "general and uniform public school system." In 1998, the
Legislature passed a plan that reformulates education funding by providing $350
million in state funds to build new schools and places a statutory cap on the
D-1-2
<PAGE>
amount of bond indebtedness a school district may incur. Essentially, the
legislation replaces general obligation bonding with a centralized stated funded
system. The bill should not effect the payment of debt service on any school
district's bonds since the debt service on school district bonds is levied and
collected directly by the counties on behalf of the school districts.
Although many of the municipal bonds in the Fund may be revenue obligations
of local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the market
value or marketability of the municipal bonds or the ability of the respective
obligors to pay principal of and interest on the municipal bonds when due.
The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of municipal bonds and does not
purport to be a complete or exhaustive description of all adverse conditions to
which the issuers of municipal bonds held by the Fund are subject.
Additionally, many factors including national economic, social and environmental
policies and conditions, which are not within the control of the issuers of the
municipal bonds, could affect or could have an adverse impact on the financial
condition of the issuers. The Fund is unable to predict whether or to what
extent such factors or other factors may affect the issuers of the municipal
bonds, the market value or marketability of the municipal bonds or the ability
of the respective issuers of the municipal bonds acquired by the Fund to pay
interest on or principal of the municipal bonds. This information has not been
independently verified.
Arizona Tax Matters
The following is based upon the advice of Chapman and Cutler, special
Arizona counsel to the Fund.
Assuming that the Fund qualifies as a "regulated investment company" for
federal income tax purposes under Subchapter M of the Code and that amounts so
designated by the Fund to its shareholders qualify as "exempt-interest
dividends" under Section 852(b)(5) of the Code, such exempt-interest dividends
attributable to Arizona municipal bonds will be exempt from Arizona income tax
when received by a shareholder of the Fund to the same extent as interest on the
Arizona municipal bonds would be exempt from Arizona income tax if received
directly by such shareholder. Generally, other dividends by the Fund, including
capital gain distributions, if any, or additional amounts includable in the
gross income of the shareholders for Federal income tax purposes (including
gains realized upon the redemption or exchange of shares of the Fund) will be
subject to Arizona income tax.
It is unclear under current law whether the Fund will be subject to Arizona
income tax. If the Fund was required to pay an Arizona income tax, the net
income available for distribution to shareholders would be reduced.
Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase or carrying of shares in the Fund will not be
deductible for Arizona income tax purposes. Special rules apply in the case of
financial institutions.
Neither the Arizona municipal bonds purchased by the Fund nor the shares in
the Fund owned by a shareholder will be subject to Arizona property taxes, sales
or use taxes.
D-1-3
<PAGE>
Chapman and Cutler has expressed no opinion with respect to taxation under
any other provision of Arizona law. Ownership of the Common Shares may result in
collateral Arizona tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
D-1-4
<PAGE>
APPENDIX D-2
Factors Pertaining to Connecticut
Except to the extent the Connecticut Municipal Bond Fund (the "Connecticut
Fund") invests in temporary investments, the Connecticut Fund will invest
substantially all of its net assets in Connecticut municipal bonds. The
Connecticut Fund is therefore susceptible to political, economic or regulatory
facts affecting issuers of Connecticut municipal bonds. The following briefly
summarizes the current financial situation of the State of Connecticut (the
"State"). It is derived from sources that are generally available to investors
and is based in part on information obtained from various agencies in
Connecticut. There can be no assurance that current or future statewide or
regional economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the market value of
Connecticut Obligations in the Fund or the ability of particular obligors to
make timely payments of debt serves on (or relating to) those obligations.
Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State") but has declined during the
last decade. The State's manufacturing sector is diversified, with the
construction of transportation equipment (primarily aircraft engines,
helicopters and submarines) being the dominant industry, followed by fabricated
metals, non-electrical machinery, and electrical equipment. As a result of a
rise in employment in service-related industries and the decline in
manufacturing employment, manufacturing accounted for only 16.11% of total non-
agricultural employment in Connecticut in 1999. Defense-related business
represents a relatively high proportion of the manufacturing sector. On a per
capita basis, defense awards to Connecticut have traditionally been among the
highest in the nation, but reductions in defense spending have considerably
reduced this sector's significance in Connecticut's economy.
The average annual unemployment rate in Connecticut decreased from 7.6% in
1991 to be 3.2% in 1999. Per capita personal income of Connecticut residents
increased in every year from 1990 to 1999, rising from $26,736 to $39,300.
However, pockets of significant unemployment and poverty exist in several
Connecticut cities and towns.
At the end of the 1990-1991 fiscal year, the General Fund had an
accumulated unappropriated deficit of $965,712,000. For the eight fiscal years
ended June 30, 1999, the General Fund ran operating surpluses, based on the
State's budgetary method of accounting, of approximately $110,200,000,
$113,500,000, $19,700,000, $80,500,000, $250,000,000, $262,600,000,
$312,900,000, and $71,800,000, respectively. General Fund budgets adopted for
the biennium ending June 30, 2001, authorized expenditures of $10,581,600,000
for the 1999-2000 fiscal year and $11,085,200,000 for the 2000-2001 fiscal year
and projected surpluses of $64,400,000 and $4,800,000, respectively, for those
years.
As of April 30, 2000, the Comptroller estimated an operating surplus of
$402,200,000 for the 1999-2000 fiscal year. Thereafter, following a declaration
by the Governor needed to permit the appropriation of funds beyond the limits of
the State's expenditure cap, midterm budget adjustments were enacted. For the
1999-2000 fiscal year, expenditures not previously budgeted totaling
$196,400,000 were authorized and, after a required deposit into the Budget
Reserve Fund from unappropriated surplus of 5% of General Fund expenditures,
provision was made for the disposition of substantially the entire remaining
surplus, most of which would be used to avoid having to issue debt for school
construction. For the 2000-2001 fiscal year, the midterm budget adjustments
anticipate General Fund expenditures of $11,280,800,000, unrestricted revenue of
$11,281,300,000, and a resulting surplus of only $500,000.
The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of November 1, 2000, the State had authorized direct
general obligation bond indebtedness totaling $13,839,841,000, of which
$11,613,383,000 had been approved for issuance by the State Bond Commission and
$10,045,215,000 had been issued. As of November 1, 2000, net State direct
general obligation bond indebtedness outstanding was $7,127,727,000.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University was authorized to issue bonds totaling $962,000,000
by June 30, 2005, that are secured by a State debt service commitment to finance
the improvements, $471,355,000 of which were outstanding on November 1, 2000.
The State is expected to provide further financing by issuing $18,000,000 of
general obligation bonds. To the extent additional costs for the improvements
anticipated to be $270,000,000 are not funded from other sources, capital cost
reductions or deferrals are expected to be effected.
D-2-1
<PAGE>
In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-public
agencies: the Connecticut Housing Finance Authority, the Connecticut Development
Authority, the Connecticut Higher Education Supplemental Loan Authority, the
Connecticut Resources Recovery Authority and the Connecticut Health and
Educational Facilities Authority. Such bonds have also been issued by the cities
of Bridgeport and West Haven and the Southeastern Connecticut Water Authority.
As of November 1, 2000, the amount of bonds outstanding on which the State has
limited or contingent liability totaled $4,208,700,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2004, is currently estimated to be
$14.1 billion, to be met from federal, State, and local funds. The State expects
to finance most of its $5.5 billion share of such cost by issuing $5.0 billion
of special tax obligation ("STO") bonds. The STO bonds are payable solely from
specified motor fuel taxes, motor vehicle receipts, and license, permit and fee
revenues pledged therefor and credited to the Special Transportation Fund, which
was established to budget and account for such revenues.
The State's general obligation bonds are rated Aa3 by Moody's and AA by
Fitch. On October 8, 1998, Standard & Poor's upgraded its ratings of the State's
general obligation bonds from AA- to AA.
The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) an action on behalf of all persons with traumatic brain injury who
have been placed in certain State hospitals, and other persons with acquired
brain injury who are in the custody of the Department of Mental Health and
Addiction Services, claiming that their constitutional rights are violated by
placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; (ii) litigation involving claims by Indian tribes
to portions of the State's land area; (iii) an action by certain students and
municipalities claiming that the State's formula for financing public education
violates the State's Constitution and seeking a declaratory judgment and
injunctive relief; (iv) an action in which the plaintiffs seek to represent a
class of certain Medicaid recipients, claiming that the Commissioner of the
Department of Social Services fails to provide them adequate access to dental
services and to adequately compensate providers of such services, and seeking
declaratory and injunctive relief plus attorneys' fees and costs; (v) actions by
several hospitals claiming partial refunds of taxes imposed on hospital gross
earnings to the extent such taxes related to tangible personal property
transferred in the provision of services to patients; and (vi) an action against
the State and the Attorney General by importers and distributors of cigarettes
previously sold by their manufacturers seeking damages and injunctive relief
relating to business losses alleged to result from the 1998 Master Settlement
Agreement entered into by most states in litigation against the major domestic
tobacco companies and challenging certain related so-called Non Participating
Manufacturer statutes.
As a result of litigation on behalf of black and Hispanic school children
in the City of Hartford seeking "integrated education" within the Greater
Hartford metropolitan area, on July 9, 1996, the State Supreme Court directed
the legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court ordered the State
to show cause as to whether there has been compliance with the Supreme Court's
ruling and concluded that the State had complied but that the plaintiffs had not
allowed the State sufficient time to take additional remedial steps.
Accordingly, the plaintiffs might be able to pursue their claim at a later date.
The fiscal impact of this matter might be significant but is not determinable at
this time.
The State's Department of Information Technology coordinated a review of
the State's Year 2000 exposure and completed its plans on a timely basis. All
mission critical systems and technology infrastructure components are working
with no Year 2000 impacts. Nevertheless, there is still a risk that testing for
all failure scenarios did not reveal all software or hardware problems or that
systems of others on whom the State's systems or service commitments rely were
not tested and remediated in a timely fashion. If the necessary
D-2-2
<PAGE>
remediations were not adequately tested, the Year 2000 problem may have a
material impact on the operations of the State.
General obligation bonds issued by municipalities are payable primarily
from ad valorem taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport had authority to file such a
petition but that its petition should be dismissed on the grounds that
Bridgeport was not insolvent when the petition was filed. State legislation
enacted in 1993 prohibits municipal bankruptcy filings without the prior
written consent of the Governor.
In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality. Such bonds may be
repaid only from revenues of the financed project, the revenues from which may
be insufficient to service the related debt obligations.
D-2-3
<PAGE>
Connecticut Tax Matters
The following is based upon the advice of Day, Berry & Howard LLP, special
Connecticut counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable Connecticut tax law as presently in effect as it directly governs
the taxation of resident individual and corporate 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 Fund transactions.
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 the Fund distributions to qualify as exempt-
interest dividends to shareholders, and that it will distribute all interest and
dividends it receives to the Fund's shareholders.
The Fund will be subject to the Connecticut corporation business tax only
if it has a sufficient nexus with Connecticut. If it is subject to that tax, it
does not expect to pay a material amount of such tax.
Dividends paid by the Fund are not subject to the Connecticut personal
income tax on individuals, trusts and estates to the extent that they qualify as
exempt-interest dividends for Federal income tax purposes that are derived from
obligations issued by or on behalf of the State of Connecticut or its political
subdivisions, instrumentalities, authorities, districts, or similar public
entities created under Connecticut law ("Connecticut Obligations") or
obligations the interest on which states are prohibited from taxing by Federal
law. Other Fund dividends, whether received in cash or additional shares, are
subject to this tax, except that, in the case of shares of the Fund held by
shareholders as a capital asset, dividends qualifying as capital gain dividends
for Federal income tax purposes are not subject to the tax to the extent they
are derived from Connecticut Obligations. Dividends paid by the Fund that
constitute items of tax preference for purposes of the Federal alternative
minimum tax, other than exempt-interest dividends not subject to the Connecticut
personal income tax, could cause liability for the net Connecticut minimum tax,
applicable to shareholders subject to the Connecticut personal income tax who
are required to pay the Federal alternative minimum tax. Interest on
indebtedness incurred to purchase or carry Fund shares will not reduce taxable
income under the Connecticut personal income tax except to the extent it may
reduce the shareholder's Federal adjusted gross income.
Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for Federal income tax purposes, are taxable for purposes of the
Connecticut corporation business tax. However, 70% (100% if the shareholder owns
at least 20% of the total voting power and value of the Fund's shares) of
amounts that are treated as dividends and not as exempt-interest dividends or
capital gain dividends for Federal income tax purposes are deductible for
purposes of this tax, but no deduction is allowed for expenses related
thereto.
Gain on the sale, exchange, or other disposition of shares of the Fund will
be subject to the Connecticut personal income tax and the Connecticut
corporation business tax.
No local income taxes or state or local intangible personal property taxes
are imposed in Connecticut.
Shares of the Fund may be subject to the Connecticut gift tax or the
Connecticut succession tax and the Connecticut estate tax if directly or
indirectly transferred by a Connecticut resident by gift or at death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning Connecticut and local tax matters.
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APPENDIX D-3
Factors Pertaining to Maryland
The Fund's concentration on municipal bonds issued by the State of Maryland
(the "State"), its political subdivisions and its agencies means that investors
are subject to risks of default or change in value of the securities making up
the Fund deriving from certain unique factors affecting Maryland issuers. The
information presented below has been derived from the most recent official
statement for the State's general obligation bonds, and does not purport to be
comprehensive. Because the Fund has not yet acquired its portfolio, the
information is necessarily limited to general economic conditions.
General Factors
The State of Maryland has a population of approximately 5.2 million, with
employment based largely in services, trade, and government. Those sectors,
along with finance, insurance, and real estate, were the largest contributors to
the gross state product, according to the most recent Census. Population is
concentrated around Baltimore and Washington, D.C., and proximity to Washington,
D.C. influences the above average percentage of employees in government.
Manufacturing, on the other hand, is a much smaller proportion of employment
than for the nation as a whole. Annual unemployment rates have been below those
of the national average for each of the last 20 years except 1979 and 1997. The
unemployment figure for 1999 was 3.6% compared to a national rate for the same
period of 4.2%. Total employment increased by 8.3% between 1991 and 1999. The
State's personal income per capita was the fifth highest in the nation in 1999,
according to the U.S. Department of Commerce, Bureau of Economic Analysis, at
112.8% of the national average.
State Finances
The State Constitution mandates a balanced budget. The State enacts its
budget annually. The State's total expenditures as shown in its summary
financial statements for the fiscal years ending June 30, 1997, June 30, 1998
and June 30, 1999 were $13,385,744,000, $13,566,389,000 and $14,579,431,000,
respectively. Revenues are derived largely from certain broad-based taxes,
including statewide income, sales, motor vehicle, and property taxes. Non-tax
revenues are largely from the federal government for transportation, health
care, welfare and other social programs. General fund revenues on a budgetary
basis realized in the State's fiscal year ended June 30, 1999 exceeded estimates
by about $327.7 million, or 4.0%. The State ended fiscal 1999 with a $583.3
million general fund balance on a budgetary basis, of which $263.3 million was
designated to fund fiscal year 2000 operations; this balance reflects a $568.8
million increase compared to the balance projected at the time the 1999 budget
was enacted. In addition, there was a balance in the Revenue Stabilization Fund
of $634.9 million. On a GAAP basis, the fiscal 1999 undesignated general fund
balance was $539.3 million, compared with $230.2 million at the end of fiscal
1998. The total GAAP fund balance
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for fiscal year 1999 was $1,978.0 million compared with a total fund balance of
$1,595.2 million for fiscal year 1998.
Estimates for fiscal 2000 project a total budget of $18.2 billion, a
$1.5 billion increase over fiscal 1999. The general fund accounts for
approximately $9.0 billion, of which the largest expenditures are for health and
education, which together represent two-thirds of total general fund
expenditures. General fund expenditures exclude transportation, which is funded
with special fund revenues from the Transportation Trust Fund.
Reserve funds consist of the Revenue Stabilization Fund and other reserve
accounts, which together totaled $741.0 million at the end of fiscal 1999. The
Revenue Stabilization Fund was established to retain State revenues for future
needs and to reduce the need for future tax increases. Current estimates for the
close of fiscal 2000 project a total reserve balance of $679.7 million, of which
$581.0 million is projected to be in the Revenue Stabilization Fund. The
projected balance in the Revenue Stabilization Fund represents 6.4% of estimated
General Fund Revenues.
Maryland municipal debt
The public indebtedness of Maryland, its political subdivisions and its
agencies is divided into three basic types. The State and its political
subdivisions issue general obligation bonds, to the payment of which the ad
valorem property tax is pledged, for capital improvements and for various State
or local projects. The Maryland Department of Transportation issues its limited,
special obligation bonds for transportation purposes payable primarily from
specific, fixed-rate excise taxes and other revenues related mainly to highway
use. Certain authorities issue obligations payable solely from specific non-tax,
enterprise fund revenues and for which the State has no liability and has given
no moral obligation assurance. The State, its political subdivisions and certain
of its agencies also have entered into a variety of lease purchase agreements to
finance the acquisition of capital assets. These lease agreements specify that
payments thereunder are subject to annual appropriation.
At least since the end of the Civil War, the State has paid the principal
of and interest on its general obligation bonds when due. There is no general
debt limit imposed at the State level by the State Constitution or public
general laws. Maryland had $4.6 billion of net State tax supported debt
outstanding at March 31, 2000. General obligation bonds accounted for $3.4
billion of that amount. About 58% of debt service on general obligation bonds is
paid from State property tax receipts, with the remainder paid from general
funds of the State and by loan repayments from local units and other sources.
Department of Transportation bonds outstanding account for another $1.0
billion; the debt service on those bonds is payable from taxes and fees related
to motor vehicles and motor vehicles fuel and a portion of the corporate income
tax. Debt obligations issued by the Maryland Stadium Authority in the form of
lease-backed revenue bonds account for $290.8 million of State tax supported
debt outstanding at March 31, 2000. Rental payments under the lease are subject
to annual appropriation by the General Assembly.
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The State has also financed construction and acquisition of various other
facilities and equipment through lease-type financing, subject to annual
appropriation by the General Assembly. The State had $893.7 million of
authorized but unissued debt at March 31, 2000. The State issued $200,000,000
of its general obligation bonds on August 3, 2000.
Risks associated with Maryland municipal bonds
Risks associated with municipal obligations vary by type. Major factors
affecting the State's general obligation bonds are discussed above under the
headings "General Factors" and "State Finances." However, factors affecting the
local economy of a particular county or city may affect the investment quality
of that county or city's general obligation bonds without necessarily affecting
the investment quality of the general obligation bonds of the State.
Limited obligation revenue bonds may fluctuate in investment
quality due to factors affecting only the particular revenue stream. For
example, a downturn in the Maryland health care sector or a downturn for a
specific health care borrower might affect the investment quality of Maryland
hospital revenue bonds generally or might only affect a specific health care
revenue bond issue. For another example, a sharp change in prevailing mortgage
interest rates could affect the investment quality of housing mortgage revenue
bonds. Risks associated with any type of municipal obligations may be
significantly reduced when such bonds have been pre-refunded, or if such bonds
are insured.
Industry specific conditions may affect the investment quality and value of
revenue bonds. This paragraph discusses some of the major economic factors
affecting the principal types of revenue bonds issued by Maryland governmental
entities. Water and sewer revenues are affected by trends in population and new
construction and by weather cycles. Transportation facility revenues are
affected by economic conditions generally and by special factors such as rising
energy prices. Revenues from private, non-profit healthcare corporations and
hospitals are subject to federal and state regulatory restrictions, Maryland
State rate regulation and fluctuations in federal and state reimbursement rates
for Medicare and Medicaid. As of mid-year 2000, Maryland hospitals and
health care corporations generally face a more difficult operating environment
than in previous years, due to revenue constraints imposed by the Maryland
Health Services Cost Review Commission. The revenues of private colleges and
universities are affected by enrollment demand and cost pressures. Enrollment
demand fluctuates with changes in the population of college bound persons and
with the state of the economy. Housing revenue bonds are affected by the pace of
housing starts, sales and refinancings, and by the levels of mortgage rates
generally and local housing demand.
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State Tax Matters
The following is based upon the advice of Venable, Baetjer and Howard, LLP,
special Maryland counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable Maryland tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the Maryland
Fund. This summary does not address the taxation of other shareholders. These
provisions are subject to change by legislative or administrative actions, and
any such change may be retroactive with respect to Maryland Fund transactions.
The following is based on the assumptions that the Maryland Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause Maryland Fund distributions to
qualify as exempt-interest dividends to shareholders, and that it will
distribute all interest and dividends it receives to the Maryland Fund's
shareholders.
The Maryland Fund will be subject to the Maryland corporate income tax only
if it has a sufficient nexus with Maryland. If it is subject to the Maryland
corporate income tax, it does not expect to pay a material amount of such tax.
Distributions by the Maryland Fund that are attributable to interest on or
gain from the sale or exchange of any obligation of Maryland or its political
subdivisions ("Maryland Obligations") or to interest on or gain from the sale or
exchange of obligations of the United States, its territories, possessions, or
instrumentalities that are exempt from state taxation under federal law
("Federal Obligations") will not be subject to the Maryland individual income
tax or the Maryland corporate income tax. All remaining distributions to
shareholders will be subject to the Maryland individual and corporate income
taxes, and in the case of individuals, will be subject to local taxes as well.
Gain on the sale, exchange, or other disposition of shares of the Maryland
Fund will be subject to the Maryland individual and corporate income taxes, and
in the case of individuals, will be subject to local taxes as well.
Shares of the Maryland Fund may be subject to the Maryland estate tax if
owned by a Maryland decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning Maryland state and local tax matters.
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<PAGE>
APPENDIX D-4
Factors Pertaining to Massachusetts
Except to the extent the Massachusetts Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in
Massachusetts municipal bonds. The Fund is therefore susceptible to political,
economic or regulatory factors affecting issuers of Massachusetts municipal
bonds. Without intending to be complete, the following briefly summarizes the
current financial situation, as well as some of the complex factors affecting
the financial situation, in the Commonwealth of Massachusetts (the
"Commonwealth"). It is derived from sources that are generally available to
investors and is based in part on information obtained from various agencies in
Massachusetts. No independent verification has been made of the accuracy or
completeness of the following information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on Commonwealth or local
government finances generally, will not adversely affect the market value of
Massachusetts bonds in the Fund or the ability of particular obligors to make
timely payments of debt service on (or relating to) those obligations.
Between 1982 and 1988, the economies of Massachusetts and New England were
among the strongest performers in the nation, with growth rates considerably
higher than those for the national economy as a whole. Between 1989 and 1992,
however, both Massachusetts and New England experienced growth rates
significantly below the national average. Since then, growth rates in
Massachusetts and New England have improved to levels on a par with the rest of
the nation. In 1997, the economies of both Massachusetts and New England grew at
a faster pace than the nation as a whole for the first time since 1988. The
Massachusetts economy has been the strongest in New England, making up an
average of 47.7 percent of New England's total Gross Product and an average of
2.8 percent of the nation's economy over the decade and a half.
The Massachusetts services sector, with 35.7 percent of the non-
agricultural work force in November 1999, is the largest employment sector in
the Massachusetts economy, followed by wholesale and retail trade (22.9
percent), manufacturing (13.7 percent), and government employment (13.1
percent). Between 1988 and 1992, total employment in Massachusetts declined 10.7
percent. The construction, manufacturing, and trade sectors experienced the
greatest decreases during this time, with more modest declines taking place in
the government and finance, insurance and real estate ("FIRE") sectors. The
economic recovery that began in 1993 has been accompanied by increased
employment levels; since 1994, total employment levels in Massachusetts have
increased at yearly rates greater than 2.0 percent. In 1998, employment levels
in every industry increased or remained constant. The most rapid growth in 1998
came in the construction sector and the services sector, which grew at rates of
7.6 percent and 2.8 percent, respectively. Total non-agricultural employment in
Massachusetts grew at a rate of 1.9 percent in 1998.
The Massachusetts economy is fairly concentrated in the eastern portion of
the state, with more than 50% of its total population residing in the
metropolitan Boston area. Of the 16 Fortune 500 companies located in the
Commonwealth in 1999, 14 were located in the metropolitan Boston region. While
many of the communities in the eastern portion of the Commonwealth have
benefited from the economic growth described above, several areas outside the
metropolitan Boston region have not
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participated as fully and continue to be hampered by higher employment,
lower per capita income and stagnant property values.
Fiscal Matters
Budgeted Operating Funds. The Commonwealth's operating fund structure
satisfies the requirements of state finance law and is in accordance with the
generally accepted accounting principles ("GAAP"), as defined by the Government
Accounting Standards Board. The General Fund and those special revenue funds
which are appropriated in the annual state budget receive most of the non-bond
and non-federal grant revenues of the Commonwealth. These funds are referred to
as the "budgeted operating funds" of the Commonwealth. They do not include the
capital projects funds of the Commonwealth, into which the proceeds of
Commonwealth bonds are deposited. The three principal budgeted operating funds
are the General Fund, the Highway Fund and the Local Aid Fund. Expenditures from
these three funds generally account for approximately 93% of total expenditures
of the budgeted operating funds.
The Commonwealth's budgeted operating funds for fiscal 1997, 1998,
1999 and 2000 showed an excess (deficiency) of revenues and other sources over
expenditures and other uses of $221 million, $798 million, ($80) million and
$173 million and positive fund balances of $1.394 billion, $2.192 billion,
$2.112 billion and $2.285 billion, respectively. Over the same period, budgeted
expenditures and other uses were approximately $17.949 billion for fiscal 1997,
$19.002 billion for fiscal 1998, $20.245 billion for fiscal 1999 and $22.414
billion for fiscal 2000.
The fiscal 2001 budget is based on numerous spending and revenue estimates
the achievement of which cannot be assured. The Executive Office of
Administration and Finance estimates fiscal 2001 budgeted expenditures and other
uses will total approximately $22.110 billion, while budgeted revenues and other
sources will total approximately $21.933 billion.
Limitations on Tax Revenues. Chapter 62F of the General Laws, which was
enacted by the voters in November 1986, establishes a state tax revenue growth
limit for each fiscal year equal to the average positive rate of growth in total
wages and salaries in the Commonwealth, as reported by the federal government,
during the three calendar years immediately preceding the end of such fiscal
year. Chapter 62F also requires that allowable state tax revenues be reduced by
the aggregate amount received by local governmental units from any newly
authorized or increased local option taxes or excises. Any excess in state tax
revenue collections for a given fiscal year over the prescribed limit, as
determined by the State Auditor, is to be applied as a credit against the then
current personal income tax liability of all taxpayers in the Commonwealth in
proportion to the personal income tax liability of all taxpayers in the
Commonwealth for the immediately preceding tax year. The law does not exclude
principal and interest payments on Commonwealth debt obligations from the scope
of its tax limit. However, the preamble contained in Chapter 62F provides that
"although not specifically required by anything contained in this chapter, it is
assumed that from allowable state tax revenues as defined herein the
Commonwealth will give priority attention to the funding of state financial
assistance to local government units, obligations under the state governmental
pension systems, and payment of principal and interest on debt and other
obligations of the Commonwealth."
Tax revenues in fiscal 1995 through fiscal 2000 were lower than the limit
set by Chapter 62F. For fiscal 2000, as calculated by the State Auditor pursuant
to Chapter 62F, net state tax revenues were approximately $15.702 billion and
allowable state tax revenues
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<PAGE>
were approximately $16.694 billion.
On November 7, 2000 Massachusetts voters approved two initiative petitions
that will reduce personal income taxes. One of the approved petitions sets the
Part B income tax rate at 5.6% on January 1, 2001, 5.3% on January 1, 2002 and
5% on January 1, 2003 and thereafter. The Department of Revenue estimates that
this change will reduce fiscal 2001 revenues by $135 million, fiscal 2002
revenues by $457 million and fiscal 2003 revenues by $883 million. The
annualized value of the reduction, once fully effective in fiscal 2004, is
estimated to be approximately $1.154 billion. The other approved petition
provides for a personal income tax deduction for charitable contributions,
effective January 1, 2001. The petition essentially re-enacts a provision for
such a deduction included in the fiscal 2001 budget. The Department of Revenue
estimates the cost of the deduction to be $70 million to $90 million in fiscal
2001 and $157 million to $192 million annually thereafter. The initiative
petition that would have established tax credits for amounts paid as tolls and
motor vehicle excise taxes was disapproved by the voters.
Local Aid: Proposition 2-1/2. In November 1980, voters in the Commonwealth
approved a statewide tax limitation initiative petition, commonly known as
Proposition 2-1/2, to constrain levels of property taxation and to limit the
charges and fees imposed on cities and towns by certain governmental entities,
including county governments. Proposition 2-1/2 is not a provision of the state
constitution and accordingly is subject to amendment or repeal by the
Legislature. Proposition 2-1/2, as amended to date, limits the property taxes
that may be levied by any city or town in any fiscal year to the lessor of (i)
2.5% of the full and fair cash valuation of the real estate and personal
property therein, and (ii) 2.5% over the previous year's levy limit plus any
growth in the tax base from certain new construction and parcel subdivisions.
Proposition 2-1/2 also limits any increase in the charges and fees assessed by
certain governmental entities, including county governments, on cities and towns
to the sum of (i) 2.5% of the total charges and fees imposed in the preceding
fiscal year, and (ii) any increase in charges for services customarily provided
locally or services obtained by the city or town at its option. The law contains
certain override provisions and, in addition, permits debt service on specific
bonds and notes and expenditures for identified capital projects to be excluded
from the limits by a majority vote at a general or special election. At the time
Proposition 2-1/2 was enacted, many cities and towns had property tax levels in
excess of the limit and were therefore required to roll back property taxes with
a concurrent loss of revenues. Between fiscal 1981 and fiscal 1999, the
aggregate property tax levy grew from $3.346 billion to $6.753 billion,
representing an increase of approximately 101.8%. By contrast, according to
federal Bureau of Labor Statistics, the consumer price index for all urban
consumers in Boston grew during the same period by approximately 107.9%.
Many communities have responded to the limitation imposed by
Proposition 2-1/2 through statutorily permitted overrides and exclusions. There
are three types of referenda questions (override of levy limit, exclusion of
debt service, or exclusion of capital expenditures) which permit communities to
exceed the limits of Proposition 2-1/2. Override activity steadily increased
throughout the 1980's before peaking in fiscal 1991 and decreasing thereafter.
In fiscal 1999, 24 communities had successful override referenda which added an
aggregate of $8.7 million to their level limits. In fiscal 1999, the impact of
successful override referenda going back as far as fiscal 1993, was to raise the
levy limits of 125 communities by $67 million. Although Proposition 2-1/2 will
continue to constrain local property tax revenues, significant capacity exists
for overrides in nearly all cities and towns.
In addition to overrides, Proposition 2-1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 20 communities in fiscal 1999 and totaled $4.6 million. In fiscal
1999, the impact of successful debt exclusion votes going back as far as fiscal
1993, was to raise the levy limits of 250 communities by $945.8 million.
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<PAGE>
Commonwealth Financial Support for Local Governments. During the 1980's, the
Commonwealth increased payments to its cities, towns and regional school
districts ("Local Aid") to mitigate the impact of Proposition 2 1/2 on local
programs and services. In fiscal 2000, approximately 21.6% of the Commonwealth's
budget was allocated to direct Local Aid. Local Aid payments to cities, towns
and regional school districts take the form of both direct and indirect
assistance. Direct Local Aid consists of general revenue sharing funds and
specific program funds sent directly to local governments and regional school
districts as reported on the so-called "cherry sheet" prepared by the Department
of Revenue, excluding certain pension funds and nonappropriated funds.
As a result of comprehensive education reform legislation enacted in June
1993, a large portion of general revenue sharing funds are earmarked for public
education and are distributed through a formula designed to provide more aid to
the Commonwealth's poorer communities. The legislation established a fiscal 1993
state spending base of approximately $1.288 billion for local education purposes
and required annual increases in state expenditures for such purposes above that
base, subject to appropriation, estimated to be approximately $2.803 billion in
fiscal 2000. All of the budgets in fiscal years 1994 through 2000 have fully
funded the requirements imposed by this legislation.
Another component of general revenue sharing, the Lottery and Additional
Assistance programs, provides unrestricted funds for municipal use. There are
also several specific programs funded through direct Local Aid, such as highway
construction, school building construction, and police education incentives.
In addition to direct Local Aid, the Commonwealth has provided substantial
indirect aid to local governments, including, for example, payments for
Massachusetts Bay Transportation Authority assistance and debt service, pensions
for teachers, housing subsidies and the costs of courts and district attorneys
that formerly had been paid by the counties. Beginning July 1, 2000,
Commonwealth support for the Massachusetts Bay Transportation Authority
takes the form of dedicated tax revenues.
Initiative Law. A statute adopted by voter initiative petition at the
November 1990 statewide election regulates the distribution of Local Aid to
cities and towns. This statute requires that, subject to annual appropriation,
no less than 40% of collections from personal income taxes, sales and use taxes,
corporate excise taxes and lottery fund proceeds be distributed to cities and
towns. Under the law, the Local Aid distribution to each city or town is to
equal no less than 100% of the total Local Aid received for fiscal 1989.
Distributions in excess of fiscal 1989 levels are to be based on new formulas
that would replace the current Local Aid distribution formulas. By its terms,
the new formula would have provided for a substantial increase in direct Local
Aid in fiscal 1992 and subsequent years. Nonetheless, Local Aid payments remain
subject to annual appropriation by the Legislature, and the appropriations for
Local Aid since the enactment of the initiative law have not met the levels set
forth in the initiative law.
Commonwealth Capital Spending. The Commonwealth finances capital
expenditures from a variety of sources, including general obligation bonds and
special obligation (gas tax and convention center) bonds issued by the state and
federal reimbursements. As a result of the Central Artery/Ted Williams Tunnel
Project, certain additional funding sources have been developed, including
specified contributions from independent authorities and the issuance of bonds
to be repaid from future federal reimbursements. In addition, at the end of the
last three fiscal years, the Commonwealth has set aside surplus operating
revenues to supplement capital spending.
Since fiscal 1992 the Executive Office for Administration and Finance has
maintained a five-year capital spending plan, including an annual administrative
limit on the amount of capital
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spending to be financed by bonds issued by the state. In fiscal 1992 the annual
limit was set at approximately $825 million. During fiscal 1995 the limit was
raised to approximately $900 million and during fiscal 1998 to approximately
$1.0 billion. Actual bond-financed capital expenditures during fiscal years
1996, 1997, 1998 and 1999 were approximately $902 million, $908 million, $955
million and $1.0 billion, respectively. The fiscal 1999 figure does not include
approximately $26 million of bond-funded expenditures not counted against the
annual limit because of their relationship to debt defeasance transactions.
Capital spending for fiscal years 2000 through 2004 to be financed from debt
issued by the state is forecast at $5.6 billion, which includes both general
obligation bonds and state gas tax bonds, and which is significantly below
legislatively authorized capital spending levels. The five-year capital plan
contemplates that the projected level of Commonwealth capital spending will
leverage approximately $2.3 billion in federal highway funding. Due to the size
and complexity of the Commonwealth's capital program and other factors, the
timing and amount of actual capital expenditures and debt issuances over the
period will likely vary from the annual spending amounts contained in the
five-year capital spending plan.
The largest single component of the Commonwealth's capital program currently
is the Central Artery/Ted Williams Tunnel project, a major construction project
that is part of the completion of the federal interstate highway system. The
project involves the depression of a portion of Interstate 93 in downtown Boston
(the Central Artery), which is now an elevated highway, and the construction of
a new tunnel under Boston harbor (the Ted Williams Tunnel) to link the Boston
terminus of the Massachusetts turnpike (Interstate 90) to Logan International
Airport and points north. The magnitude of the Central Artery/Ted Williams
Tunnel project has resulted in the realignment of certain transportation assets
in the Commonwealth and the development of additional financing mechanisms to
support its completion, including payments from the Massachusetts Turnpike
Authority and the Massachusetts Port Authority and state borrowings in
anticipation of future federal highway reimbursements. The completed project
will be owned and operated by the Massachusetts Turnpike Authority as part of
the Metropolitan Highway System which was established in conjunction with the
project.
On February 1, 2000, the Massachusetts Turnpike Authority revised upward by
$1.398 billion its estimate of the total expenditures expected to be required to
complete the Central Artery/Ted Williams Tunnel project. According to the
revised estimate, by the time of the project's completion, the project was to
have required expenditures totaling approximately $13.1 billion, excluding
insurance reimbursements and proceeds from real estate dispositions related to
the project that will be received after project completion. On March 31, 2000,
the Federal Highway Administration published the findings from its independent
assessment of the project, which concluded that, instead of the Turnpike
Authority's announced $1.398 billion budget increase, an additional $1.691 to
$1.856 billion would be required to complete the project. The Turnpike Authority
completed a further review of the project in May 2000 and released the findings
in June 2000. The project's estimated overrun was increased from the $1.398
billion announced in February 2000 to $1.845 billion with an additional
contingency of $131 million for a total increase of $1.976 billion.
Subsequently, the Executive Office of Administration and Finance retained
an independent consulting and accounting firm to provide an assessment of the
project's budget and schedule through completion of construction. The
consultant's report, dated as of July 31, 2000, estimates that a reasonable
budget target would include a $2.140 billion budget increase, or an increase of
$294 million over the amount provided for in the June 2000 financial plan
update, with potential additional exposure of up to $280 million.
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On September 29, 2000 the Turnpike Authority filed with the Federal Highway
Administration a new finance plan dated October 1, 2000. The October 1, 2000
finance plan is based on information as of June 30, 2000 and the results of a
comprehensive cost and schedule evaluation. The finance plan estimates total
project costs to be $14.075 billion, an increase of $562 million over the
estimates contained in the June 2000 finance plan update. Most of the increase
is contained in a $203 million increase in estimated construction cost and the
addition of a project contingency budget of $258 million.
The project cost estimates contained in the October 1, 2000 finance plan
are $2.408 billion higher than the $11.667 billion project budget in place prior
to the announcement of additional costs on February 1, 2000. Excluding the $53
million for a garage and surface restoration work that had been added to the
project budget in the June 2000 update (and which is being financed from
Turnpike Authority resources), the difference between the October 1, 2000
estimate and the pre-February 1, 2000 estimate is $2.355 billion. The finance
plan contemplates that $2.168 billion of this amount will be defrayed by amounts
in the Central Artery and Statewide Road and Bridge Infrastructure Fund
established by legislation approved in May 2000. The balance of the increase,
$185 million, is budgeted to come from the proceeds of the sale of certain real
estate assets by the Turnpike Authority (approximately $152 million was received
in July 2000) and investment earnings thereon ($40 million anticipated, $33
million budgeted). The $2.168 billion figure to be provided by the Central
Artery and Statewide Road and Bridge Infrastructure Fund consists of $1.35
billion of Commonwealth bond proceeds, $231 million of license and registration
fees not used for debt service, $664 million from avoided debt service related
to debt defeasance transactions, $200 million from the Turnpike Authority, $65
million from the Port Authority and $159 million in interest earnings through
fiscal year 2005 on the balances in the Central Artery and Statewide Road and
Bridge Infrastructure Fund itself, less $500 million that is budgeted to be
spent on highway and bridge projects not related to the Central Artery/Ted
Williams Tunnel project.
The October 1, 2000 finance plan also identifies additional funding
sources that could be utilized as a contingency if there were to be growth in
the project cost estimate. One potential source of funds is additional sales of
Turnpike Authority real estate assets, including assets made available after
completion of the project (with an estimated range of values of $142 million to
$309 million). Other sources include up to $150 million of proceeds of
additional revenue bonds that could be supported by the currently projected
Metropolitan Highway System tolls and $50 million expected to be withdrawn from
the owner-controlled insurance program trust fund for the project.
Internal project cost estimates prepared by the Massachusetts Division of
the Federal Highway Administration as of September 27, 2000 totalled $13.8
billion. The Division indicated at that time that the estimates used by the
Turnpike Authority in preparing the October 1, 2000 finance plan constituted a
reasonable representation of expected costs to be used as a basis for budgetary
planning. The Turnpike Authority is still awaiting final Federal Highway
Administration approval of the October 1, 2000 finance plan.
On October 23, 2000 the President of the United States approved
legislation providing for appropriations for the U.S. Department of
Transportation and related agencies for the federal fiscal year ending September
30, 2001. The legislation provides that the U.S. Secretary of Transportation is
to withhold obligation of federal funds and all project approvals for the
Central Artery/Ted Williams Tunnel project in federal fiscal year 2001 and
thereafter unless the Secretary has approved the annual update of the project
finance plan and has determined that the Commonwealth is in full compliance with
its project partnership agreement with the Federal Highway Administration and is
maintaining a balanced statewide transportation program, including spending at
least $400 million each year for construction activities and transportation
projects other than the Central Artery/Ted Williams Tunnel project. In addition,
the legislation limits total federal funding to $8.549 billion. This limit is
consistent with the October 1, 2000 finance plan. Finally, the legislation ties
future federal funding for the project to an annual finding by the Inspector
General of the U.S. Department of Transportation that the annual update of the
project finance plan is consistent with Federal Highway Administration financial
plan guidance. Should any federal assistance be withheld from the project
pursuant to such legislation, such funding would nonetheless be available to the
Commonwealth for projects other than the Central Artery/Ted Williams Tunnel
project. Moreover, the legislation provides that federal funds will not be
withheld if the Secretary of Administration and Finance certifies that such
funds are required to pay all or any portion of the principal of federal grant
anticipation notes issued for the project. The Commonwealth's revised funding
plan may require or include other sources of revenue, on either a temporary or
permanent basis, including additional Commonwealth funds. The use of such other
financing sources may require legislative approval and certain executive branch
action.
Debt Ratings. As of September 30, 2000, Moody's and Fitch maintained Aa2
and AA- ratings on the Commonwealth's general obligation debt, respectively.
These ratings reflect the credit quality of the Commonwealth only, and do not
indicate the creditworthiness of tax-exempt securities of other issuers located
in the Commonwealth in which the Fund may invest.
There can be no assurance that these ratings will continue.
In past years, the Commonwealth and certain of its public bodies and
municipalities have faced serious financial difficulties which have affected the
credit standing and borrowing abilities of Massachusetts and its respective
entities and may have contributed to higher interest rates on debt obligations.
The recurrence of such financial difficulties could result in declines in the
market values of, or default on, existing obligations including Massachusetts
bonds in the Fund. Should there be during the term of the fund a financial
crisis relating to Massachusetts, its public bodies or municipalities, the
market value or marketability of all outstanding bonds issued by the
Commonwealth and its public authorities or municipalities including the
Massachusetts bonds in the Fund and interest income to the Fund could be
adversely affected.
Commonwealth Bond and Note Liabilities. The Commonwealth is authorized to
issue three types of debt: general obligation debt, special obligation debt and
federal grant anticipation notes. General obligation debt is secured by a pledge
of the full faith and credit of the Commonwealth. Special obligation debt may be
secured either with a pledge of receipts credited to the Highway Fund or with a
pledge of receipts credited to the Boston Convention and Exhibition Center fund.
Federal grant anticipation notes are secured by a pledge of federal highway
construction reimbursements. In addition, certain independent authorities and
agencies within the Commonwealth are statutorily authorized to issue bonds and
notes for which the Commonwealth is either directly, in whole or in part, or
indirectly liable. The Commonwealth's liabilities with respect to these bonds
and notes are classified as either Commonwealth-supported debt, Commonwealth-
guaranteed debt or indirect obligations. As of October 1, 2000, the
Commonwealth's total long-term bond and note liabilities were approximately
$15.992 billion, consisting of approximately $10.414 billion of general
obligation debt, $564 million of special obligation debt, $922 million of
federal grant anticipation notes, $3.879 billion of Commonwealth-supported debt
and $212 million of Commonwealth-guaranteed debt.
Debt Service. The growth of capital expenditures during the 1980's accounts
for the significant rise in annual debt services expenditures since fiscal 1989.
Debt service expenditures for fiscal 1997, fiscal 1998, and fiscal 1999 were
$998 million, $1.079 billion and $1.174 billion, respectively (excluding debt
service on Fiscal Recovery Bonds), and were projected to be $1.197 billion for
fiscal 2000.
In January 1990, legislation was passed to impose a limit on debt service
beginning in fiscal 1991, providing that no more than 10% of the total
appropriations in any fiscal year may be expended for payment of interest and
principal on general obligation debt (excluding the Fiscal Recovery Bonds). The
percentage of total appropriations expended from the budgeted operating funds
for debt service for fiscal 1999 was 5.8%, which was projected to decrease to
5.6% in fiscal 2000.
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Certain Liabilities. Among the material future liabilities of the
Commonwealth are significant unfunded general liabilities of its retirement
systems and a program to fund such liabilities; a program whereby, starting in
1978, the Commonwealth began assuming full financial responsibility for all
costs of the administration of justice within the Commonwealth; continuing
demands to raise aggregate aid to cities, towns, schools and other districts and
transit authorities above current levels; and Medicaid expenditures which have
increased each year since the program was initiated (from $3.398 billion in 1995
to $3.856 billion in 1999).
As a result of comprehensive legislation approved in January 1988, the
Commonwealth is required to fund future pension liabilities currently and to
amortize the Commonwealth's unfunded liabilities over 30 years. The legislation
was revised in July 1997, as part of the fiscal 1998 budget, to require the
amortization of such liabilities by June 30, 2018.
The Commonwealth has now completed the transition from a pay-as-you-go
system to an actuarially funded system. Accordingly, as contemplated by the
pension funding legislation approved in January 1988, amounts required to be
appropriated in the eleventh and later years of the funding schedule need not be
sufficient to cover the benefit costs payable in those years. In fiscal 1998 the
benefit costs exceeded the amount appropriated by approximately $20.4 million,
which was disbursed from the Pension Reserves Investment Trust Fund to cover
such costs. For fiscal 1999, a similar disbursement of approximately $132
million was necessary. For fiscal 2000, it was estimated that $281 million would
be disbursed from the PRIT Fund. Total pension expenditures were $986 million in
fiscal 2000, and are estimated to be $1,042 million in fiscal 2001.
Litigation
There are pending in state and federal courts within the Commonwealth and in
the Supreme Court of the United States various suits in which the Commonwealth
is a party. In the opinion of the Attorney General of the Commonwealth, no
litigation is pending or, to his knowledge, threatened which is likely to
result, either individually or in the aggregate, in final judgments against the
Commonwealth that would affect materially its financial condition.
Commonwealth Programs and Services. From time to time actions are brought
against the Commonwealth by the recipients of governmental services,
particularly recipients of human services benefits, seeking expanded levels of
services and benefits and by the providers of such services challenging the
Commonwealth's reimbursement rates and methodologies. To the extent that such
actions result in judgments requiring the Commonwealth to provide expanded
services or benefits or pay increased rates, additional operating and capital
expenditures might be needed to implement such judgments. In June 1993, in an
action challenging the Commonwealth's funding of public primary and secondary
education systems on both federal and state constitutional grounds, Webby v.
Dukakis (now known as McDuffy v. Robertson, Supreme Judicial Court for Suffolk
County No. 90-128), the Supreme Judicial Court ruled that the Massachusetts
Constitution imposes an enforceable duty on the Commonwealth to provide adequate
public education for all children in the Commonwealth and that the Commonwealth
was not at that time fulfilling this constitutional duty. However, the court
also ruled that no then-present statutory enactment was to be declared
unconstitutional. The court further ruled that the Legislature and the Governor
were to determine the necessary response to satisfy the Commonwealth's
constitutional duty, although a single justice of the court could retain
jurisdiction to determine whether, within a reasonable time, appropriate
legislative action had been taken. Comprehensive education reform legislation
was approved by the Legislature and the Governor later in June 1993. On May 10,
1995, the plaintiffs filed a motion for further relief, arguing that the 1993
legislation did not provide sufficiently for public education and that its
timetable was too slow. It cannot be determined at this time
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what further action, if any, the plaintiffs in McDuffy may take or whether the
court will order any further relief.
Challenges by residents of five state schools for the retarded in Ricci v.
Murphy (U.S. District Court C.A. No 72-469-T) resulted in a consent decree in
the 1970's which required the Commonwealth to upgrade and rehabilitate the
facilities in question and to provide services and community placements in
western Massachusetts. The District Court issued orders in October, 1986 leading
to termination of active judicial supervision. On May 25, 1993, the District
Court entered a final order vacating and replacing all consent decrees and court
orders. In their place, the final order requires lifelong provisions for
individualized services to class members and contains requirements regarding
staffing, maintenance of effort (including funding) and other matters.
Rolland v. Cellucci (U.S. District Court C.A. No. 98-32208 KPN) is a class
action by mentally retarded nursing home patients seeking community placements
and services. The court approved a settlement agreement entered into by the
parties which will provide certain benefits to nursing home residents with
mental retardation and other developmental disabilities over the next seven
years. The Department of Mental Retardation estimates that the agreement will
cost approximately $5 million per fiscal year for seven years.
In Ramos v. McIntire (Suffolk Superior Court No. 98-2154), plaintiffs allege
that the Department of Transitional Assistance violated state and federal law,
including the Americans with Disabilities Act, by failing to accommodate welfare
recipients with learning disabilities in its Employment Service Program. The
court has denied, without prejudice, plaintiffs' motions for class certification
and injunctive relief. If the case remains limited to the two existing
plaintiffs, potential liability will likely be under $50,000. However, if the
Court at some point allows a motion for class certification, potential liability
could increase to $33.5 million. The Court denied a renewed motion for class
certification.
The Division of Medical Assistance ("DMA") is also engaged in four related
lawsuits in which numerous hospitals seek injunctive and declaratory relief from
DMA's implementation of its prepayment review program and its postpayment review
program. The hospitals also seek damages consisting of the value of all claims
for payment previously denied by DMA under these two review programs, where the
basis for the denial was DMA's determination that the claims were not medically
necessary. In Athol Memorial Hospital, et al. v. Commissioner of the Division of
Medical Assistance (Suffolk Superior Court No. 99-2325-F), the plaintiffs seek
injunctive and declaratory relief. In Baystate Medical Center v. Commissioner of
the Division of Medical Assistance (Suffolk Superior Court No. 99-2115-E), the
plaintiff seeks injunctive and declaratory relief and monetary damages. In
Massachusetts Hospital Association, et al. v. Commissioner of the Division of
Medical Assistance (Suffolk Superior Court No. 99-2324-E), the plaintiffs seek
injunctive and declaratory relief. Salem Hospital v. Commissioner of the
Division of Medical Assistance (Suffolk Superior Court No. 99-0750-C), is an
alleged class action seeking declaratory relief and monetary damages.
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In the Baystate Medical case, the Court dismissed the claims under 42
U.S.C.(S) 1983 on December 16, 1999. In the Athol and Salem cases, the Court
dismissed the claims under 42 U.S.C.(S) 1983 on December 29, 1999. In the Salem
case, the Court denied the motion for class certification on December 29, 1999.
The remaining claims for declaratory and injunctive relief could prevent
DMA from continuing to implement the prepayment and postpayment review programs
under its new regulations. Since continued implementation of these programs
would save the Division between $6 million and $11 million annually, DMA's
expenditures would increase by that amount if it is barred from implementing
these programs. The remaining claims for damages could reach approximately $40
million.
Valerie Anderson v. Cellucci (U.S. District Court C.A. No. 99-10617-DPW),
now recaptioned Boulet v. Celluci, is a class action against the Department of
Mental Retardation and the Division of Medical Assistance asserting that the
Commonwealth has an obligation under the Medicaid Home and Community Based
Services Waiver Program to provide group residences for adult mentally retarded
individuals who currently reside with their parents. The court granted
plaintiff's motion for partial summary judgment and issued an order requiring
the defendant agencies to provide services to all eligible individuals on the
waiting list within 90 days. However, the court invited the Commonwealth to
propose alternative relief by August 15, 2000, which the Commonwealth did. The
Department of Mental Retardation currently estimates the potential exposure to
the Commonwealth to be a total of $85 million over fiscal years 2002-2006.
Environmental Matters. The Commonwealth is engaged in various lawsuits
concerning environmental and related laws, including an action brought by the
U.S. Environmental Protection Agency alleging violations of the Clean Water Act
and seeking to enforce the clean-up of Boston Harbor. United States v.
Metropolitan District Commission (U.S. District Court C.A. No. 85-0489-MA). See
also Conservation Law Foundation v. Metropolitan District Commission (U.S.
District Court No. 83-1614-MA). The Massachusetts Water Resources Authority
(MWRA), successor in liability to the Metropolitan District Commission (MDC),
has assumed primary responsibility for developing and implementing a court-
approved plan and timetable for the construction of the treatment facilities
necessary to achieve compliance with the federal requirements. The MWRA
currently projects that the total cost of construction of the wastewater
facilities required under the court's order, not including CSO costs, will be
approximately $3.142 billion in current dollars, with approximately $601 million
to be spent after June 30, 1997. With CSO costs, the MWRA anticipates spending
approximately $901 million after that date. Under the Clean Water Act, the
Commonwealth may be liable for any cost of complying with any judgment in these
or any other Clean Water Act cases to the extent the MWRA or a municipality is
prevented by state law from raising revenues necessary to comply with such a
judgment.
On February 12, 1998, the U.S. Department of Justice filed a complaint in
federal district court seeking to compel the MWRA to build a water filtration
plant for the metropolitan Boston water supply and, together with the MDC, to
take certain watershed protection measures. United States v. MWRA (U.S. District
Court C.A. No. 98-10267). The U.S. District Court issued a decision on May 5,
1999 allowing the U.S. government's motion for summary judgment by finding the
MWRA liable under the Safe Drinking Water Act, but denying its motion for
summary judgment on the remedy issue. A trial on appropriate remedies, if any,
including filtration, took place in January 2000. The court ruled in May 2000
that MWRA does not need to build a filtration system based on a finding that
ozonation treatment and improvement of the Wachusett watershed are sufficient
actions at this time. On June 2, 2000, the U.S. District Court entered a
judgment in accordance with its ruling in May, denying the United States' motion
for injunctive relief. The United States filed a notice of appeal on July 3,
2000.
Wellesley College is seeking contribution from the Commonwealth for costs
related to environmental contamination on the Wellesley College campus and
adjacent areas, including Lake Waban. Such costs may reach $35 million.
Currently, the Commonwealth and Wellesley College are mediating this potential
claim for contribution. As of February 17, 2000, no litigation against the
Commonwealth has been filed.
Taxes And Other Revenues. In The First National Bank of Boston v.
Commissioner of Revenue
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<PAGE>
(Appellate Tax Board No. F232249), the First National Bank of Boston challenges
the constitutionality of the former version of the Commonwealth's bank excise
tax. In 1992, several pre-1992 petitions filed by the bank, which raised the
same issues, were settled prior to a board decision. The bank then filed claims
with respect to 1993 and 1994. The bank claims that the tax violated the
Commerce Clause of the United States Constitution by including its worldwide
income without apportionment. The Department of Revenue refunded $35.3 million
in April 2000 to the First National Bank of Boston for tax year 1993 for reasons
unrelated to the claims against the Department of Revenue. The bank has
accordingly withdrawn all of its claims for tax year 1993. The Commissioner and
the bank entered into a settlement on August 31, 2000 pursuant to which $27.5
million has been refunded to the bank for tax years 1992 and 1994.
In General Mills, Inc. v. Commissioner of Revenue (Appellate Tax Board No.
F223398), the taxpayer challenges a corporate excise tax, including the proper
treatment of the sale of two of its subsidiaries. The total exposure to the
Commonwealth, including tax, interest and penalties, is approximately $36
million. The Appellate Tax Board issued a decision awarding an abatement of
$634,077. The Board has not yet issued its findings of fact and report.
In Tenneco, Inc. v. Commissioner of Revenue (Appellate Tax Board Nos.
F162137-F162140), the taxpayer seeks $34.3 million in excise taxes and interest.
On September 6, 2000, the Appellate Tax Board issued findings of fact and a
report in support of its 1998 decision in favor of the Commissioner. On October
31, 2000, the taxpayer filed a notice of appeal.
In EG&G, Inc. v. Commissioner of Revenue (Appellate Tax Board Nos. F245459,
F245460, F245461, F253131, F233126), the taxpayer seeks $21.2 million in excise
taxes and interest.
In addition, there are several other tax cases pending which could result in
significant refunds if taxpayers prevail. It is the policy of the Attorney
General and the Commissioner of Revenue to defend such actions vigorously on
behalf of the Commonwealth, and the descriptions that follow are not intended to
imply that the Commissioner has conceded any liability whatsoever. Approximately
$80 million in taxes and interest in the aggregate are at issue in several other
cases pending before the Appellate Tax Board or on appeal to the Appeals Court
or the Supreme Judicial Court.
Eminent Domain. In Spaulding Rehabilitation Hospital Corporation v.
Massachusetts Highway Department (Suffolk Superior Court No. 95-4360C), the
Spaulding Rehabilitation Hospital filed an action to enforce an agreement to
acquire its property by eminent domain, in connection with the Central
Artery/Ted Williams Tunnel project. On March 13, 1998, the Superior Court
entered judgment for the Commonwealth dismissing the complaint. The plaintiff
has appealed the Superior Court's dismissal of the complaint. In December 1999,
the Spaulding Rehabilitation Hospital filed an eminent domain action concerning
the same property. Spaulding Rehabilitation Hospital Corp. v. Commonwealth
(Suffolk Superior Court No. 99-5733-E).
Thomas Rich v. Commonwealth of Massachusetts (Norfolk Superior Court No. 94-
2319) and Shea v. Commonwealth (Norfolk Superior Court No. 97-1070-B) are
eminent domain cases concerning property in the city of Quincy. Thomas Rich has
settled for $6.2 million. In Shea, the Commonwealth faces a potential liability
of $10 million. The cost of remediation of contaminated soil will also be an
issue.
Patricia I. Barletta and John G. Bulman, as Trustees of the Vincent D.
Barletta 1971 Trust v. Commonwealth (Worcester Superior Court C.A. No. 99-
0657C). This case concerns a taking of land in Douglas, Massachusetts in which
the plaintiffs claim at least $46 million.
In Boston & Maine Railroad v. Commonwealth (C.A. No. 99-3928E), pending in
Middlesex Superior Court, the plaintiff may seek $40 million for a taking of
land in Cambridge for the Central Artery/Ted Williams Tunnel project.
Receivership. On January 4, 2000, the Attorney General, at the request of
the Commissioner of Insurance, obtained a court order from the Massachusetts
Supreme Judicial Court placing Harvard Pilgrim Health Care, Inc., Pilgrim Health
Care, Inc. and Harvard Pilgrim Health Care of New England, Inc. (collectively,
"HPHC") into temporary receivership. HPHC is one of the largest nonprofit
managed care operations in the United States, providing care and coverage to
more than 1.2 million members in New England, approximately 1.1 million of whom
are Massachusetts residents. As the temporary receiver, the Insurance Commission
has taken control of HPHC for the purpose of rehabilitating HPHC and conserving
its assets. On January 17, 2000, the temporary receiver engaged an investment
banker to identify and evaluate all viable options to recapitalize HPHC and
ensure continuity of care and coverage to HPHC members, including a merger or
other affiliation, a sale/leaseback or other leasing transaction, a third-party
capital infusion or a sale. In the temporary receiver's first status report,
submitted to the Supreme Judicial Court on January 28, 2000, the temporary
receiver and the Attorney General proposed to continue the process of
identifying and evaluating possible options to recapitalize HPHC and to report
to the Court when a desirable approach is available. While the receivership
statute does not require state financial assistance, various health care
providers and other interested parties have publicly discussed
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<PAGE>
public participation in the resolution of this matter.
SEC Investigation
On May 8, 2000, the State Treasurer's office was advised that the staff of
the Securities and Exchange Commission is conducting a formal investigation in
the matter of "Certain Municipal Securities/Massachusetts Central Artery
(B-1610)," pursuant to a formal order of private investigation issued by the
Commission.
Other Issuers of Massachusetts Bonds
There are a number of state agencies, instrumentalities and political
subdivisions of the Commonwealth that issue Municipal bonds, 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
Commonwealth. The brief summary above does not address, nor does it attempt to
address, any difficulties and the financial situations of those other issuers of
Massachusetts bonds.
Many factors, in addition to those cited above, have or may have a bearing
upon the financial condition of the Commonwealth, including social and economic
conditions, many of which are not within the control of the Commonwealth.
Massachusetts Tax Matters
The following is based upon the advice of Edwards & Angell, LLP, special
Massachusetts counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of the
applicable Massachusetts tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the Fund. This
summary does not address the taxation of other shareholders nor does it discuss
any local taxes that may be applicable. These provisions are subject to change
by legislative or administrative action, and any such change may be retroactive
with respect to the Fund's transactions.
The following is based on the assumptions that the Fund will qualify under
Subchapter M of the Code as regulated investment companies, that it will satisfy
the conditions which will cause distributions of the Fund to qualify as exempt-
interest dividends to shareholders, and that it will distribute all interest and
dividends it receives to the Fund's shareholders.
The Fund is not subject to the Massachusetts corporate excise tax, the
Massachusetts franchise tax, or the Massachusetts income tax.
Distributions by the Fund that qualify, for federal income tax purposes,
either as exempt-interest dividends or as capital gain dividends, and that are
attributable to interest or gain from the sale or exchange of certain
obligations of Massachusetts and its political subdivisions, agencies and
instrumentalities will not be subject to the Massachusetts personal income tax.
In addition, distributions by the Fund that are attributable to interest on
obligations of the United States exempt from state income tax under federal law
will not be subject to the Massachusetts personal income tax. All other
distributions will be subject to the Massachusetts personal income tax.
tax.
Distributions by the Fund, regardless of source, are subject to the
Massachusetts corporate excise tax.
Gain on the sale, exchange, or other disposition of shares of the Fund will
be subject to the Massachusetts personal income or corporate excise tax.
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<PAGE>
Shares of the Fund may be subject to the Massachusetts estate tax if owned
by a Massachusetts decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning Massachusetts state and local tax matters.
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<PAGE>
APPENDIX D-5
Factors Pertaining to North Carolina
North Carolina's economy continues to grow and diversify. The State ranks
among the top ten states in terms of economic growth, as measured by employment
growth between 1988 and 1998. While manufacturing remains an important
employment sector, the services and retail trade sectors also supply a
significant percentage of employment. Growth in the high-technology sector has
helped diversify the State's economy and has also helped offset recent
employment losses in the textile, apparel, and tobacco industries.
The State's unemployment rate was 3.6% in September 2000, below the
national average of 3.9% in September 2000 and slightly up from the State's 3.1%
rate in September 1999. Per capita income in 1999 was $27,541, approximately 91%
of the national average.
The State has implemented sound financial policies and currently has low
debt levels. The level of debt is subject to increase as a result of bonds which
have been authorized by the voters of the State, which bonds have yet to be
issued. In the aggregate, there is approximately $4.72 billion of authorized but
unissued bonds for higher education capital, highways, public school buildings,
natural gas and clean water. It is expected that these bonds will be issued over
the next several years, which will cause the debt levels to increase. However,
the State's Constitution mandates that total expenditures not exceed receipts
for the same period plus any surplus available at the start of the fiscal year.
These conservative policies, combined with the State's economic recovery,
resulted in budget surpluses in each fiscal year from 1992-1999. Moody's, S&P,
and Fitch all rate the State AAA.
North Carolina Tax Matters
The following is based upon the advice of Moore & Van Allen PLLC, special
North Carolina counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable North Carolina tax law as presently in effect as it directly
governs the taxation of resident individual and corporate 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 Fund transactions.
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 Fund distributions to qualify as exempt-interest
dividends to shareholders, and that it will distribute all interest and
dividends it receives to the Fund's shareholders.
The Fund will be subject to the North Carolina corporation income tax and
the North Carolina franchise tax only if it has a sufficient nexus with North
Carolina. If it is subject to such taxes, it does not expect to pay a material
amount of either tax.
Distributions from the Fund that are attributable to interest on any
obligation of North Carolina or its political subdivisions or to interest on
obligations of the United States, its territories, possessions or
instrumentalities that are exempt from state taxation under federal law will not
be subject to the North Carolina personal income tax or the North Carolina
corporation income tax. All other distributions, including distributions
attributable to capital gains, will be subject to the North Carolina personal
and corporate income taxes.
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<PAGE>
Gain on the sale, exchange, or other disposition of shares of the Fund will
be subject to the North Carolina personal and corporate income taxes.
Shares of the Fund may be subject to the North Carolina estate tax if owned
by a North Carolina decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning North Carolina and local tax matters.
D-5-2
<PAGE>
APPENDIX D-6
Factors Pertaining to Virginia
The Virginia Fund is susceptible to political, economic or regulatory
factors affecting issuers of Virginia municipal bonds. Without intending to be
complete, the following briefly summarizes some of these matters, as well as
some of the complex factors affecting the financial situation in the
Commonwealth of Virginia (the "Commonwealth" or "Virginia"). This information is
derived from sources that are generally available to investors and is based in
part on information obtained from various agencies in Virginia. No independent
verification has been made of the accuracy or completeness of the following
information.
There can be no assurance that current or future statewide or regional
economic difficulties, and the resulting impact on State or local governmental
finances, generally, will not adversely affect the market value of Virginia
municipal bonds held in the portfolio of the Virginia Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.
The Virginia economy matches or surpasses national growth rates in many key
economic indicators including personal income, wages and salaries, and total
nonagricultural employment. Furthermore, Virginia's unemployment rate continues
to decline to record lows.
Virginia incorporated 5.7 percent more new businesses in FY 1999 than in FY
1998. With the Commonwealth attracting an increasing number of new businesses,
Virginia's unemployment rate continued its seven-year decline, reaching 2.8
percent in FY 1999. This decline marks the lowest unemployment rate since 1974
when the Bureau of Labor Statistics began its current method of computing the
unemployment rate.
Further, the difference between Virginia's unemployment rate and that of
the United States has continued to widen. Throughout the 1990's, Virginia's
unemployment rate has been,
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<PAGE>
on average, about 1.2 percentage points less than the national rate. In FY 1999,
the spread increased to 1.6 percentage points.
Virginia's extremely low unemployment rate has influenced the growth in
average compensation per employee. In order to attract new workers from within
the Commonwealth as well as from other states, companies in Virginia have been
raising wages and salaries. The year-to-year quarterly growth rates in real
wages and salaries have exceeded the growth rates in nonagricultural employment
in each of the past sixteen quarters. In the second quarter of FY 1999, the
difference between these two growth rates reached 5.8 percentage points as real
wages and salaries increased 8.2 percent and nonagricultural employment expanded
by 2.4 percent over the same period of the preceding fiscal year.
Virginia nonagricultural wage and salary employment grew by 2.4 percent
over FY 1998, matching the national growth rate. The growth in services sector
employment surpassed all other sectors. Almost 75 percent of these jobs were
added in high technology services subsectors, including business services,
engineering, architectural and management consulting services, and health
services.
The retail trade sector added 9,300 jobs and construction accounted for an
increase of 6,700 jobs. The growth in these two areas reflect continued strength
in Virginia's retail sales and housing markets.
During FY 1999, state and local government employment increased by 10,900
jobs while federal government employment declined by 3,000 jobs. The 4.7 percent
growth rate in state government employment is the largest since FY 1994 and the
1.9 percent decline in federal government employment is the smallest percentage
decline since FY 1993. Overall total civilian
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<PAGE>
governmental employment grew by 1.3 percent in FY 1999 compared with 0.1 percent
in FY 1998.
Employment in Virginia's manufacturing sector declined for the seventh year
since FY 1990. Losing 6,500 jobs, total manufacturing employment fell to 400,500
in FY 1999. The loss in FY 1999 more than reversed the nearly 5,100 gain in
manufacturing employment in FY 1998.
Employment in finance, insurance, and real estate grew at a rate of 3.7
percent, matching last year's growth rate. Employment in the security and
commodity brokers and dealers subsector grew by 16.4 percent. Employment in the
banking industry, still affected by the mergers and acquisitions of the previous
year, declined by 0.8 percent.
Virginia's average payroll per job in FY 1999 was $32,857 compared to the
national average of $33,198. While still below the national average, Virginia's
gap in average payroll per job relative to the nation has narrowed by nearly 50
percent from $669 in FY 1998 to $341 in FY 1999.
The sectors for which Virginia's payroll per job is higher than that of the
nation are transportation and public utilities, wholesale trade, services and
total civilian government. Those jobs for which average payroll per job is lower
include mining, construction, manufacturing, retail and finance, insurance and
real estate.
The growth rate in payroll per job for total nonagricultural employment is
estimated to be 5.7 percent in Virginia for FY 1999, exceeding the 4.5 percent
estimated US growth rate. As further evidence of Virginia's strong economy and
tightening labor market, growth rates in payroll per job either equaled or
exceeded those estimated for the nation in six of the nine employment sectors.
D-6-3
<PAGE>
Virginia personal income in FY 1999 grew 6.3 percent over FY 1998,
surpassing the national growth rate of 5.8 percent. Total Virginia wages and
salaries grew at 8.1 percent compared with 7.2 percent growth for the United
States, marking the third straight fiscal year that Virginia's wages and
salaries grew at a pace greater than that of the nation.
Given high nominal growth rates in wages and salaries and low inflation,
Virginians experienced substantial gains in real income and wages and salaries.
Virginia real personal income grew by 5.2 percent and real wages and salaries
grew at 7.1 percent. In the United States, real personal income grew at a 4.7
percent rate and real wages and salaries grew at 6.2 percent.
Increases in income translated into increases in spending. Virginia retail
sales grew by $3.5 billion to reach $61.9 billion in FY 1999, a growth rate of
5.9 percent compared to 4.9 percent in FY 1998. This is the largest rate of
growth in retail sales since FY 1995. At the national level, retail sales grew
by 6.5 percent in FY 1999, compared to 4.7 percent in FY 1998.
As another indication of an extremely strong Virginia economy, building
permits increased by 14.7 percent from FY 1998. The growth in authorizations
more than doubled the FY 1998 6.6 percent growth.
In 1998, Virginia's foreign exports to the world surpassed $11 billion for
the second straight year. Although Virginia's exports declined by 0.5 percent,
Virginia now ranks 16th among all states in terms of exports to the world.
Exports account for about 5 percent of Virginia's gross state product. In the
coming year, Virginia's exports to Asia should increase as the Asian economies
recover and Asian currencies continue to strengthen.
As the decade comes to a close, Virginia's overall economic performance is
such that it has outpaced the nation in many measures of economic activity.
Residents of the Commonwealth have enjoyed the benefits of low unemployment,
continued job growth and higher real wages and salaries. Continued growth of new
companies locating in the Commonwealth, the Asian recovery and strengthening
world economy, and the Federal Reserve's policy to fight wage inflation are all
positive factors for Virginia's economic outlook.
D-6-4
<PAGE>
The Commonwealth of Virginia has historically operated on a fiscally
conservative basis and is required by its Constitution to have a balanced
biennial budget. At the end of the June 30, 1999, fiscal year, the General Fund
of the Commonwealth had an ending fund balance, computed on a budgetary cash
basis, of $1,599.6 million, of which $1,591.4 million was in required reserves
or designated for appropriations, leaving an undesignated, unreserved fund
balance of $8.2 million available for future appropriation. Computed on a
modified accrual basis in accordance with generally accepted accounting
principles, the General Fund balance at the end of the fiscal year ended June
30, 1999, was $1,173.7 million, compared with a General Fund balance of $1,011.4
million at the end of the fiscal year ended June 30, 1998.
As of June 30, 1999, total debt of the Commonwealth aggregated $13.5
billion. Of that amount, $4.2 billion was tax supported. Outstanding general
obligation bonded debt backed by the full faith and credit of the Commonwealth
was $1.1 billion at June 30, 1999. Of that amount, $541.2 million was also
secured by revenue-producing capital projects.
The Virginia Constitution contains limits on the amount of general
obligation bonds which the Commonwealth can issue. These limits are
substantially in excess of current levels of outstanding bonds, and at June 30,
1999, would permit an additional total of approximately $8.4 billion of bonds
secured by revenue-producing projects and approximately $8.4 billion of Section
9(b) general obligation bonds for capital projects, with not more than
approximately $2.2 billion of the latter to be issued in any four-year period.
General obligation bonds for capital projects which are not secured by revenue-
producing projects must be approved in a State-wide election.
The Commonwealth of Virginia maintains a "triple A" bond rating from
Standard & Poor's Corporation, Moody's Investors Services and Fitch Investors
Services on its general obligation indebtedness, reflecting in part its sound
fiscal management, diversified economic base and low debt ratios. There can be
no assurances that these conditions will continue. Nor are these same
conditions necessarily applicable to securities which are not general
obligations of the Commonwealth. Securities issued by specific municipalities,
governmental authorities or similar issuers may be subject to economic risks or
uncertainties peculiar to the issuers of such securities or the sources from
which they are to be paid.
Virginia Tax Matters
The following is based upon the advice of Christian & Barton, L.L.P.,
special Virginia counsel to the Fund.
The following is a general, abbreviated summary of certain provisions of
the applicable Virginia tax law as presently in effect as it directly governs
the taxation of resident individual and corporate shareholders of the Virginia
Fund. This summary does not address the taxation of other shareholders. These
provisions are subject to change by legislative or administrative action, and
any such change may be retroactive with respect to Virginia Fund transactions.
The following is based on the assumptions that the Virginia Fund will
qualify under Subchapter M of the Code as a regulated investment company, that
it will satisfy the conditions which will cause Virginia Fund distributions to
qualify as exempt-interest dividends to
D-6-5
<PAGE>
shareholders, and that it will distribute all of its net tax exempt interest,
investment company taxable income and net capital gain it receives to the
Virginia Fund's shareholders.
The Virginia Fund will be subject to the Virginia corporate income tax only
if it has a sufficient nexus with Virginia. If it is subject to the Virginia
corporate income tax, it does not expect to pay a material amount of such tax.
Distributions by the Virginia Fund that are attributable to income derived
from or on the sale and exchange of obligations of Virginia and its political
subdivisions and instrumentalities, to income derived from or on the sale and
exchange of obligations of the United States, or to income derived from or on
the sale and exchange of obligations or securities of any authority, commission
or instrumentality of the United States to the extent exempt from state income
taxes under the laws of the United States, will not be subject to the Virginia
personal income tax or the Virginia corporate income tax. Distributions by the
Virginia Fund that are attributable to interest earned on obligations of certain
United States territories or possessions for which federal law provides an
exemption from state income taxes will not be subject to the Virginia personal
income tax or the Virginia corporate income tax. All remaining distributions
will be subject to the Virginia personal and corporate income taxes, and may be
subject to local income taxes.
Gain on the sale, exchange, or other disposition of shares of the Virginia
Fund will be subject to the Virginia personal and corporate income taxes.
Shares of the Virginia Fund may be subject to the Virginia estate tax if
owned by a Virginia decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning Virginia state and local tax matters.
D-6-6
<PAGE>
APPENDIX E
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
A 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. Municipal bonds can provide double, tax-free
income (exempt from both regular federal and state income taxes) for residents
of that state. Because each 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.
Each 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 a Fund to an alternative investment should
be made with consideration of differences in features and expected performance.
A Fund may obtain data from sources or reporting services, such as Bloomberg
Financial ("Bloomberg") and Lipper, that the Fund believes to be generally
accurate.
E-1
<PAGE>
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.
Higher Dividends Often Correlate with Higher Share Prices Scatter chart appears
here (share prices of all state closed-end municipal bond funds):
<TABLE>
<CAPTION>
12/4/00
Annualized Share Price
Dividend (Adjusted to $15 IPO)
---------- ---------------------
<S> <C>
0.7725 14.875
0.75 14.1875
0.8172 12.125
0.75 13.5625
0.892224 13.8125
0.816 12.9375
0.68502 11.75
0.864 14.5
0.738 12.28125
0.72 12.46875
0.66 10.4375
0.66 11.125
0.67302 11.5
0.663 10.75
0.675 11.1875
0.822408 12.625
0.663 10.875
0.75 14.6875
0.75 13.6875
0.78 13.4375
0.69 12.125
0.69 12.0625
0.8076 13.125
0.861012 12.75
0.774816 11.375
0.7512 12.5
0.7644 12.5625
0.772392 12.6875
0.7773 11.9375
0.764076 12.66
0.7755 12.5
0.8052 13.5
0.675 11.375
0.9162 15
0.8856 14.8125
0.783048 12
0.784668 11.8125
0.799368 12.6875
0.728448 11.8125
0.795 12.5625
0.7908 12.9375
0.767412 11.4375
0.79578 12.8125
0.754896 11.5
0.776736 12.125
0.684 11.5
0.804 12.8125
0.78 12.4375
0.816 14.75
0.774 13.96875
0.774 13.25
0.906 15.5
0.894 15.125
0.768 13.0625
0.768 13.25
0.81 12.75
0.816 14.25
0.78 14.125
0.75 13.6875
0.798 13.0625
0.81 13.8125
0.87 13.5
0.765 12.65625
0.738 13
0.834 14.4375
0.768 14
0.804 14.5625
0.78 12.3125
0.918 15
0.888 13.5
0.918 14.75
0.828 13.3125
0.912 13.75
0.816 14.3125
0.858 12.8125
0.942 15.6875
0.882 13.625
0.882 13.6875
0.852 13.0625
0.9 15.5
0.912 15.0625
0.87 13.5
0.792 14
0.78 12.875
0.87 13.875
0.81 12.375
0.7875 13.5
0.7956 13.125
0.7308 12.125
0.8175 12.625
0.9 14.75
0.7725 14.25
0.735 12.875
0.84 14.4375
0.7575 12.4375
0.822 13.25
0.918 16.375
0.768 13.5
0.639 12.46875
0.8175 13
0.84 12.9375
0.828 13.875
0.792 13.5
0.84 13.25
0.696 11.875
0.816 14.1875
0.696 12.125
0.882 14.4375
0.72 12.375
0.882 14.625
0.804 13.625
0.852 14.125
0.96 15.375
0.9 13.875
0.7575 11.6875
</TABLE>
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.
E-2
<PAGE>
Nuveen Arizona Dividend Advantage Municipal Fund 1,000,000 Common Shares
Nuveen Connecticut Dividend Advantage Municipal Fund 1,000,000 Common Shares
Nuveen Maryland Dividend Advantage Municipal Fund 1,000,000 Common Shares
Nuveen Massachusetts Dividend Advantage Municipal Fund 1,000,000 Common Shares
Nuveen North Carolina Dividend Advantage Municipal Fund 1,000,000 Common Shares
Nuveen Virginia Dividend Advantage Municipal Fund 1,000,000 Common Shares
-------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------
___________, 2001
<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. Declaration of Trust dated June 1, 1999. Filed as Exhibit a to Registrant's
Registration Statement on Form N-2 (File No. 333-49266) 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. 333-49266) and incorporated
herein by reference.*
c. None.
d. None.
e. Terms and Conditions of the Dividend Investment Plan.**
f. None.
g. Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated December 14, 2000. Filed as Exhibit g to Registrant's
Registration Statement on Form N-2 (File No. 333-49294) and incorporated
herein by reference.*
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.**
h.3 Form of Master Agreement Among Underwriters.**
h.4 Form of Salomon Smith Barney Inc. Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.**
j. Exchange Traded Fund Custody Agreement between Registrant and The Chase
Manhattan Bank dated ________.**
k.1 Form of Shareholder Transfer Agency Agreement between Registrant and Chase
Manhattan Bank dated ________.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp. Filed as Exhibit k.2 to Registrant's Registration Statement on Form
N-2 (File No. 333-49294) and incorporated herein by reference.*
C-1
<PAGE>
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC. Filed as Exhibit l.1 to
Registrant's Registration Statement on Form N-2 (File No. 333-49294) and
incorporated herein by reference.*
l.2 Opinion and consent of Bingham Dana LLP. Filed as Exhibit l.2 to
Registrant's Registration Statement on Form N-2 (File No. 333-49294) and
incorporated herein by reference.*
l.3 Consent of Bell, Boyd & Lloyd LLC
l.4 Consent of Bingham Dana LLP
m. None.
n. Consent of Ernst & Young LLP.*
o. None.
p. Form of Subscription Agreement of Nuveen Advisory Corp. dated _______,
2000. Filed as Exhibit p to Registrant's Registration Statement on Form N-2
(File No. 333-49294) and incorporated herein by reference.*
q. None.
r.1 Code of ethics of Nuveen Advisory Corp. Filed as Exhibit r.1 to
Registrant's Registration Statement on Form N-2 (File No. 333-49294) and
incorporated herein by reference.*
r.2 Code of ethics of Salomon Smith Barney. Filed as Exhibit r.2 to
Registrant's Registration Statement on Form N-2 (File No. 333-49294) and
incorporated herein by reference.*
s. Powers of Attorney.
___________________
* Previously filed.
** To be filed by amendment.
Item 25: Marketing Arrangements
See Section 3 of the Underwriting Agreement filed as Exhibit h to this
Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission fees $3,960
National Association of Securities Dealers, Inc. fees 2,000
Printing and engraving expenses *
Legal Fees *
American Stock Exchange listing fees *
Accounting expenses *
Blue Sky filing fees and expenses *
Transfer agent fees *
Miscellaneous expenses *
------
Total *
======
</TABLE>
C-2
<PAGE>
------------
*To be completed by amendment. Expenses may be reduced pursuant to the
contractual agreement of Nuveen Investments to pay (i) all Registrant's
organizational expenses and (ii) offering costs (other than the sales load) that
exceed $.03 per Common Share.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At December 19, 2000
<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 conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
C-3
<PAGE>
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
C-4
<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 Money
Market Trust, Nuveen Municipal Money Market Fund, 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,
C-5
<PAGE>
Nuveen California Quality Income Municipal Fund, Inc., Nuveen New York Quality
Income Municipal Fund, Inc., Nuveen Premier Municipal Income Fund, Inc., Nuveen
Premier Insured Municipal Income Fund, Inc., Nuveen Insured California Premium
Income Municipal Fund, Inc., Nuveen Insured New York Premium Income Municipal
Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., Nuveen Select
Maturities Municipal Fund, Nuveen Arizona Premium Income Municipal Fund, Inc.,
Nuveen Insured Florida Premium Income Municipal Fund, Nuveen Michigan Premium
Income Municipal Fund, Inc., Nuveen 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 Connecticut Premium Income
Municipal Fund, Nuveen Georgia Premium Income Municipal Fund, Nuveen Missouri
Premium Income Municipal Fund, Nuveen North Carolina Premium Income Municipal
Fund, Nuveen California Premium Income Municipal Fund, Nuveen Insured Premium
Income Municipal Fund 2, Nuveen New York Dividend Advantage Municipal Fund,
Nuveen California Dividend Advantage Municipal Fund, Nuveen Dividend Advantage
Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen
Connecticut Dividend Advantage Municipal Fund, Nuveen Maryland Dividend
Advantage Municipal Fund, Nuveen Massachusetts Dividend Advantage Municipal
Fund, Nuveen North Carolina Dividend Advantage Municipal Fund, and Nuveen
Virginia Dividend Advantage Municipal Fund. Nuveen Advisory Corp. has no other
clients or business at the present time. For a description of other business,
profession, vocation or employment of a substantial nature in which any director
or officer of the investment adviser has engaged during the last two years for
his account or in the capacity of director, officer, employee, partner or
trustee, see the descriptions under "Management of the Fund" in Part A of this
Registration Statement.
Item 31: Location of Accounts and Records
Nuveen Advisory Corp., 333 West Wacker Drive, Chicago, Illinois 60606,
maintains the Declaration of Trust, By-Laws, minutes of trustees and
shareholders meetings and contracts of the Registrant and all advisory material
of the investment adviser.
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004-2413,
all general and subsidiary ledgers, journals, trial balances, records of all
portfolio purchases and sales, and all other required records not maintained by
Nuveen Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
<PAGE>
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-7
<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 28th day of
December, 2000.
NUVEEN CONNECTICUT 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 Controller December 28, 2000
-------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
Chairman of the Board and
Timothy R. Schwertfeger ) Trustee (Principal Executive
) Officer)
)
Robert P. Bremner ) Trustee
)
Lawrence H. Brown ) Trustee
)
Anne E. Impellizzeri ) Trustee
)
Peter R. Sawers ) Trustee
)
William J. Schneider ) Trustee
)
Judith M. Stockdale ) Trustee
By: /s/ Gifford R. Zimmerman
--------------------------
Gifford R. Zimmerman
Attorney-In-Fact
December 28, 2000
</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. Declaration of Trust dated June 1, 1999.*
b. By-Laws of Registrant.*
c. None.
d. None.
e. Terms and Conditions of the Dividend Investment Plan.**
f. None.
g. Investment Management Agreement between Registrant and Nuveen Advisory
Corp. dated December 14, 2000.*
h.1 Form of Underwriting Agreement.**
h.2 Form of Master Selected Dealer Agreement.**
h.3 Form of Master Agreement Among Underwriters.**
h.4 Form of Salomon Smith Barney Inc. Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.**
j. Exchange Traded Fund Custody Agreement between Registrant and The Chase
Manhattan Bank dated ________.**
k.1 Form of Shareholder Transfer Agency Agreement between Registrant and Chase
Manhattan Bank dated ________.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Advisory
Corp.*
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.*
l.2 Opinion and consent of Bingham Dana LLP.*
l.3 Consent of Bell, Boyd & Lloyd LLC
l.4 Consent of Bingham Dana LLP
m. None.
n. Consent of Ernst & Young LLP.**
o. None.
p. Form of Subscription Agreement of Nuveen Advisory Corp. dated _______,
2000.*
q. None.
r.1 Code of ethics of Nuveen Advisory Corp.*
r.2 Code of ethics of Salomon Smith Barney.*
s. Powers of Attorney.
___________________
* Previously filed.
** To be filed by amendment.
